Description
Entrepreneurship Factors Affecting Smallscale Business Performance And Development
Faculty of Business Economics and Entrepreneurship 1
EMPLOYMENT, EDUCATION AND
ENTREPRENEURSHIP
15-17 October 2014 Belgrade Serbia
ENTREPRENEURSHIP:
FACTORS AFFECTING SMALL-
SCALE BUSINESS
PERFORMANCE AND
DEVELOPMENT
Faculty of Business Economics and Entrepreneurship 3
Faculty of Business Economics and Entrepreneurship (BEE) from Belgrade, Serbia
www.vspep.edu.rs
International Research Institute for Social Entrepreneurship & Economic Development
(IRISEED), Birmingham, United Kingdom
www.iriseed.org
International College of Interdisciplinary Sciences, United Stateshttp://www.americanschoolofgenealogy.com
Faculty of Entrepreneurship, University of Tehran, Iran
www.ut.ac.ir
College of Economics and Management, Northwest University, China,
Yangling, Shaanxi, Chinahttp://en.nwsuaf.edu.cn
University of Business Engineering and Management, Banja Luka, Bosnia i Hercegovina,
www.univerzitetpim.com
Sofia University,,St.Kliment Ohridski,, Faculty of Philosophy, Sofia, Bulgariahttp://phls.uni-sofia.bg
ECSB - European Council for Small Business and Entrepreneurship, School of Economics,
University of Turku, Finland
www.ecsb.org
jointly organize
The Third International Scientific Conference
EMPLOYMENT, EDUCATION AND ENTREPRENEURSHIP
(EEE 2014)
4 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
EDITORS
Full Professor Mirjana Radovic Markovic, PhD
Sladjana Vujicic, MA
Assistant Professor Dragan I vkovic, PhD
INTERNATIONAL SCIENTIFIC COMMITTEE:
Academician Professor Mirjana Radovic Markovic, PhD, Faculty of Business Economics
and Entrepreneurship, Belgrade, Serbia (president)
Academician Professor Radmila Grozdanic, PhD, Faculty of Business Economics and
Entrepreneurship, Belgrade, Serbia
Academician Professor Slavko Karavidic, PhD, Faculty of Business Economics and
Entrepreneurship, Belgrade, Serbia
Full Professor Krum Krumov, PhD, St. Kliment Ohridski University in Sofia, Bulgaria
Full Professor I mani Silver Kyaruzi, PhD, Institute of Social Entrepreneurship
(IRESEED), Great Britain
Full Professor Ayinla Omolaja Muhammed, PhD, International College of Management
and Technology, Nigeria
Full Professor Ugur Demiray, PhD, Anadolia University, Turkey
Full Professor Emine Demiray, PhD, Anadolia Universityr, Turkey
Full Professor Sofronija Miladinoski, PhD, Faculty of Tourism and Hospitality, Ohrid,
Macedonia,
Full Professor Nezameddin Faghih,PhD, Faculty of Entrepreneurship, University of
Tehran, Iran
Full Professor Radovan Pejanovic, PhD, University of Novi Sad, Serbia
Full Professor Vlajko Petkovic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Full Professor Edita Kastratovic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Full Professor Radojko Lukic, PhD, Faculty of Economics, University of Belgrade, Serbia
Full Professor Hasan Hanic, PhD, Belgrade Banking Academy, Belgrade, Serbia
Associate Professor Beatrice Avolio, PhD, Faculty of Entrepreneurship, CENTRUM
Católica, Lima, Peru
Associate Professor Mohammad Reza Zali, PhD, Faculty of Entrepreneurship, University
of Tehran, Iran
Associate Professor Dragana Vojteski Kljenak, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Associate Professor Milan Krstic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Associate Professor Slavoljub Sljivic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Associate Professor Natasa Tanjevic, PhD, National Bank of Serbia, Belgrade, Serbia
Associate Professor I siaka Esema, PhD, Prentice Nigeria Ltd, Lagos, Nigeria
Assistant Professor Reza Mohammadkazemi, PhD, Faculty of Entrepreneurship,
University of Tehran, Iran
Faculty of Business Economics and Entrepreneurship 5
Assistant Professor Plama Hristova, PhD, St.Kliment Ohridski University in Sofia,
Bulgaria
Assistant Professor Dragan Milosevic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Assistant Professor Almir Pestek, PhD, Faculty of Economics, University of Sarajevo,
Bosnia and Herzegovina
Assistant Professor Vera Karadjova, PhD, Faculty of Tourism and Hospitality, Ohrid,
Macedonia
Assistant Professor Zélia Breda, PhD, Department of Economics, Management and
Industrial Engineering of the University of Aveiro, Aveiro, Portugal
Assistant Professor Neven Vidakovic, PhD, EFFECTUS University College, for Law and
Finance, Croatia
Lecturer Vasileus Kallinterakis, PhD, University of Liverpool Management School,
Liverpool, Great Britain
Tatjana Brankov PhD, Institute of Agricultural Economics, Belgrade, Serbia
Lecturer Dusan Markovic, MSc, Belgrade Business School, Belgrade, Serbia
Lecturer Aidin Salamzadeh, MSc, Faculty of Entrepreneurship, University of Tehran, Iran
Prof. Boufeldja Ghiat, PhD, Faculty of Social Sciences Oran University, Oran, Algeria
Prof. José G. Vargas-Hernández PhD, University Center for Economic and Managerial
Sciences, University of Guadalajara,Guadalajara, Jalisco, México
ORGANIZING COMMITTEE:
Full Professor Goran Kvrgic, PhD, Faculty for Business Economics and Entrepreneurship,
Belgrade, Serbia
Assistant Professor Dusan Cogoljevic, PhD,Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Assistant Professor Dragica J ovancevic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia, president of the Organizing Committee
Assistant Professor Djordje Minkov, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia, PR of the Conference
Assistant Professor Zorana Nikitovic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Sladjana Vujicic, MA, Faculty for Business Economics and Entrepreneurship, Belgrade,
Serbia
Marija Petrovic, MA, Faculty for Business Economics and Entrepreneurship, Belgrade,
Serbia
6 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
PUBLISHING AND ORGANIZACION
Faculty of Business Economics and Entrepreneurship
8 Mitropolita Petra Street
11000 Belgrade, Serbia
PERSON RESPONSIBLE FOR PUBLISHING
Full Professor Goran Kvrgic, PhD, Director of Faculty of Business Economics and
Entrepreneurship, Belgrade, Serbia
CIP - ?????????????? ? ???????????
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334.71(082)
005.961:005.9(082)
005.961:005.9:316(082)
INTERNATIONAL Conference Employment,
Education and Enterpreneurship (3rd ; 2014 ;
Belgrade)
Entrepreneurship : factors affectin
small-scale business performance and
development / #[The #Third] International
Conference Employment, Education and
Enterpreneurship [EEE 2014], 15-17 October
2014 Belgrade Serbia ; [organizer Faculty of
Business Economics and Entrepreneurship ;
editors Mirjana Radovic Markovic, Sladjana
Vujicic, Dragan Ivkovic]. - Belgrade :
Faculty of Business Economics and
Enterpreneurship, 2014 (Valjevo :
Valjevoprint). - 537 str. : graf. prikazi,
tabele ; 25 cm
Tiraž 250. - Str. 11-12: Foreword / Mirjana
Radovic-Markovic. - Napomene i bibliografske
reference uz tekst. - Bibliografija uz svaki
rad.
ISBN 978-86-6069-106-6
1. Radovi? Markovi?, Mirjana [???????]
[????? ???????? ??????] 2. Visoka škola za
poslovnu ekonomiju i preduzetništvo
(Beograd)
a) ???? ???????? - ?????????????? -
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COBISS.SR-ID 210590476
Copyright© 2014
Faculty of Business Economics and Entrepreneurship, Belgrade.
All rights reserved.
Printing 250 copies
Faculty of Business Economics and Entrepreneurship 7
CONTENTS
I PART. ENTREPRENEURSHI P DEVELOPMENT & FI RM
PERFORMANCE ....................................................................................... 13
THE DI GI TALI ZATI ON ERA CHALLENGES FOR THE
ORGANI ZATI ON OF XXI CENTURY ..................................................... 15
SASA TRANDAFILOVIC, PHD
IVANA CVETKOVIC
THE ROLE OF FREE ZONES, TECHNOLOGY PARKS AND
BUSI NESS I NCUBATORS I N THE DEVELOPMENT OF SMALL
AND MEDI UM ENTERPRI SES ............................................................... 30
MOMCILO ZIVKOVIC, PHD
VUK BEVANDA, PHD
DOWNSI ZI NG AS A MEASURE FOR THE I NCREASE OF
EFFI CI ENCY AND FLEXI BI LI TY OF AN ENTREPRI SE ................... 50
NENAD RAVIC, MA
VLADO RADIC, PHD
MARKET ORI ENTATI ON AND BUSI NESS PERFORMANCE ........... 67
VLADO RADIC, PHD,
JOVANKA POPOVIC, PHD
BUSI NESS I MPROVI NG WI TH CLOUD COMPUTI NG
TECHNOLOGY .......................................................................................... 98
DJORDJE ILIC, MA,
MARIJA MARKOVIC BLAGOJEVIC, MA
APPLI CATI ON OF BUSI NESS I NTELLI GENCE AND OLAP
TECHNOLOGY I N BUSI NESS DECI SI ON-MAKI NG ......................... 118
JOVAN ZIVADINOVIC, PHD
ZORICA MEDIC, PHD
LEAN LEADERSHI P AS A PRECONDI TI ON FOR SUCCESSFUL
BUSI NESS OPERATI ONS OF ENTERPRI SES ................................... 140
SAVETA VUKADINOVIC, MA
JOVANKA POPOVIC, PHD
THE RESEARCH OF THE ECONOMI C EFFECTS OF
STANDARDI ZATI ON .............................................................................. 159
MILAN KRSTIC, PHD
ANA SKORUP, PHD
COMPANI ES RESTRUCTURI NG - MYTHS AND
MI SCONCEPTI ONS ................................................................................ 184
SLAVICA ANDJELIC, PHD
NEMANJA DAMNJANOVIC, PHD
8 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BUSI NESS NEGOTI ATI ON .................................................................... 204
VLAJKO PETKOVIC, PHD
ZORANA PETKOVIC
AMI CABLE FI NANCI AL RESTRUCTURI NG OF COMPANI ES I N
REPUBLI C OF SERBI A .......................................................................... 225
VLADIMIR KOZAR, PHD
ANA OPACIC, PHD
THE ADOPTI ON OF OPEN I NNOVATI ON PRACTI CES I N
SERBI AN I CT I NDUSTRY ...................................................................... 241
JELENA LUKIC, MA
I I PART. SOCI OLOGI CAL AND SOCI AL PSYCHOLOGI CAL
ASPECTS OF ENTREPRENEURSHI P ................................................. 259
ROLE STRESSORS AND ORGANI ZATI ONAL COMMI TMENT:
EMPI RI CAL RESEARCH ....................................................................... 261
PLAMA HRISTOVA, PHD
ALBENA KRUMOVA, PHD
JULIKA NOVKOVA
DEVELOPI NG BUSI NESS CULTURE THROUGH MOTI VATI ON
AND CONFLI CT MANAGEMENT ........................................................ 275
ZARKO PAVIC, PHD
MARIJA CUKANOVIC KARAVIDIC, PHD
THE TRANSFORMATI ON OF TRADI TI ONAL ORGANI ZATI ONS
TOWARDS A MODERN APPROACH BASED ON QUALI TY
MANAGEMENT AND EMPLOYEE MOTI VATI ON ............................ 295
MARINA GASIC, MSC
ENABLI NG EMOTI ONAL I NTELLI GENCE: EXPLORI NG THE
SOURCE OF MOTI VATI ON ................................................................... 307
VAIBHAV BIRWATKAR, PHD
THE MORAL VALUES OF BUSI NESS I N VI RTUAL
ORGANI ZATI ONS ................................................................................... 325
KATARINA MAJSTOROVIC, MA
DEJAN RADULOVIC, PHD
ORGANI ZATI ONAL DI AGNOSI S AND MANAGEMENT OF
CHANGE I N ORGANI ZATI ONAL CULTURE OF BANK
I NSTI TUTI ON .......................................................................................... 338
MIRYANA STANCHEVA, PHD
SNEZHANA ILIEVA, PHD
STAFF MANAGMENT AND EVALUATI NG THE STAFF
EFFI CACY ................................................................................................ 349
BORKO SOMBORAC, MA
DEJAN ILIC, PHD
Faculty of Business Economics and Entrepreneurship 9
EMPLOYEE PERFORMANCE AND DEVELOPMENT: ALCOHOL
AND I TS EFFECT ON ORGANI SATI ONAL PERFORMANCE ......... 368
SAMUEL OSEI-NIMO, PHD
IMANI SILVER KYARUZI, PHD
REFORM OF THE HUMAN RESOURCES MANAGEMENT
FUNCTI ON I N THE MI NI STRY OF I NTERI OR OF THE
REPUBLI C OF SERBI A - THE STRATEGI C BASI S, KEY
ACTI VI TI ES AND CHALLENGES ........................................................ 379
MILAN KLISARIC, PHD
SINISA DOSTIC, PHD
I I I PART. PART CASE STUDI ES ........................................................... 401
I NNOVATI VE GLOBAL COMPANI ES – SOME CASE STUDI ES ..... 403
MIRJANA RADOVIC MARKOVIC, PHD
SLADJANA VUJICIC, MA
PROFESSI ONAL EDUCATI ON AND YOUTH EMPOWERMENT
THROUGH ENTREPRENEURSHI P FOR SOCI O-ECONOMI C
DEVELOPMENT I N NI GERI A .............................................................. 418
ISAAC ELIJAH ESEMA, PHD
SASA STEFANOVIC
FEMALE ENTREPRENEURSHI P AND THE WOMEN CHAMBER
OF COMMERCE AND I NDUSTRY: ECONOMI C
EMANCI PATI ON AND CLOUT FOR PAKI STANI WOMEN ............. 431
IQBAL KHAN
I MPORTANCE OF OWNERSHI P TRANSFER PLANNI NG FOR
FAMI LY BUSI NESS ENTI TI ES ............................................................. 458
DRAGAN MILOSEVIC, PHD
DRAGICA JOVANCEVIC, PHD
THOUGHTS ON ENTREPRENEURSHI P AND I TS LI NKAGE
WI TH I NTRAPRENEURSHI P: I MPLI CATI ONS FOR ECONOMI C
DEVELOPMENT ...................................................................................... 482
MUHAMMAD OMOLAJA, PHD
ANA ALEKSIC
J OURNEY OF A SMALL TOWN ENTREPRENEUR : AN I NDI AN
CASE STUDY ............................................................................................ 498
REENA AGRAWAL, PHD
THE APPLI CATI ON OF THE EU PUBLI C SERVI CES
GUI DELI NES I N SERBI AN PUBLI C ENTERPRI SES........................ 507
DALIBORKA PETROVIC, PHD
TIHOMIR GLIGORIC, PHD
NEW SYSTEM OF ASSOCI ATI ON CORNER SHOP'S I N SERBI A... 523
NEMANJA DAMNJANOVIC, PHD,
SLAVICA ANDJELIC, PHD
Faculty of Business Economics and Entrepreneurship 11
FOREWORD
This book is the fourth in sequence, and it relates to issues of entrepreneurship.
It was preceded by the following books Entrepreneurship (2012), Entrepreneurship:
Economic Development & Finance (2013), and Gender, IT and Marketing Issues in
Entrepreneurship (2013). For the past few years, in this way, we have been forming
and expanding the existing library in this multidisciplinary field, to which we
permanently add new aspects and develop existing concepts.
National and international experts are participating in creating the
entrepreneurial library. With their research papers, they always open some new
topics and inspire us to focus and dedicate our special knowledge to those topics,
which is also the case with this new monograph. Namely, this one is different from
the previous publications from the field of entrepreneurship where the role of
entrepreneurship in economic development and financial, gender, marketing and
informatics aspects were considered. Publication Entrepreneurship: Factors
Affecting Small-Scale Business Performance and Development joined economic,
psychological, social and other factors which influence the characteristics and
development of entrepreneurship, as well as entrepreneurial behaviour.
Monograph has three parts:
I Part. Entrepreneurship development & Firm performance
II Part. Sociological and socio-psychological aspects of entrepreneurship
III Part. Case Studies.
The first part analyses the possibilities of measuring and improvement of
business results of small enterprises. Effects of different factors on achieving the
ultimate business results are taken into consideration. Considering that
improvement of organizations’ performances in modern business is more important
than ever, this issue rightfully takes the central place in this publication. The
remaining parts are in its function and represent a connected whole.
The second part of the monograph considers the issues connected to socio-
psychological aspects of entrepreneurship (motivation, emotional intelligence,
stress management etc.).
The third part consists of case studies, which are original researches done from
the aspects of various kinds and categories of entrepreneurs put into global,
regional or national context. They give us a special insight in these issues and
possibility to understand and solve the problems existing in Europe, Asia or Africa.
At the same time, this enables us to understand the differences and similarities,
which exist in certain countries and parts of the world through the vision of
development and management of entrepreneurial activities.
12 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
It is our opinion that this concept of the book will at the same time be useful
and interesting to readers. Because of the limited number of pages, we reached
some of the factors and analysed them, which only sets the discussion into motion
and invites new opinions and analyses regarding this edition’s topic. Enriching this
field, from year to year, can be seen as our obligation, which is one of the basic of
the Faculty of Business Economics and Entrepreneurship (BEE) from Belgrade –
publisher of all previous editions.
August, 2014.
Acad. Prof. Dr Mirjana Radovic-Markovic
European Academy of Sciences and Arts (EASA), Salzburg, Austria
Academia Europea (EA), London, United Kingdom
World Academy of Art and Science (WAAS), United States
Royal Society of Arts (RSA), London, United Kingdom
Bulgarian Academy of Science and Arts (BASA), Sofia, Bulgaria
Faculty of Business Economics and Entrepreneurship 13
I PART.
ENTREPRENEURSHIP
DEVELOPMENT & FIRM PERFORMANCE
Faculty of Business Economics and Entrepreneurship 15
THE DIGITALIZATION ERA CHALLENGES FOR THE
ORGANIZATION OF XXI CENTURY
Sasa Trandafilovic, PhD
1
Ivana Cvetkovic
2
ABSTRACT
In today's business environment, and under the influence of globalization and
advances in the field of information technology, organizations are facing
increasing demands for information processing. In order to respond to the
demands of the current business context, modern organization are finding the
solution in creating adequate capacity and infrastructure to support the
establishment of harmony between the external and internal factors of the design of
organization. The phenomenon of "Big Data" is the most important creation of the
modern environment that pervades and influences all the elements of
organizational design. That is why the importance of creating a digital business
function that represents the core of experts in the field of modern technology is
more and more emphasized. These experts affect the company to keep pace with the
new environment through finding new ideas, sharing knowledge and experiences
and applying them in the organization.
Key words: Big Data, Digitization, Organizational Processes, Organizational
Design, Digital Skills and Knowledge
J EL Classification: C80, M15
UDK: 005.591.1:004.4
1
Sasa Trandafilovic,Ministry of Defence – Budget and Finance Sector (University of Defence),
Belgrade, Serbia, [email protected]
2
Ivana Cvetkovic, Ministry of Defence – Defence Policy Sector, Belgrade, Serbia,
[email protected]
16 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Business context for modern organizations becomes more and more dynamic,
complex and heterogeneous, due to the increased interdependence at the global
level and taking advantage of improvements in information technology.
Modern environment is bringing the creation of new phenomena that affects
all the elements of the organization and that changes its characteristics. In such
circumstances, companies must constantly adapt to changes in order to establish a
balance between internal (strategy and organizational design) and external
(environment) organizational factors.
Starting with the key challenges of the Digital Era and with the need for
adaptation, the aim of this paper is to identify: 1. Which is a key phenomenon of
the Digitization Era and its features; 2 How and in what manner the phenomenon
of "Big Data" influences the definition of the strategic orientation of modern
organizations, as well as the process of organizational design; 3. What is the role
and place of digital functions in the modern organization.
Characteristics of the "Big Data" as a key phenomenon of the Digital Era are
presented in the first part of this paper. Then, changes in the strategic orientation of
the company, formed under the influence of the phenomenon of "Big Data" are
defined. Also, it presents the key changes in the organizational design in the Era of
Digitization, viewed through the prism of Galbraith’s Star Model. In the end it
emphasizes the role of digital functions in terms of the sustainable development of
the modern organization, with presentation of appropriate conclusions.
BI G DATA - CURRENT CHALLENGE
The changes that marked the end of the XX century had a great impact on
modern business organization. New global markets have become highly
competitive, with demand for continual adjusting the strategy and structure of the
organization to external business environment. The basic characteristics of modern
environments become: complexity, dynamism, heterogeneity, and hostility
(Petkovic, 2011). In such an environment a key competence of the organization
becomes the ability to anticipate and implement future changes. Successful
companies increasingly develop the ability to create a stable environment for
continual changes at any time and as such are called flexible organizations
(Overholt, 1997). Following the changes in the environment and on the basis of
their needs for adjusting, flexible organization continually develop new strategies
and in accordance with that, change their elements of the organization in order to
achieve coherence between environment, strategic orientation and organizational
design.
Faculty of Business Economics and Entrepreneurship 17
In the extremely competitive global economy, inadequate elements of the
design of the organization that are chosen by the top management cost very much,
and delayed reaction of management can be even more damaging for the
company's position on the market, given the pace of implementation and adoption
of innovations, as well as complex technological and market knowledge. In these
conditions, organizational design becomes a key instrument for anticipating and
not only for monitoring and responding to the demands arising from changes in the
environment (Miles, Scaringella, 2012:69).
One of the most important factors of a modern environment is globalization, so
today we are talking about global companies, global consumer and homogenization
of consumer needs around the world, global manager, and global industries as the
basic creations of globalization. The global business environment brings greater
risks but also greater opportunities for the success of a company. The main
challenge that organizations of XXI century are facing is how to avoid threats of
the modern environment, and take advantage of the benefits it brings. Keeping in
mind the growing importance of the development of information technology and
innovations, the key challenge for modern organization is constant acceptance of
changes due to technological progress and alignment of strategic orientation and
design of organization with updates in the field of information and communication
technology.
Information technology requires new infrastructure of organizations, new
skills and knowledge while defining new roles and positions in the organization. It
increases the flexibility of the organization and facilitates coordination, and also
leads to changes in the decision-making process. The information in the Age of
Digitalization is available to everyone and is the primary source of competitive
advantage for modern companies. Successful management and use of information
from different sources become an essential way of creating value. Proceeding from
this, Galbraith (2012) predicts adding the new dimension to the structure of
organization for the future called "Big Data" which is defined as an independent
comprehensive database that includes data of all dimensions of organizational
structure (for example, information about customers, regions, business functions
and business units). These data are centrally collected and used by corporate
leadership in order to take real actions. Also, the strategic importance of the term
"Big Data" means adding analytical capabilities to existing organizations.
For many years, organizations have been taking advantage of databases,
gathering, and storing, analyzing and using information for making decisions. But
what is new about the phenomenon of "Big Data" is a large amount of information,
speed and variety (McAfee, Brynjolfsson, 2012:62-63). These innovations affect
changes in the organization and analysis of data in two ways (Galbraith, 2014), as
follows: 1) more varied data appear in quantitative and qualitative sense, which in
the past were clearly structured in rows and columns, and today it is stored
unstructured and if necessary, can be digitized, stored and analyzed 2) the new data
is available in real time, which basically means that the data that is related to the
previous actions is replaced by the information that is connected to the future
actions and that may affect the final results.
18 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Possession of the information in real time is one of the basic conditions for
achieving positive results of today managers. Also, very important condition
involves the creation of organizations whose processes will be designed to support
real-time decision-making in order to enable rapid response to changing conditions.
Organizations must take into account that the risk of inaccuracy and unreliability of
information increases due to the increased availability and visibility of information
and data transfer rates (Berner et al., 2014:15).
Basic characteristics of the Big Data Era, and comparison of these properties
with the Smart Machine Era, that preceded it, were presented in Table 1.
Table 1: Comparison of information visibility in the past and the future
Source: Berner M., Graupner E., Maedche A., (2014), The information Panopticon
in The Big Data Era, Journal of Organizational Design, 3(1) pp.15.
Starting from the need for innovative solutions in the field of data acceleration
and in order to speed up process of reporting and analysis, the IBM company uses a
special system for data processing that functions on the foundation of open-source
software solutions, which are used for analyzing and organizing large amounts of
structured and unstructured data. Using the platform, the IBM company receives
data from various sources (posts on social networks, digital pictures and videos,
online transactions, data obtained using the capabilities of modern mobile phones),
and then uses for decision-making and making the necessary analysis (Figure 1).
Faculty of Business Economics and Entrepreneurship 19
Figure 1: Platform of the IBM company
Source:http://turbotodd.wordpress.com/2013/04/03/big-moves-in-big-data-ibm-
new-data-acceleration-hadoop-capabilities/
Modern global companies are under constant pressure to analyze more data,
increase the speed and reduce costs in order to create deeper customer relationships
as well as to avoid threats and identify new opportunities for revenue creation. To
address these challenges, the IBM company introduced the implementation of
“BLU Acceleration” software that combines various techniques to improve
analytical performance and simplify administration by: 1. providing the ability for
users to have faster access to information and make the right decisions; 2. allowing
the use of, so-called, “data skipping” in order to exclude unnecessary and duplicate
data from the analysis; 3. providing an analysis of data simultaneously between the
two processors and 4. performing data compression which means that data would
not have to be decomposed to be analyzed.
In the following text we analyze the influence of "Big Data" on defining the
business strategy, the process of organizational design, as well as the role and place
of analytic function in the structure of modern organizations.
20 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BI G DATA AND STRATEGY
Organizations that manage to respond to the challenges of the Digital Era and
ensure a successful market position previously have defined strategy that will
monitor changes in the modern business environment, and which incorporates
phenomena from external sources. Modern authors (Galbraith, 2014; Miller, 2014;
Berner et al., 2014; Grossman, Siegel, 2014; Korhonen, 2014; Gabel, Tokarski,
2014) place an emphasis on the concept of the "Big Data" as the most important
phenomenon of the environment of the XXI century and its impact on the strategic
management of the company by introducing a number of changes in the strategic
orientation and defining strategies of modern organizations.
By analyzing the research and opinions of many authors in the field of
strategic management and organizational design we can distinguish the following
changes:
? the time of the decision making process speeds up
? the consumer needs are put in the foreground as the main condition to create
value
? there is a constant need to innovate
? the procreation of a need to create a complex organizational structure
? changing the characteristics of human resources through the emphasis of
new skills and knowledge necessary to perform new tasks.
Modern organizations have large databases in order to make adequate
decisions and properly react to changes in the environment. Communication
channels permeate all the elements of business activity and derive information
from them, whether it is about internal channels within the organization or external,
related to communication with stakeholders outside the company. Information is
becoming easily accessible to everyone, to both, strategic management and
operational managers, and this contributes to real-time decisions making which is
used as an instrument for facing immediately without delay and responding to the
demands that are imposed by the external world (Berner et al., 2014). The Nike
Company applies Software Developmental Processes that occur in the continued
and iterative cycles. New products is set on the company website with minimal
features, and then the visitors learn about the characteristics of the product, present
their experiences and propose appropriate adjustments which the development
team immediately consider for modification of the product in accordance with the
desires of potential customers (Galbraith, 2014:7).
This indicates that the main goal for the organizations of XXI is creating value
for their customers in order to sell their outputs in the market successfully, and
consequently increase their results and projected values. Constant communication
with customers using a variety of tools, especially social networks (Facebook,
Twiteer, Instagram, LinkedIn) is becoming increasingly important due to the
availability of instantaneous information about modern market trends and the
possibility of making optimal decisions in order to meet customer needs.
Faculty of Business Economics and Entrepreneurship 21
Therefore, the availability of information provides opportunities for companies to
innovate continuously and to improve products and services.
In the current conditions the modern environment has been shifting the locus
of innovation outside the boundaries of a firm, considering that entities outside the
traditional boundaries of the organization have specific knowledge and solutions
that can be used to create value for consumers, and for the organization, which
contributes to improvement of market position of the company. These innovations
are called open innovation (Gulati et al., 2012). The most important actors with
whom organizations share knowledge and skills apart from other organizations
(direct or indirect competitors, educational institutions, institutes, etc.) are
consumers themselves.
Visibility and accessibility of information to all organizational levels increases
the requirements for the creation of new capacity for processing information, and
the decentralization through the lateral forms of coordination (Berner et al., 2014).
Creating a new form of organization is the result of the needs of a company to align
its internal (strategy and structure) with external factors (environment). This
creates a multi-dimensional matrix model, an innovative model and horizontal
structure. Today only the most advanced and most successful companies (IBM,
Procter & Gamble) reached the most complex four-dimensional matrix structure
(dimensions: function, business unit, region, customer). Galbraith (2012) goes a
step further by envisaging the introduction of the fifth dimension, and thus creating
a fifth-dimensional matrix structure. This new dimension is the "Big Data".
In modern environment circumstances data becomes essential strategic assets,
the need for specialists in the new fields and new professions are much wider than
the needs of people who only know how to manage and use databases. Under the
influence of "Big Data" existing jobs are increasingly redefining, and therefore the
need for entirely new occupations. Modern operating systems require analytical
skills, complex knowledge related to finding software solutions, top professionals
in the field of data management and definition of information strategy.
Today, there is a lack of digital experts, experts in finding software solutions,
experts in social media, IT strategists, professionals in the field of database
management and analysis at the labor market. Therefore, there are more frequent
suggestions for coordinated and mutual cooperation of universities and modern
organizations from different sectors (for-profit or non-profit) which create
conditions for proper respond to requests for needed skills in the Era of "Big Data"
(Miller, 2014).
22 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BI G DATA AND ORGANI ZATI ONAL DESI GN
When it comes to organization, changes that the phenomenon of "Big Data"
causes can be best illustrated by using Galbraith’s Star Model shown in Figure 2
(Galbraith, 2014:11-12). In this model, Galbraith (2002) identifies five
organizational components to be matched with each other, and they include: 1)
Strategy - defining a clear vision, goals, values and sources of competitive
advantage; 2) Structure - defining structural elements (training, distribution of
authority, departmentalization) and relationship; 3) Processes - refer to the teams,
informal networks and integrated roles that are designed to allow the connection of
all elements of the organization; 4) Reward system - a special element that has the
aim to align individual goals with organizational goals and 5) People - defining
strategy in the field of human resources with an emphasis on skills, abilities and
competencies required of employees, except that the different strategic orientations
of company means adjusted human resources strategy.
Galbraith (2014) predicts that the use of dual strategy will be increasingly
important in the Information Era. The first strategy refers to the developing of
digital skills in order to make the best possible decisions and reduce the time of
their adoption. The second strategy assumes the use of data and analytical skills to
create appropriate analysis and preparation of data structured reports for the
specific needs of different stakeholders of the organization. In this regard, there is a
need to create special digital organizational unit that has the characteristics of a
profit center.
Figure 2: The impact of the Big Data phenomenon to the organization through the
prism of the Star Model
Source: Galbraith J. R., (2014), Organization Design Challenges Resulting from
Big Data, Journal of Organizational Design, 3(1) pp.12.
Faculty of Business Economics and Entrepreneurship 23
When it comes to organizational structure, the existence of digital corporate
officer, whose function is to promote the importance of analytic functions and the
digitization of management process can be noticed. In essence, this person has a
leading role, with the aim to show the importance of information and databases, as
a strategic asset of modern organizations. It is also assumed that the need for the
introduction of digital officer will be much wider, and that each dimension of
modern organization (regions, functions, business units, consumers) will require
digital business unit.
Despite the Galbraith's projections that the Big Data will become the fifth
dimension of complex matrix structure, this matrix is still not implemented in
practice. However, with the further development of information and
communication technology and the increasing computerization and digitization of
business processes, it is reasonable to expect its establishment in a relatively short
period of time. We could also expect that experts in the field of the most advanced
technology (software engineers, database experts, professionals in the field of
modern digital systems, etc.) will be implemented in the process teams that will be
formed for finding the most effective solutions.
One of the crucial consequences of the increasing importance of information
and the use of databases, as well as gaining the new knowledge and skills that are
necessary in order to meet up with the changes in the environment in which the
company operates is the transfer of power to the digital units (Galbraith, 2014).
They have not only the core of digital experts but also a huge number of updated
information about the market trends and internal processes, which significantly
increases the importance of their role in terms of making the best decisions.
Organization of XXI century must create processes that are consistent with a
changed structure and strategy. Digitization process involves the use of analytical
models, analytical infrastructure and analytical operations (Grossman, Siegel,
2014:22-23). Analytical models contain large amounts of data that are collected,
tested and structured using different methods. Analytical infrastructure includes
adequate software solutions, applications and platforms for data management and
data processing, as well as the creation of models and their implementation. It also
assumes creation of an infrastructure that can support the harmonization of
requirements for information processing with the requirements of capacity for
information processing. For example, the use of internal social networks as a way
of communication in the organization as well as the tools for communicating with
stakeholders in the external environment, creates cross-functional digital teams
which aim to share data from their domain in order to take joint measures and
come up with creative solutions through the exchange of knowledge, experience
and ideas. Finally, analytical operations are various processes undertaken to
produce the final outcomes of the model, which will be further used in the decision
making process and taking further actions in the business.
The last two elements of Galbraith’s Star Model are very closely connected.
Performance management system must be designed to be compliant with the other
elements of the Star Model, but primarily to reward those people in the
24 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
organization that have the most advanced skills and knowledge in different areas,
then the proper implementation of that knowledge, and teamwork. Due to the
frequency and intensity of change that organizations are facing, it can be noticed
that the need for new professionals who are specialized in different fields of
modern technology is becoming more frequent. Also, if we look at the today's labor
market, we can notice the lack of digital experts and specialists for implementation
of the most advanced technology. As a main solution for this issue Miller (2014)
suggests the cooperation between Universities all over the world and modern
companies. In this manner, the educational institution may, depending on the
current trends, in collaboration with modern business entities predict new jobs and
improve the existing occupations, and in this way make it possible to create an
adequate supply of labor, both in qualitative and in quantitative terms.
A major challenge for modern Universities involves the acquisition of the
necessary skills through appropriate programs of education and professional
development, that can create the ”T shaped professionals'' (Miller, 2014). Here the
vertical line of “T'' is considered the foundation and depth of knowledge that
should be possessed by a professional, and a horizontal line is its breadth of
knowledge, or more precisely, the knowledge that a student gains in collaboration
with experts from other parts of the organization, through teamwork, and
exchanging creative design solutions. In order to become an outstanding expert,
besides the narrow specialization, it is necessary to acquire knowledge from other
disciplines such as mathematics, statistics, engineering, analytical discipline,
management and decision-making, organizational science, computer science and
programming, the ethics of data usage, legal sciences, data security, visualization
and communication. According to the author mentioned above a recommendation
for closing the gap that exists between the need for certain skills, knowledge and
supply in the labor market includes the following: 1) create a formal definition of
priority tasks; 2) develop curricula that will produce the required knowledge and
skills; 3) set the minimum standards of literacy in the field of database
management which must be possessed in digital age; 4) create an open “online
community'' that will discuss topics of interest, which connects government,
academia and the business world; 5) provide the literature that will enable learning
from this area; 6) develop a working group to identify key issues in the field of
digitization of the organization, such as data security, individual privacy and the
ethical use of data.
Faculty of Business Economics and Entrepreneurship 25
BI G DATA AS AN I NDI VI DUAL ORGANI ZATI ONAL UNI T
Considering the growing importance of the impact of modern technology on
the organization of the XXI century, certain questions should be asked: 1) Is it
necessary to create a digital business function as a separate function in the
organization? 2) Where is digital business function located in the company? 3)
What is the degree of its independence? 4) What knowledge must digital experts
possess? In the following, special attention is given to these questions.
Correlation between digital functions in the organization and other parts of the
organization can be viewed through the prism of the theory of information
processing introduced by Nedler and Tushman (1978). This theory presupposes
linking the requests for information processing, on one hand, and the capacity for
information processing, on the other hand. The greater the complexity of tasks and
environment, as well as the interdependence of organizational units, the greater the
demands for information processing and decentralization. The capacity for the
most effective way to respond to requests for information processing could be
created through the implementation of digital infrastructure in modern
organizations. In this context, it can be assumed that the digital functions are
increasingly gaining in importance, and their primary basis represents the core of
professionals and experts in the field of software engineering, database
management, digital and social media experts. As the need for real-time decision-
making is growing, the role of digital decision makers is also growing. These
decision makers are seen as digital managers who have a mediating role in the
process of implementation of the "Big Data" (Galbraith, 2014).
Modern companies are constantly facing with the challenge of whether to
implement different types of digital functions in existing functions or to create a
new, separate, digital function. For example, a digital marketing and social media
experts can be included in the group for marketing. The Nike company decided to
create a separate digital unit, NikePlus.com. This unit is not fully independent, but
it is interdependent compared to other and play a mediating role in the
organizational structure of the Nike company. Functional digital structure of the
Nike company is shown in Figure 3.
26 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 3: Digital functional structure of Nike company
Source: Galbraith, JR (2014), Organization Design Challenges Resulting from Big
Data, Journal of Organizational Design, 3 (1) pp.8.
The next question to be answered is where the digital business unit is located in
the company. In this sense, there are three models of locating, and each of them
represents a settlement between centralization and decentralization (Grossman, Siegel,
2014:22): 1) Model of centralized digital function involves setting up all of digital
experts into a single unit. In this way it is easy to achieve a critical mass of experts, to
get the necessary data, to lead integrated infrastructure and to provide an adequate
expertise for the efficient use of statistical models. On the other hand, this model
emphasizes the distance of digital experts from other business units, and therefore the
lack of understanding of business units and their needs; 2) Model of decentralized
digital function implies the existence of digital experts in each business unit. In that
way the understanding of the needs of units is achieved and models are created in
accordance with their requirements. A shortcoming that is associated with this model is
the lack of a critical mass of professionals who will work for the welfare and
improvement of the system as a whole, and not just at the level of business unit; 3) A
hybrid model of locating digital function is a combination of the previous two models.
The critical mass of experts realizes their concentration in the central unit, except that
there are also digital experts who are located in different business units. This model
primarily aims to achieve the benefits of both centralization and decentralization.
In general, it can be concluded that the perfect model does not exist. Managers
need to identify the most appropriate model to match the requirements of an
organization.
Reports, analysis, reviews and other analytical materials which can be used for the
purposes of internal organizational units, as well as for external stakeholders could be
made by combining and processing of relevant information. Some companies have
Faculty of Business Economics and Entrepreneurship 27
recognized this opportunity, so they created the foundation for the creation of profit
centers, by assuming that digital organization units can sell their products to external
customers, and using that as a basis to generate their own income (Galbraith, 2014). In
this way, the level of independence of digital organization units extends, and each unit
has the opportunity to create "a small company", which could compete with other
companies in the same industry in the market through production of its output. It
should be noted that full autonomy of digital unit compared to others in the
organization is not a solution that will give the best effect, because of the fact that each
organizational unit requires maintenance and support of top management in order to
start with its own business. Constant harmonization of the pace of work with other
organizational units is also required because the effects of the organization as a whole
are greatest when there is the interdependence between organizational units, and their
work together is achieved and coordinated.
Finally, we need to answer the question of what knowledge a digital expert
should have. Grossman and Siegel (2014) have developed a model that
distinguishes: analytical knowledge, knowledge of the business and the use of
information technology as the primary knowledge (Figure 4).
Figure 4: Required knowledge of digital experts
Source: Grossman RL, Siegel KP, (2014), Organizational Models for Big Data and
Analytics, Journal of Organizational Design, 3 (1) pp.21.
This model supports the hypothesis that it is necessary for the modern experts
to possess much broader knowledge that is not exclusively related to the area of
database management and knowledge of analytical models. Digital experts must,
above all, know how to implement successfully and be familiar with information
infrastructure of organization, and then the company's business, product and
service, as well as the characteristics of organizational parts.
28 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON
The modern business environment is heavily influenced by the increasing
interdependence of the global development and information technology. The most
important creation of the environment of the XXI century is the "Big Data"
phenomenon, which involves the establishment of the comprehensive and
independent data base in the organization that is essential for real-time decision
making.
Under the influence of the creations of the Digitalization Era, modern
companies are changing their strategic orientation, and these changes are reflected
in accelerating the timing of the decision making process, the growing importance
of consumer needs as one of the condition to create value, then, a constant need to
innovate, the creation of complex organizational structures, changing the
characteristics of human resources through emphasizing the new skills and
knowledge necessary to perform new tasks.
Using contemporary and comprehensive databases by modern organizations is
becoming a key challenge for managers. In the future it can be expected that the
role of digital business units are increasingly gaining in importance, creating more
complex forms of organizational design. This function permeates other
organizational units and contributes to more effective job performance and the
creation of new values. Therefore, it is more certain that the next step in the
process of organizational design and strategic orientation will be inclusion of the
"Big Data" phenomenon as the key constructs of the Digital Era in the dimensions
of the matrix model and creating a fifth-dimensional matrix structure. Although no
company has reached this level of complexity, according to the modern trends in
the field of development and use of information-technology, creating the model is
realistic in a relatively short period of time.
Faculty of Business Economics and Entrepreneurship 29
REFERENCES
[1] Berner M., Graupner E., Maedche A., (2014), The information Panopticon in
The Big Data Era, Journal of Organizational Design, 3(1) pp.14-19.
[2] Galbraith J. R., (2012), The Future of Organization Design, Journal of
Organizational Design, 1(1) pp.3-6.
[3] Galbraith J. R., (2014), Organization Design Challenges Resulting from Big
Data, Journal of Organizational Design, 3(1) pp.2-13.
[4] Galbraith J.R., Downey D., Kates A., (2002), Designing Dynamic
Organization: a hands on Guide for Leaders at all Levels, AMACOM
[5] Grossman R. L., Siegel K. P., (2014), Organizational Models for Big Data and
Analytics, Journal of Organizational Design, 3(1) pp.20-25.
[6] Gulati R., Puranam P., Tushman M., (2012), Meta - Organization Design:
Rethinking Design in interorganizational and Community Contexts, Strategic
Management Journal, 33 pp. 571-586.
[7]http://turbotodd.wordpress.com/2013/04/03/big-moves-in-big-data-ibm-new-
data-acceleration-hadoop-capabilities/
[8] McAfee A., Brynjolfsson E., (2012), Big Data: The Management Revolution,
Howard Business Review, October, pp. 60-68.
[9] Miler R. E., Scaringella L., (2012), Designing The Firm to Fit The Future,
Journal of Organizational Design, 1(2) pp.69-74.
[10]Miller S., (2014), Collaborative Approaches Needed to Close The Big Data
Skills Gap, Journal of Organizational Design, 3(1) pp.26-30.
[11]Overholt, Miles H., (1997), Flexibile Organizations: Using Organizational
Design as a Comparative Advantage, Human Resource Planning, March, Vol.
20, No. 1, pp. 22-32.
[12]Petkovi? M., (2011), Organizaciono ponašanje, Univerzitet u Beogradu.
[13]Porter, M.E., (1986), Changing Paterns of International Competition,
California Management Review, Winter, Vol XXVIII, No.2, pp. 9-40.
[14]Tushman. M., Lakhani K., Assaf L. H., (2012), Open Innovation and
Organization Design, Journal of Organizational Design, 1(1) pp. 24-27.
30 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE ROLE OF FREE ZONES, TECHNOLOGY PARKS
AND BUSINESS INCUBATORS IN THE DEVELOPMENT
OF SMALL AND MEDIUM ENTERPRISES
Momcilo Zivkovic, PhD
3
Vuk Bevanda, PhD
4
ABSTRACT
Necessities of contemporary business environment in about past ten years have
created sudden expansion of free zones, technology parks, business incubators and other
modern forms of running business in the world. They could be differentiated by types and
structure, but all have common mission – speeding up of the development of small and
medium sized enterprises and improvement of the entire business environment of the
country where they exist. Experiences of developed economies, as well as countries in
transition, justifiy the fact that the private entrepreneurship is of great importance for the
economic development and that it represents an essential part of the process of economic
reform. In our country these forms of running business are still at the beginning, however
considering the possibilities they offer in the encouragement of local economic
development, their progressive increase will be expected in the following years.
Subject of this research are: entrepreneurs, entrepreneurship, SMEs, local
economic development.
The aim of this research is to analyze the relevant data, processes and relations in
the theory and practice of entrepreneurship, understand the role and importance of
modern instruments of business support to small and medium-sized enterprises - with
special emphasis on the role of free zones, technology parks and business incubators in
encouraging entrepreneurship and entrepreneurial initiatives, development of small and
medium enterprises and local economic development. In the framework of the work will
be considered different modalities to help businesses and entrepreneurs in starting and
realization of new business, during the initial period of operations that are critical for the
survival and further development of the company.
Key words: Entrepreneurship, Entrepreneurs, Business Operations, SMEs,
Local Economic Development.
J EL Classification: M 21
UDK: 334.713(497.11) 005.5:[004:007 339.543.624
332.122:338.45 332.146.2:334.012.64
3
Momcilo Zivkovic, Faculty of Business Studies, Megatrend University, Belgrade, Serbia,
[email protected]
4
Vuk Bevanda, Faculty of Business Studies, Megatrend University, Belgrade, Serbia,
[email protected]
Faculty of Business Economics and Entrepreneurship 31
I NTRODUCTI ON
Small and medium-sized businesses and entrepreneurs are the most efficient
segment of the economy in almost all countries of the world. Individually, these
enterprises make the largest contribution to the increase in employment, gross
value added and turnover therefore considered to be the backbone of the growth
and development of the national economy. Their role is particularly important in
countries in transition that are faced with problems of high unemployment, low
level of economic activity, lack of competition and lack of investment, and with
still present large and inefficient state-owned enterprises. As a reliable source of
job creation, small and medium enterprises make an important social function by
absorbing surplus labor incurred in the process of transition and transformation of
state and socially-owned enterprises (Group of authors, 2012).
Small and Medium Enterprises (SMEs) are also a key factor in the economic
development and innovation. The core of the political and economic transformation of
any country is the creation of the private sector, the development of entrepreneurship
and creation of SMEs. They are considered to be one of the principal driving forces in
economic development. SMEs stimulate private ownership and entrepreneurial skills,
they are flexible and can adapt quickly to changing market demand and supply
situations, they generate employment, help diversify economic activity and make a
significant contribution to exports and trade. SMEs also play an important role in
innovation and the high-tech business, due to their flexibility and creativity many of
them became large businesses (Stiki?, 2008).
These enterprises have a very important role in local and regional development
in a country. They are often the main source of new employment. Small businesses
can also have a significant role in the foreign trade of a country, as subcontractors
of multinational enterprises and companies (Group of authors, 2014).
As companies whose competitive advantage is reflected in the speed,
flexibility and sensitivity to the needs of consumers, small businesses can
contribute significantly to the development of a market economy. New, small
companies are creators of new products and services, which have essentially
changed people's lives, significantly contributing to changes in economic structure.
Nowadays they represent the most flexible forms of business and they are most
sensitive to consumer needs. In this sense, they represent the most sensitive part of
any economy. The development of small enterprises is vital to a healthy economy
of every country and the development of entrepreneurship, because they provide
greater business initiative, employment and income (Bevanda, 2011).
In all sectors where a larger number of participants is involved, their
connection, compliance and coordination are essential. Entrepreneurship, as an
activity of creative combining of entrepreneurial initiative, risk and available
factors in an enterprise, represents the driving force of companies and activities
that arise, grow and develop in the market. In the domestic economy, the focus is
on development of the private sector and entrepreneurial activities of small and
32 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
medium-sized enterprises in order to create a climate and business environment in
which it will be possible to transform existing enterprises according to
requirements of the market economy.
Free zones, technology parks, business incubators and other modern business and
organizational forms, as tools of a local economic development, have expanded in
Europe in the 90s of the 20th century, and that is the reason why we know very little
about them and why we have made poor use of them. This paper represents additional
effort in spreading the information and knowledge about the possibilities of these forms
for stimulating entrepreneur’s initiative, as well as support to small new businesses in
first years of their growth and development. Through the provision of new workspace
or the renewal of older industrial premises, they provide a further contribution to the
development of the local economy. This basic concept has been adopted and applied in
many different countries all over the world.
It has already been recognized that these instruments could make a valuable
contribution to the development of the SME sector. All those currently involved in
exploring the possibilities for the creation of free zones, technology parks and business
incubators, will find the information included in the paper of great help in determining
the approach that would be most relevant in the context of the current stage of
development of the Serbian economy in general, as well as the needs of different
localities.
SME SECTOR I N SERBI A
The economy of Serbia in 2012. has entered a new phase of the recession that
has slowed the reform of the implementation of the new growth model based on
export demand, increasing investment and reducing public consumption,
strengthening the industrial sector in parallel with the development of the service
sector. The consequence of growth based on domestic demand is reported budget
deficit (6.4% of GDP in 2012.), deficit in current account balance (10.5% of GDP),
and high external debt (85.9% of GDP). The economy is still faced with low level
of investment (18.0% share of GDP), inflation risk (inflation of 12.2%) and low
employment (unemployment rate of 23.9%) (Report on SMEs, 2013).
In 2012, from total number of 317.668 companies, the entrepreneurial sector
accounts for 99.8% (317.162 companies). SMEs generate 65.1% of employees
(782.026), 65.4% of turnover (5.690 billion RSD), 55.8% of GDP (977.1 billion RSD)
and engages 45.5% of the investment of non-financial sector. SMEs employ 45.3% of
total employment, 39.1% of total investments, it has realized 49.8% of exports, 58.2%
of imports, generating 70.8% of the trade deficit of the Serbian economy and accounts
for about 33% of the GDP of the Republic of Serbia. Regarding the size, the structure
of the SME sector consists mostly of micro-enterprises (305.321), while small and
medium-sized enterprises (11.841) dominated in all observed indicators (53.8%
employment, 60.7% of turnover, 61.6% of GVA, 77.0% of exports, imports 74.5% of
SMEs). (Report on SMEs, 2013)
Faculty of Business Economics and Entrepreneurship 33
To a weak level of recovery of the SME sector in 2012. decisive influence had
a medium-sized companies. Rather than develop into a driving force in the
development of the entire sector, recessionary crisis in largely affected this
segment of the economy. In comparison to 2011, medium-sized companies have
expressed above average reduction in the number of companies (-3.4% to -0.7 in
the SME sector), employment (-3.5% to -0.6%), investments (-59.8% vs. -29.4%)
and below-average sales growth (0.1% vs. 1.5%). Although medium-sized
enterprises are the largest exporters and importers of the SME sector and have an
above average coverage imports (67.5% versus 51.3% in the SME sector), in 2012.
they formed a ¼ deficit of SME sector (Report on SMEs, 2013).
The main positive business trends in the SME sector compared to 2011
(Report on SMEs, 2013):
? Increase business - turnover in real terms by 1.5%,
? Dynamic growth in exports (15.7%), and take a leading role in the export of
non-financial sector of the economy (share of 51.1%), and held sufficient
coverage of imports by exports above (the rate of 51.3%),
? Achieved above-average growth rates of GDP (3.2%) and profits (6.5%)
compared to the non-financial sector (2.1% and 4.3%, respectively),
? Increased productivity, which in part can be attributed to the decrease in
employment. realized the growth rate of GVA per employee of 3.8%, which
is higher than in the non-financial sector (2.4%) and large companies (0.4%),
? Above-average earnings growth - 6.5% versus 4.3% in the non-financial
sector and 2.1% in large companies, and
? Poor level of reduction of the total number of businesses and shops, the ratio
of established and closed companies is much more favorable than in the
previous year (1.2:1 versus 0.6:1), although it retained unfavorable net effect
of the establishment of new operations (0.9:1).
The most important adverse effects are (Report on SMEs, 2013):
? Reduction of employment in the SME sector by 0.6% (to 4,847 employees),
? Reducing the number of active business entities at the end of 2012. by 1.3%
compared to late 2011. year (for 4,287 companies and shops),
? Above average increase in the trade deficit (20.6%) and imports (18.0%),
which led to increase of the total deficit of the nonfinancial sector from
66.7% to 74.0%, respectively,
? At the end of 2012, the number of active business entities was 1.3% lower
(4.287 for companies and actions),
? Retain the unfavorable trend of sectoral concentration of SMEs with
absolute dominance of manufacturing sector and the wholesale and retail,
? Regional imbalances are still exaggerated - the level of development of the
SME sector as measured indicator of GVA per employee in the City of
Belgrade, in relation to the underdeveloped area P?injska is 2.3:1.
34 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DI FFI CULTI ES I N THE OPERATI ONS OF SMES
The most important difficulty in the operations of small businesses, according
to the study of the economic sector and the OECD are: lack of consumer
purchasing power, increase input costs, lack of working capital, unfavorable credit,
intense competition, high taxes, etc. Entrepreneurs in Serbia and small businesses
are faced with many problems in business, both in the start-up, daily operations,
and in the case of termination. Among the many obstacles to SMEs, there are:
? Unresolved issues: gray economy, still relatively high tax burden, unreliable
and slow legal process of debt collection and bankruptcy,
? Lack of funding - according to the owners of SMEs, it is the main problem
in this sector,
? Credit financing is still the only solution for the vast majority of SMEs (in
addition to personal savings),
? Banks can not provide sufficient resources, even though interest rates and
credit conditions are not favorable for SMEs,
? Other issues: poor functioning of the insurance system and the claims
collection, lack of mortgages and the unsettled state of the land registers,
which limits the possibility of using a mortgage, and so on.
The business of the SME sector, in the opinion of their respective owners
burdens (The working group Small and medium enterprises and entrepreneurship,
2009):
? Advanced payment of taxes, high tax rates, as well as unfavorable costs of
electricity, telephone, etc..,
? Pending legal aspects, the slow process of obtaining the necessary permits
and long legalization procedures,
? Tariff barriers, etc.
To create a higher level of competition among local entrepreneurs, conditions
for the survival of competitive businesses, and to strengthen the entrepreneurial and
creative skills of local businesses, it is necessary to develop modern instruments of
business support and local economic development. Promotion of SMEs primarily
involve creating environments to support SMEs, which includes the provision of
services and lobbying for SMEs. This includes promotion of both existing and new
businesses, providing advice, support and resources of local government. Legal
requirements are often barriers to SMEs, so the activities that a municipality may
take are working to improve procedures and processes that companies must go
through.
Faculty of Business Economics and Entrepreneurship 35
THE ROLE OF FREE ZONES I N THE DEVELOPMENT OF SMES
AND LOCAL ECONOMI C DEVELOPMENT
Free zones are areas or parts of the territory which are especially physically
identified and marked, which perform a variety of activities, and where is applied
incentive regime of business that is primarily reflected in the preferential tariff
treatment, tax exemptions and simplified administrative procedures. In other
words, free zones include the specific area with the special conditions, a special
regime of economy, significant benefits, allowances and incentives to produce
goods, which is primarily intended for export (Law on Free Zones, 2006).
The concept of free zones began to develop in the fifties, as a tool that created
the perfect environment for business, especially for companies who seek low-cost
export base. Free zones are formed from the free ports and port cities, and their
development and the transformation to the legal institute began in the late
nineteenth and early twentieth century. In another half of the last century, their
number in the world is measured in hundreds, and their share in world trade was
around 20% (Serbian Chamber of Commerce, 2012).
Table 1: Free zones in the world
REGION Number of zones
North America + Mexico 320
Central America 41
Caribbean 51
South America 41
Europe 81
Middle East 39
Asia 225
Africa 47
Pacific 2
TOTAL 847
Source: WEPZA and ILO - World Associations of Free Zones: World Export
processings Zones, The National Association of Foreign-Trade Zones, 2012.
In business practice, free zones have proven as prosperous and profitable institutions
with numerous specific businesses. Economic and administrative reasons for the
existence of free zones, that allow their profitability, are reflected in the fact that they
allow savings in different areas: customs (default or deferred payment), fees, taxes and
other measures and decisions of an economic nature. One of the reasons for developing
free zone is a concentration of services and needs in one place. They are logistics center
for shipping, customs, transportation and storage services, transshipment, treatment etc.
Free zones significantly encourage and stimulate investment in the economy of a
36 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
country, thus it faster integrates in international division of labor. Also, within the free
zones, economic activities are taking place in order to encourage export and thus increase
the intensity of foreign exchange of the country, and the realization of positive indirect
effects on the domestic economy. In addition, investment motives of foreign partners in
the free zone must be supported efficiently by the legal framework that ensures the
stability of laws and regulations, and therefore legal security and the role of business
(Serbian Chamber of Commerce, 2012).
The Free zone is a comfortable ground for effective ways of business
development, ie. economic prosperity. It shows statistics of economically
developed countries, due to the fact that the development of business and
entrepreneurial infrastructure is grounded way of overcoming underdevelopment
and poverty. The free zone is the one that provides a number of benefits for the
development of entrepreneurship. On the other hand, entrepreneurship is a
fundamental driving force for economic development and at the same time entering
into a market economy (Su?eska, 2006).
The fundamental starting point of free zones is to create conditions for
development of entrepreneurship, considering free zone as a large and complex
company from which economic development of the country will arise. Designing
the zone should incorporate economic policy with far-reaching views of the future.
This policy allows entrepreneurial infrastructure, proper marketing and financial
policy. Zone creation is based on the investment thinking - to gather an attractive
profit sector with high employment, low capital investment, short period of
activation and return of capital, while preferring manufacturing and service
industries. Most often business in the zone is done with less risk in relation to the
environment, but in fact there is no ideal concept. Behind every success there are
difficulties, requiring perseverance and willingness to take risks. Less risk is
certainly implied in fact that there are greater tax, trade, customs and financial
benefits, all in favor of reducing costs and increasing competitive advantage.
The Free zone is to be arranged legally and practically to encourage business and
controlling action in the direction of developmental effects. Companies that are placed
in the zone are available to choose from programs in several fields of manufacturing
and service businesses, that can comfortably adjust to the possibilities and the available
funds. Doing business in free zones refines entrepreneurial spirit, encourages creative
thinking in the direction of continuous improvement of business performance, and that
intensifies local economic development.
Free zones are guided by owners of capital that have incentives to develop
business, increase profits and property values through reinvestment. Such
motivation can become a decisive factor in the development of the economy on the
principles of increasing and improving performance. It is the lever of faster and
more efficient economic development of the countries flooded with economic and
social problems. This means that the free zone introduces new elements to the
economic development, enhancing the creative process of creating new economic
values, especially in SME sector. This process is driven by invisible force that
reduces the risk of failure that follows each company.
Faculty of Business Economics and Entrepreneurship 37
The most important reason for establishing a free zone is to increase the
employment of the labor force of the host country. It has been shown that free zones
model increases the number of workers, if it is properly implemented. A large part of
the workforce in such areas are women, that provide better income than, for example,
in agriculture or domestic service industries. In some areas female labor force counts
90% of the total number of employees, especially in zones that have implemented
production programs of electronic parts and apparel. In any case, the type of business,
as well as high-tech in zones develops change of the profile of the workforce. Research
shows that one employee in the zone affects/provides employment for up to four
workers outside the free zone (Kosti?, 2008).
Free zones improve the laws and regulations of the host country, giving
contribution to streamlining the process of exchange in the wider context. They
also support the development of infrastructure and human resources development.
Hereby free zone take on the role of flexible development strategy with positive
effects on disturbed economic and social situation in developing countries, and a
catalyst in the mobilization of resources, especially manpower. According to many
researches, zones successfully help in stopping the downward trend of the
development. As a source of growth appears additional energy arising from the
restructuring of business entities in the form of the free zone, offering benefits to
reduce costs and accelerate the revitalization of the economy and overall life.
Practice in the world shows that the free zone, established in any geographic and
economic area, enable fast direct investment and increase the level of employment of
labor. Free zones have contributed to a significant increase in employment of low-
skilled population, thus solving big problems of unemployment in many developing
countries. Statistics show that about 42 million workers are currently directly and
indirectly employed in the free trade zones, of which 30 million in China, 2 million in
Mexico, 700.000 in the Middle East, 300.000 in America and about 250.000 in
countries in transition. In past few years foreign direct investments have recorded a
smaller decline in countries with a developed network of free zones.
A comparative study, carried out between countries of different income, support the
notion that countries that have established free zones in their territories have achieved a
higher growth of exports comparing to the countries of similar rank without free zones.
Export in countries that have established a free zone is tens of percent higher.
Within the European Union, 74 Free Zones are defined under the Community
Customs Code. Exemptions beyond customs arrangements can include services such as
grants offered for research and development and advanced infrastructure. But tax
incentives may also be offered and these may, especially on a regional level, distort
competition. As such, the tax regime applied needs to be compliant with internal
market and State aid rules. As for customs regulation, the Modernised Community
Customs Code, that took effect in June 2013, also have an effect on those Free Zones
in which there is currently no physical control of goods leaving and entering the zone.
A measure mostly meant to streamline customs procedures amongst Member States
but also underlining the importance of sufficient regulatory oversight in such zones to
avoid institutional problems and organised crime (European Parliamentary Research
Service, 2013).
38 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Table 2: Examples of European Free Zones
Source: Regional development companies sites and tax consultancy research,
2013.
The recent development of free zones in Serbia was inadequate and did not
meet expectations. Free zones in the Republic of Serbia based their business on
service warehousing and operated as free trade zones. The exception is a positive
example of the economic effects of the use of regime of free zones in Subotica and
Pirot. Free Zone "Pirot" currently has eight manufacturing programs, one of which
is dominant - section for the production of tires (Michelin), enabling the use of free
zones as export production zone (Export processing zone). This enabled testing of
operating mode with production activities in free zones in the Republic of Serbia,
and thus provide an answer that free zones in function of the production for export
gives good results (Development strategy of free zones in the Republic of Serbia
for the period from 2011th to 2016th year, RS Official Gazette, no. 22/2011).
TECHNOLOGY PARKS AS A MODEL OF I MPROVI NG THE
EFFI CI ENCY OF BUSI NESS AND ECONOMI C DEVELOPMENT
Technology park is the term used to describe a variety of efforts to stimulate
the development of entrepreneurial, knowledge-based small and medium-sized
enterprises (SMEs) within a country. The term has at least 16 synonyms, with the
most common being "science park," "research park," and "technopole." As much
as there is no consistent definition for technology park, there is also no consistent
term for the functions that a technology park provides. While in the United States,
"technology park," "research park" or "research and technology park" are
frequently used, "science park" is popular in Britain and Europe and "technopole"
is widely used in France. New terms are constantly arising as technology parks
attempt to distinguish themselves from the considerable competition of at least 295
technology parks worldwide (Briggs, Watt,http://www.american.edu/).
Faculty of Business Economics and Entrepreneurship 39
Originally, the term technology park had a very limited definition, focusing on
the real estate aspect of the park concept, in which universities typically leased real
estate, office space or research facilities to businesses. Sometimes these
arrangements are referred to as "industrial estates" or "firm hotels." The term,
however, has evolved to include a much broader range of functions, including
economic development and technology transfer.
The most commonly used definition of a technology park (TP) is:
"Technology park is management organization of specialized professionals, whose
main task is to increase the well-being of the community by promoting the culture
of innovation and competitiveness of associated entrepreneurs and research
institutions. To achieve these goals, TP stimulates and manages the flow of
knowledge and technology amongst universities, R&D institutions, SMEs and
markets; It facilitates the creation and growth of the innovation-based companies
through incubation and spin - off processes and provides maintenance services in
order to increase the added value together with high-quality environment and
equipment in TP." (International Association of Science Parks - IASP).
The most important characteristics of the technology park are (Briggs,Watt,http://www.american.edu/):
? It is linked with educational or research institutions,
? It provides infrastructure and support services for businesses, particularly
real estate and office space,
? It performs a technology transfer function,
? It performs an economic development function.
However, not all technology parks will meet all of these characteristics and
some may contain additional functions.
While each country or municipality may have different reasons for creating
technology parks, generally the primary goal of a technology park arrangement is
to increase the number of entrepreneurial, knowledge-based small and medium-
sized enterprises (SMEs) in an economy. SME's have been recognized as a driving
force of the private sector as they help diversify the economy. Developing
countries with no local expertise in technology, may use technology parks to attract
foreign direct investment to create jobs and increase tax revenues. An important
reason, in terms of the Western Balkans, is certainly the retention or return of the
best young professionals in the country, providing the ability to obtain attractive
jobs in their own country. Another important factor is the establishment and
encouragement of so-called transfer of technology from research institutions in the
economy, because research and development are key functions of TP.
Based on practical experiences, TP is inevitably associated with higher
education and research institutions. Companies are adopting new technologies from
its own research and development activities or the work of these educational or
research institutions, that facilitate technology transfer through spin-off companies.
Spin-off is a new company that was created by people who are former employees
of major companies (parent), by transferring the core technology from the parent to
40 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
the company. It is usually created to apply and commercialize technology, which
was created by state, university or other publicly-funded research. In recent years,
many spin-off companies in the European TP have been a result of undergraduate
and graduate research of candidates.
Technology parks and incubators vary in the way they are established and
managed. They can be founded as independent legal organizations by state and
local governments, universities and research institutes, development foundations,
private corporations or any combination of those. Depending on the institutional
character of their founders, parks and incubators can be public or not-for-profit,
private, academic-related, hybrid, and other. This classification is used by the
American National Business Incubation Association in Athens, Ohio, in relation to
incubation facilities, but can be extended, in principle, to include technology parks.
(Petree, Petkov, Spiro)
Establishing the park on the basis of existing facilities is much less costly than
building new premises. As in the case of a university-based science park, those
university institutes and laboratories that are at an advanced stage of developing
commercially suitable products and services can become the first tenants of the
park. A young IT-service firm can also serve as a major attraction to software
development and information technology-related companies. The research
personnel and faculty of the host university (or the Academy of science), as well as
its students will be encouraged to participate in the park as consultants and interns.
Another major component of the park can be a high-technology incubator that will
provide professional and business support to software development and hi-tech
R&D projects (Petree, Petkov, Spiro)
The organisational structure of the technology park can vary in complexity
depending on the size and concept of the park. With the development of the park its
structural parts can be changed, because it is basically a flexible organization.
Figure 1: Example: Organisational structure of Danang Hi-Tech Park, Vietnam
Source: Danang Hi-Tech Park, Vietnam, dhtp.gov.vn, visited 09.06.2014.
Faculty of Business Economics and Entrepreneurship 41
The distribution by sector in technology parks is usually dominated by ICT
companies. Industrial technologies, environmental energy, chemical &
pharmaceutical, and other different types of services also participate in its sectoral
distribution. (Castilla y León, cordis.europa.eu)
Figure 2: Example: Employment distribution by sectors in the Technology Park of
Boecillo, Spain
Source: Technology Parks of Castilla y León, Spain
Numerous studies indicate the fact that technology parks have a number of
advantages that are reflected in the following:
? TP is the fastest and best way of restructuring the regional economies and
towards a more flexible economic activities,
? TP is the engine of growth of SMEs,
? TP is the best place where private entrepreneurs solve their production,
management, design, legal and other problems,
? TP is a place where scientific thought is practically applied and
implemented,
? TP attack weaknesses that characterize an area; In the case of the Western
Balkans that are insufficiently developed market mechanisms of economic
activities and operations, inadequate design and redesign of products, poor
development and the implementation of new technology, undefined
legislation, lack of managerial and marketing skills, non-existence of defined
clusters, undeveloped market, and so on.
42 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Technology park, in the constellation of new organizational forms that
encourage entrepreneurship and appearing at the present time, takes one of the
strategic places. The field of operation is the same as other forms that support the
development of SMEs, but the activities of the TP are much more sophisticated and
complex. The TP is intended to be a place in which will be created:
? Motivation and climate for the development of enterprises,
? Promotion of self-employment and the development of their own business as
a modern social trend,
? Positive image of entrepreneurs,
? Detailed information and solutions for business people,
? New jobs and businesses in the region,
? Support for the conversion of regional potential in commercial enterprises,
? Profile on the market for technology companies in the region and their
clusters by providing foreign partners and international network of contacts.
BUSI NESS I NCUBATORS AS A MODERN I NSTRUMENT OF
SUPPORT FOR SMALL AND MEDI UM-SI ZED ENTERPRI SES
Business incubation is a business support process that accelerates the
successful development of start-up and fledgling companies by providing
entrepreneurs with an array of targeted resources and services. These services are
usually developed or orchestrated by incubator management and offered both in the
business incubator and through its network of contacts. A business incubator’s
main goal is to produce successful firms that will leave the program financially
viable and freestanding. These incubator graduates have the potential to create
jobs, revitalize neighborhoods, commercialize new technologies, and strengthen
local and national economies (www.nbia.org).
Critical to the definition of an incubator is the provision of management
guidance, technical assistance and consulting tailored to young growing
companies. Incubators usually also provide clients access to appropriate rental
space and flexible leases, shared basic business services and equipment, technology
support services and assistance in obtaining the financing necessary for company
growth. (www.nbia.org)
Term incubation involves ensuring good conditions for starting new businesses
and achievement of business ideas, innovation in stimulating the entrepreneurial
spirit, as well as taking concrete steps to preserve such conditions and resources
required for the survival, growth and development. Business incubators are tending
to create favorable conditions to enable interested entrepreneurs starting their own
businesses, establishing, maintaining stable performance in several years, and train
them to leave the incubator and perform independently on the market after few
years (http://www.mrrls.gov.rs/).
Faculty of Business Economics and Entrepreneurship 43
The first step to establish and develop business incubator is to finance
infrastructure by state and local governments, and later continued with entry of
private investment (donors, other economic organizations, profit organizations,
academic institutions). After the construction is done, there comes the phase of
filling incubator with tenants (enerprises) with predefined criteria for their
selection, and defined criteria for getting out of incubation.
The goals of creating a business incubator are: creating jobs, reducing the
number of failed SMEs, strengthen SMEs in the region (local development),
retention of young people in local communities, supporting the process of
privatization and restructuring, connecting enterprises in the region and beyond
with large enterprises. Business incubators provide opportunities for the
development of new services, implement new technologies, and new business,
technical, organizational structures and marketing methods.
The range of services provided by business incubators varies considerably in
different countries depending on the tradition and financing models, as well as the
needs and problems faced by local businesses. The key element is to provide an
environment in which entrepreneurs and enterprises can quickly begin to work and
expand their business. Within the business incubators are usually facilities in which
national or local governments, municipalities or groups of large companies provide
office and administrative services, as well as assistance in various areas, such as
technical support, access to financial resources, advice, marketing services,
equipment and assistance in management, in the key (early) stages of business life.
Usage of incubator space, shared services such as common secretary, office
equipment, networking - commercial space, counseling, mentoring, and so on at
subsidized prices, increases the probability of success of the enterprise that
operates in the incubator, in relation to a company which operates independently.
Figure 3: Services provided inside the incubator
Source: United Nations Industrial Development Organization, Technology
Business Incubators and Technology Parks, www.unido.org, visited january 2014.
44 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
The most important segment of the support that business incubators provide, is
access to start-up capital needed to start and grow new businesses. When a company
finds itself in an incubator, the way to potential investors is more accesible and direct,
due to a fact that free capital looking for profitable investment opportunity, can
recognize new entrepreneurial initiatives more easily. Simply belonging to a business
incubator is a favorable sign for potential investors, as they are considered that
members of the business incubators already passed the conformance test of business
ideas when entering the incubator. With good price lease, joint service service,
providing professional business support and training at subsidized prices, investors get
a sense of security and a sense of equity significantly less risky than would be the case
in a pure market business environment. Statistical reports provide confirmation of this
view, by showing that business incubators increase the degree of success of the
company from 20% to as much as 87% (Avlijaš, 2010).
Figure 4: Comparison of efectivness of the enterprises inside and outside the
incubator
Source: National Business Incubation Association - NBIA, www.nbia.org, visited
January 2014.
Most of the studies dealing with the analysis of the success of business
incubators used as an indicator of the success its impact survival rates in the initial
stages of development of the company, while it is located in the incubator, and
their survival rate after leaving the incubator. Studies show that about 90% of
companies that have started operating in the business incubator, do business 3
years after that. Available data confirm validity of the constitution of business
incubators as a form of organizing social protection of entrepreneurial ventures.
In evaluating the success of the incubator were used various criteria, among
which the following are the most common (Tables 3 and 4) (Stiki?, 2008):
? The number of newly established enterprises - who survived the critical
period of 3 years,
? The number of newly created permanent jobs - where the indicator of
"permanence" take into account the companies that have crossed the limit of
6 years of existence,
Faculty of Business Economics and Entrepreneurship 45
? The economic activity of companies - members (evaluated using a variety of
indicators, depending on the type of activity - usually a total revenue),
? Number of implemented and market-acclaimed innovation,
? Answers of surveyed companies about the impact of business incubators on
their development and competitiveness.
Tables 3 and 4: Performance indicators of business incubators
Performance indicator Total Average
value
Number of start-ups and other entrepreneurial projects
during the year
7891 75
Number of business plans implemented during the year 7468 74.68
Number of start-ups created during the year 2678 26
Companies survivability / 87.55%
Number of companies (tenants) in an incubator 2916 29.76
Number of employees in enterprises tenants 17940 188.84
Number of new jobs 5909 79.85
Number of participants in the various events aimed at
encouraging entrepreneurship
69131 652.18
Number of participants in training programs for the
improvement of business skills
51930 570.66
Process indicator Total
(Network)
Average
value
Number of existing companies 15244 148
Number of projects based on technological innovation
expressed as a percentage
54.01% /
Number of events organized to promote
entrepreneurship
1884 17.61
Number of organized business skills training during the
year
10567 114
Number of employees in a business incubator / 7-9
Source: Stiki?, D., Business incubators as a tool to support the development of
innovative enterprises, 35th National Conference on Quality, Kragujevac, 2008.
Business incubators have a direct impact on the local and wider community. It
is reflected, above all, in increase of employment, restructuring, growth in
production and an increase in GDP. Using the "input-output" method for measuring
the total income and the impact on employment, research has shown that business
incubators increase employment and income in greater amount than the number of
directly employed and paid workforce within the incubator. For example, research
conducted in one region showed that employment and income increase, on average,
46 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
with a coefficient of 1.35 to 1.43, compared to the direct effects produced by
companies within the incubator. This means that in addition to direct effects,
indirect employment and income grow at the rate of 35% to 43%.
(http://www.unece.org/indust/sme/incubator).
Business incubators are associated with the growth of state and local revenues.
Taking into account the increased state and local tax revenues at the same rate as
personal income, can be accomplished by increasing estimates of tax revenue
caused by the existence of a business incubator. There was also evidence that the
social costs of job creation, support for start-up businesses through business
incubators, re much lower than those needed to implement various other programs
to create new jobs. Research, which was conducted within the European Union,
showed that 900 existing business incubator helps in opening productive 40,000
new jobs each year in companies that are more stable than those arising out of
business incubators.
The main income of the local and social community from the business
incubators are healthy companies. The companies that emerge from the business
incubators are often on the leading line of the development of new, innovative
technologies, which will progressively affect the environment, especially the
quality of its products and services. For these reasons, in the last 3-4 years in our
country there is a growing awareness that business incubators can make a
significant contribution to the development of entrepreneurship of small and
medium enterprises. Using already developed models and their adaptation to the
existing conditions in the country, provides us the opportunity to catch up with
developed countries.
Therefore, business incubators appear as an increasingly popular way of
encouraging entrepreneurship and reduce unemployment in Serbia. The purpose of
business incubators as a business association in Serbia is to provide good
conditions for starting new businesses and translating business ideas into practice,
and to prevent the departure of educated young people abroad due to lack of
conditions. There is about ten operational business incubators such as incubator of
engineering faculties in Belgrade, business incubator Knjaževac, Niš, Kruševac,
Užice, Prokuplje, Bor, Senta, Subotica, Zrenjanin, Pan?evo, Beo?in and Ra?a.
Faculty of Business Economics and Entrepreneurship 47
CONCLUSI ON
Many companies and entrepreneurs in the beginning are facing the problem of
lack of capital, lack of experience in managing the company, and the lack of the
market, both in terms of demand for the products offered, as well as in terms of
new, unfamiliar markets. The result is a very small number of newly established
companies and, indirectly, fewer new jobs at a local level. Accordingly, the
possibilities of development of private sector and small companies in the initial
periods of their business, as well as mechanisms to help companies and
entrepreneurs in starting new businesses, are not yet sufficiently developed and
efficient. In this regard, it is necessary first of all to raise awareness about the need
to establish free zones, technology parks, business incubators and other modern
instruments of business support to the creation of new businesses and new jobs.
Free zones, technology parks and business incubators are among the most
important instruments that can help the development of new, sustainable enterprises at
the local level. These instruments are one of the solutions to this problem in the sense
of support start-ups in many aspects of their business, thereby encouraging the
development of entrepreneurship and local economic development.
Free zone programmes should target a wide assortment of economic sectors,
including commercial and manufacturing activities and professional services, such
as warehousing and trans-shipment. To reduce the burden placed on public
resources and increase the efficiency of zones, the private sector should be
encouraged to help develop them and be allowed to operate under market
mechanisms. „Free zones have many merits and have boosted investment in many
countries. More zones are in the pipeline and still more will emerge in the years
ahead. However, bringing in investment is only one, albeit vital, step in a long
journey. The ultimate goal must be to make those investments work to the benefit
of the wider economy“ (Fodor).
With plenty of business hatchlings growing bigger every year via incubators,
it’s clear that technology parks are more than just commercial neighbourhoods.
They can offer small companies resources beyond their wildest imagining or ability
to finance for themselves. Planned settings of development of technology parks in
the regions of the Western Balkans are based on the presented premises and
determinants of research and development. These parks should be a complement to
the planned commercial zones, entrepreneurship centers or business incubators.
They should be a joint effort of all to create a business environment where there are
early-commercial-industrial zones, institutes, universities, teams for local economic
development, regional development agencies, and other governmental and non-
governmental organizations with the same goal. TP create an environment with
suitable conditions for the establishment and management of companies based on
technologies, or products and services that require a little higher knowledge.
48 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Business incubators are effective instruments of helping entrepreneurs and
companies in starting new businesses, supporting start-ups and providing a variety
of assistance in order to survive during the initial operating period. As a flexible
organizational forms, which are able to effectively adapt to the needs and changes
in the environment, business incubators are trying to activate all of the company’s
resources, putting them in the function of the realization of entrepreneur and small
business development. Way of doing business in the business incubator represents
a reform of private businesses, contributing to the strengthening of small and
medium-sized enterprises, but also easier access to modern technology.
Technology parks and incubators are the important bridge between taking existing
knowledge and markets and expanding them, by supporting new businesses that
have the energy and agility to move industries to the next level.
However, one should be kept in mind – these instruments must be viewed in
the broader context of economic development, and must be an integral part of the
overall strategy for economic development. As such, they can not afford to
contribute to local economic development itself, and can only support the
development of entrepreneurship and job creation in a particular union, by
systematic provision of the stimulating environment that will enable the faster
development of the SME sector.
REFERENCES
[1] Avlijaš, R.(2010)Entrepreneurship, Singidunum University, Belgrade
[2] Briggs, A., T., Watt, Technology and research parks, report that was created in
Impacts of National Information Technology Environments on Business, an
MBA class of American University, Washington, D.C.,http://www.american.edu/, visited 05.06.2014.
[3] Bevanda, V. (2011), The establishment of business incubators in the function of
stimulating entrepreneurial activities and local economic development in the
Republic of Serbia, PhD thesis, Faculty of Business Studies, Megatrend
university, Belgrade
[4] Castilla y León, Regional Research & Innovation Service, cordis.europa.eu,
visited 07.06.2014.
[5] Danang Hi-Tech Park, Vietnam, dhtp.gov.vn, visited 09.06.2014.
[6] Development strategy of free zones in the Republic of Serbia for the period
from 2011th to 2016th year, RS Official Gazette, no. 22/2011.
[7] European Parliamentary Research Service (2013), Establishing Free Zones for
regional development,http://epthinktank.eu, visited april 2014.
[8] Free Zones (2012), Serbian Chamber of Commerce, Belgrade, Serbia
[9] Group of authors (2012), Financing small and medium enterprises in Serbia,
Serbian Chamber of Commerce, Belgrade: ?ugura print
[10] Group of authors (2014), Business economics, Belgrade: Megatrend university
Faculty of Business Economics and Entrepreneurship 49
[11] International Association of Science Parks, IASP,http://www.iasp.ws/, visited
may 2014.
[12] Kosti?, D. (2008), Free production zones and industrial parks, Faculty of
Management, Megatrend University, Zaje?ar
[13] Law on Free Zones (2006), RS Official Gazette No.62/2006
[14] Ministry of Regional Development and the local government, Republic of
Serbia,http://www.mrrls.gov.rs/, visited april 2014.
[15] National Business Incubation Association - NBIA, www.nbia.org, visited
January 2014.
[16] Petree, R., Petkov, R., Spiro, E., Technology Parks – Concept and
Organization, Summary Report, Institute for EastWest Studies
[17] Report on SMEs (december 2013), the Ministry of Economy and Regional
Development, Institute for Development, the National Agency for Regional
Development, Belgrade
[18] Stiki?, D. (2008), Business incubators as a tool to support the development of
innovative enterprises, 35th National Conference on Quality, Kragujevac
[19] Su?eska, M. (2006), Free Zone and Economic Development, Faculty of
Criminal Justice Sciences, Sarajevo
[20] The working group Small and medium enterprises and entrepreneurship
(february 2009), Implementation of the European Charter for Small Enterprises
in the Western Balkans, Belgrade
[21] United Nations Industrial Development Organization, Technology Business
Incubators and Technology Parks, www.unido.org, visited january 2014.
[22] United Nations Economic Commission for Europe – UNECE,http://www.unece.org/indust/sme/incubator, visited december 2013.
[23] World Associations of Free Zones (2012): World Export processings Zones,
The National Association of Foreign-Trade Zones
50 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DOWNSIZING AS A MEASURE FOR THE INCREASE OF
EFFICIENCY AND FLEXIBILITY OF AN ENTREPRISE
Nenad Ravic, MA
5
Vlado Radic, PhD
6
ABSTRACT
The growth of an enterprise (size wise) leads to lowering of flexibility,
innovations and creativity of an organization because of standardization and
introducing the formal organizational structure. The consequences can be seen in
the fact that the large enterprises become slow, too large and slowly adjust
themselves to changes. One of the possible solutions is downsizing, which
represents organizational reconstruction whose result is the decrease of the size of
an organization with the purpose of attaining greater flexibility and efficiency. This
can be realized through the following methods: narrowing of the management
level, programs and output, eliminating specialized functions, decrease in the
number of employees etc. In the modern business practice it is often the case that
downsizing removes the middle level of management which provides greater
flexibility and “flatter“organizational structure.
Hypothesis of this paper is the following: Downsizing represents an effective
measure for increase in efficiency and flexibility of an enterprise.
This paper applies the method of analysis of contents of documents in printed
and electronic form, which deal with this topic. The purpose of the research is to
prove or disprove the hypothesis. Based upon the research results, we can
conclude that the hypothesis is confirmed, that downsizing does represent an
efficient measure for increase in efficiency and flexibility of an enterprise, but only
if it is done in a planned and systematic way. The recommendation to the managers
is to use this measure very carefully and thoughtfully, because in another case it
can cause various counter effects and deepen the crisis in an enterprise.
Key words: Organization, Efficiency, Flexibility
J EL Classification: M 21
UDK: 005.591.47 005.336.1
5
Nenad Ravic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
6
Vlado Radic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
Faculty of Business Economics and Entrepreneurship 51
I NTRODUCTI ON
By enlarging the size of an enterprise the advantage is given to the control of
the business activities over creativity and new ideas, this decreases the
entrepreneurial spirit of an enterprise and flexibility to adapt to the changes.
Instead of focusing on the further development of their competencies, large
enterprises focus more on the control of their business activities. Formalization of
the process limits the creativity and innovations in the organization. This is why
large organizations become rigid, slow and slowly adapt to changes. Such
organization finds it difficult to answer to the demands and the needs of the
consumers. On the other hand, the expenses of doing business grow, because the
growth of an enterprise demands greater investments in supply, so management has
to find a way to make an enterprise flexible and efficient again. One of the ways is
to solve that issue is to change the organizational structure of an enterprise, like for
example, switching to division organizational structure. If that measure does not
give the adequate results, management of an enterprise can think about conducting
downsizing, which represents organized reduction of the size of an enterprise.
The subject of the research is planned and organized reduction of the size of a
large enterprise at the level of SME, which is called downsizing in literature.
The goal of this paper is to prove that downsizing can be an effective way to
increase flexibility and efficiency of an enterprise, but only if implemented in a
planned and systematic way.
Authors have found the motive for writing this paper in the fact that in Serbia
downsizing is done in a completely wrong way, unsystematically and without
previously done thorough analyses. Employees are let go in a linear way, through
the entire organizational structure and there is no care for the ones that are let go,
which creates numerous negative consequences for the enterprise. Another motive
for writing this paper is the fact that downsizing is not present enough in domestic
literature, so the wish of the authors is to contribute to the research of downsizing
in domestic framework and to encourage other authors to deal with this sensitive
topic.
This paper will use the methods of deduction and content analysis of relevant
professional literature in printed and electronic form.
The hypothesis of the research is the following: Downsizing represents an
effective measure for increase in efficiency and flexibility of an enterprise.
52 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DOWNSI ZI NG
In professional literature there are various definitions and interpretations of
downsizing. One of the most precise definitions is the following: “organized
reduction of the size of an enterprise with the goal of achieving greater level of
efficiency” (Miloševi?, Vuji?i?, 2013, p. 107). We are talking about the
organizational reconstruction which results in reduction of the size of an enterprise
with the goal of achieving greater flexibility and efficiency. Through realization of
downsizing the reduction of an enterprise to the level of SME is done, which
facilitates its functioning. In modern practice, downsizing usually includes
eliminating of the middle level of management which leads to “flatter
organization”.
Many large organizations in the period of stable growth, when the
organizations dominated their environment and changed the bureaucratic
organizational structure (Xerox, Exxom, IBM, GM, GE, etc.), have become slow,
too large and inefficient, so they had to think about how to once again become
efficient and flexible and to react to the changes in the environment at the adequate
speed. Downsizing has become the strategy of choice of many large organizations.
Almost all organizations from the list of the magazine “Fortune”, in the period of
1985-1990 opted for downsizing, and in those processes thousands of people were
left unemployed.
There are numerous reasons for conducting downsizing. The most often are
the following (Miloševi?, Vuji?i?, 2013, p. 107):
? Inability to use enough the entre number of employees,
? Insufficient competences of employees related to new technologies,
? Purchase of modern technologies that make the existing number of
employees obsolete,
? Large expenses of labor force,
? Stagnation of economic branch that organization belongs to,
? Recession of the overall economy.
Inability to use enough the entre number of employees is present when in an
enterprise it is not possible to use all employees, so certain employees do not work
effectively during the entire working hours. The cause of this can be large number
of employees, so one of the possible solutions is letting go certain number of
employees.
Insufficient competences of employees related to the new technologies. In the
modern age the technologies are developed in high speed, so the employees are
forced to follow technological innovations in their professions and to acquire new
knowledge. Those employees who do not do this, become useless for the
organization in which they work, so this can be the reason why the management
has to let them go and to bring new competent employees.
Faculty of Business Economics and Entrepreneurship 53
Purchase of modern technologies that make the existing number of employees
obsolete. If an enterprise gets the modern technology that can successfully replace a
certain number of employees, there will no longer be any need for those employees, so
they will be let go. In practice there are a large number of machines in various branches
of industry that replace people in their jobs, because they realize much more productive
results than humans (e.g. difficult, dangerous or monotonous jobs).
Large expenses of labor force. If the expenses of the labor force burden the
budget of an enterprise, management can reach a decision to let go a certain
number of employees, save the money and liberate the budget. The alternative is to
lower the wages to the employees if they agree. If not, the termination of
employment is inevitable.
Stagnation of economic branch that organization belongs to. Stagnation in the
branch leads to decrease of demand. In order to attract the consumers, the
companies are forced to lower the prices of their products, which leads to the
decrease of the sales income. In order for the enterprise to keep the lower prices in
the long run, it is necessary for the management to react and find the way to lower
the expenses. One of the ways to accomplish that is to let a certain number of
employees go.
Recession of the overall economy. If the entire economy of a country is in
crisis, the enterprises must try to lower the expenses wherever it is possible to keep
the liquidity and to do business profitably. In this sense, one of the most common
measures is letting employees go based on the thorough analysis.
KEY CHARACTERI STI CS OF DOWNSI ZI NG
Key characteristics of the concept of downsizing are (Cameron et al.,1995,
p.25):
? Downsizing is done intentionally. That is not something that is happening in
the organization, but it is planned and organized reduction of the size of an
enterprise. That is the difference between downsizing and the loss of market
share or unintentional loss of employees because of the poor labor
organization or poor results.
? Downsizing is usually realized through reduction of the number of
employees, although that is not the only method. The reduction of the
number of employees can be realized through allocations, transfers, early
retirement etc.
? Downsizing is focused on improvement of the efficiency of an organization.
It can arise as reactive (as the consequence of poorer performance of en
enterprise) or proactive (wishing to improve the performances of an
enterprise, even though there has not been any drop in it).
? Downsizing influences the work relations, consciously and unconsciously.
Measures of downsizing result in specific form of redesign.
54 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
APPROACHES TO DOWNSI ZI NG
There are two typical approaches to downsizing: reinforcement and
reorientation. These approaches are developed by Freemen (1992) in his doctoral
dissertation. These principles represent the reflection of management’s relation to
changes.
Enhancement comprises the group of activities that manager does and directs
towards the proceeding the existing mission, strategy and system. The essential
thing is adapting to the existing economic conditions. Changes in business
operations are introduced gradually and in the incremental form – little by little.
Reorientation implies the perseverance of the management to bring in the
radical changes into the business operations of an enterprise in the form of change
of mission, strategy and system. This makes the discontinuity, that is, the
termination of current business activities.
In the first case, the management introduces the incremental changes in the
business activities. The goal is to make the enterprise continue to do business in the
existing way, with gradual improvements.
In the second case, management introduces the radical changes that realize the
turning point in business activities. In order for the management to opt for
reorientation, the existence of important reasons is essential, as proofs that an
enterprise can no longer do business successfully in the existing way and that it
needs to introduce the radical changes.
The characteristics of the mentioned approaches to downsizing are shown in
the chart 1:
Table 1: Overview of the characteristics of the approaches of reinforcement and
reorientation
Reinforcement approach Reorientation approach
Incremental downsizing Discontinuous downsizing and redesign
Lower level of encouragement (less radical
downsizing approach)
Higher level encouragement, more radical
downsizing approach
Stability of TOP management, technology
and systems.
Changes in TOP management, technology and
systems.
Changes in work instead of structure Changes in structure instead of work
Reinforced mission and strategy Redefining of mission and strategy
Downsizing comes before redesign Redesign comes before downsizing
Less extensive communication needed Demands more extensive communication
Less usage of internal relations of an
organization
More usage of internal relations of an organization
Orientation towards internal constituents Orientation towards external constituents
Emphasizing of efficiency Emphasizing of effectiveness
Focus on „do things better“ Focus on do various things
Source: Mašic, 2009
Faculty of Business Economics and Entrepreneurship 55
Some organizations apply downsizing reactively, as a reaction to the decrease
of market share and profitability. That is when downsizing represents defense
strategy. This approach is known in theory as convergence. Downsizing of labor
force is used as lowering of expenses. In this way management is trying to keep
profitability as a defense from the share prices’ fall and eventual “hostile”
acquisition. However the problem with this approach is that it is often the case that
management does not count the expenses that follow the downsizing of labor force,
which significantly decreases the savings on the account of smaller number of
employees (e.g. severance pay or early retirement). Also, the significant problem of
this approach is the lack of wider redesign of an enterprise. One should also take
into consideration that the crisis can last for a while, especially if it is caused by
extreme factors and leads to new cut backs on the number of employees. This is
how an organization falls into the “downsizing spiral” that most certainly leads to
bankruptcy (Slavkovi?, 2006, p.5).
On the other hand, some organizations consider downsizing to be an
opportunity for improvement of performance so they react proactively, they
implement downsizing even though there is no crisis. Compared to the previous
approach, the downsizing of labor force is a planned activity and an integral part of
the general strategy of an organization. Downsizing is in the function of balancing
the structure of an organization with the expected changes in the future, with the
goal of keeping the existing profitability. Proactive approach offers to the managers
much more of the manoeuvre space for realizing their decisions about the reduction
of labor force. By doing this, the mistakes are minimized and the pressure of
having to reach a decision in the short period of time, removed of the managers.
METHODS OF DOWNSI ZI NG
There are the following methods of downsizing (Miloševi?, Vuji?i?, 2013, p.
108):
? Decrease in management level;
? Decrease of programs and the scope of production;
? Reduction of the number of employees;
? Eliminating the specialized functions;
? Linear letting go of the employees;
? Early retirement and voluntary leavings.
Decrease in management level. By this method the activities, accountability
and responsibility of managers of middle level are transferred on other managers.
There are two options here:
? activities, accountabilities and responsibilities of the managers of middle
level are taken by the higher managers. This decreases the specialization at
56 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
higher levels of organization, the centralization and range of control is
increased, which can burden the higher managers;
? activities, accountabilities and responsibilities of the managers of middle
level are taken by the lower executives, which brings decentralization.
Having this goal in mind, managers of the lower level get additional
trainings, in order for them to be capable to efficiently do the additional
activities.
Decrease of programs and the scope of production. This implies that the
enterprise decreases its production capacities and the scope of production. Before
that, it is necessary for the management to analyze the production program and to
identify which products are profitable enough in order to keep them in the
production range, and which should be withdrawn from that range. The result can
be the closure or selling certain parts of an enterprise.
Reduction of the number of employees. This is present in the situations when
the management decides to leave a certain market, so it lets all employees, whose
business activities are connected to that market, go or transfers them to other
positions.
Eliminating the specialized functions. This implies that an enterprise will
terminate certain number of business functions in order to save money. These can
include legal department or accounting department or cleaning etc. For doing these
jobs an enterprise can hire special organizations as external associates
(outsourcing) like for example the accounting agency which will take over keeping
of the books of an enterprise. In this way an enterprise saves means because it is
not paying for employees at the positions that are eliminated. Savings is also
realized through the economy of scope of special organizations that cooperate with
multiple enterprises, so in this way they invest more money in equipment.
Management of an enterprise should assess which businesses an enterprise can do
on its own efficiently and to keep them. The jobs which cannot be done in an
efficient way by an enterprise should be given to special organizations.
Linear letting go of the employees. This is all about the reduction of the
number of employees because of the decreased demand at the market or because of
high personal income. Letting go is realized through the entire organizational
structure of an enterprise and every department lets several people go.
Early retirement and voluntary leavings. This implies the stimulating of
employees to go to an early retirement, which is the first phase in letting employees
go. Some of employees can be motivated to take this step by stimuli that are not of
financial nature, and others can be offered financial means in the form of severance
package. The kind of severance package depends upon the years of their service. In
any case the employees are not forced to take this step. Those employees that reject
the early retirement with the severance package, risk to be let go in the future
without any compensation.
According to Cameron,Freemen, Mishra, there are three downsizing strategies:
1. strategy of the reduction of labor force;
Faculty of Business Economics and Entrepreneurship 57
2. strategy of organizational redesign;
3. system strategy.
Strategy of the reduction of labor force that the management will offer certain
benefits to a certain number of employees in order for them to leave the enterprise.
This can be in the form of early retirement, severance packages, transfers,
allocations etc. Management has to think very carefully who to let go because of
the employees’ experience. Because if they do not, the damage could be far greater
than the benefit. The main point of this strategy is to “shake” an organization (as a
positive shock therapy), for employees to realize in what kind of situation an
enterprise is, to motivate them to work more productively and to encourage the
measures of saving. This can be seen as a short-term strategy, because it can be
realized very quickly and because the effects are visible right after the
implementation.
Strategy of organizational redesign implies the tendency of the management to
eliminate the work before they let people go. Most often measures of this strategy
are: eliminating of positions, decrease in number of hierarchical levels, terminating
of certain parts, withdrawal of certain products from the product range etc.
Implementation of this strategy demands extensive analysis of an organization with
the identification of process or entity that should be eliminated. The benefits of this
measure are: simpler organizational structure, higher efficiency, lower expenses,
less burdened labor force etc. We can say that this is a middle-term strategy when
we think about the time necessary for its implementation and the appearance of
first results.
System strategy is fundamentally different from the previous two. It implies
the change of organizational culture of an enterprise, the change of core corporate
values and attitudes. This is a radical and long-term strategy, so it usually takes a
longer period of time for the positive effects to be seen. Implementation of this
strategy is very slow, because a lot of time is required to change the core values of
the company. Application of system strategy is possible in situations in which,
there is no time pressure, when the structure of labor force is dominated by older
staff and when decrease in the number of employees is not great. This strategy is
consistent with the reorientation approach to downsizing. The tactic of “freezing”
the admission of new staff and retiring the existing enables the realization of this
strategy. Continuous improvement is the imperative.
From the three mentioned strategies, in Serbia the strategy of the reduction of
the labor force is most often used. Managers in the domestic enterprises
(organizations) rarely take care of the fact that they should treat the employees,
who are let go, in a humane and just way. The letting go is not done systematically
and it is done without previous analysis or planning. Such relation is detrimental
for the employees and for the companies.
The table 2 gives the overview of the basic characteristics of the three
downsizing strategies:
58 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Table 2: Basic characteristics of the three downsizing strategies
Reduction of labor
force
Organizational
redesign
System strategy
Focus: employees jobs and units
organizational
culture
Time needed for
implementation:
short medium long
Disadvantages:
Does not solve the
problem in the long
run
Lack of short-term
result
Lack of short-
term reduction of
expenses
Measures:
No new
employments, early
retirements, leaving,
letting go.
Decrease of the
number of business
functions, merging
of units’ redesign
of jobs.
Including all
employees in the
change of
organizational
culture and basic
values.
Source: Gandolfi, Neck, 2003.
EFFECTS OF DOWNSI ZI NG
Planned and systematically done downsizing realizes numerous positive
effects. Benefits of downsizing for the organization are the following (Dulanovi?,
Ondrej, 2005.):
? increase in efficiency and flexibility,
? increase in the ability of an enterprise to respond to the market demands,
? decrease of fixed expenses,
? more efficient usage of the remaining staff,
? simplification of the systems of communication and control.
The researches have shown that the majority of profitable organizations (81%) that
realized downsizing in a planned way accentuate the significance of the strategic
motive (Dewettinck, Buyens, 2002). The absence of profitability can be explained by
the usage of convergent approach or unplanned conducting of the entire process.
Large enterprises, because of their largeness, often have a problem with the lack of
flexibility and innovation. The formal procedures and strict rules of behavior are defined
and all employees as well as the management have to obey them. Without these
procedures, large enterprise would soon turn into a chaotic system. Negative side of the
formal procedures is that they decrease entrepreneurial spirit and the flexibility of an
organization. Because of these reasons, large systems find it more difficult to adapt to the
changes in environment. Internal and external factors usually force an organization to
move to other markets, change its structure and the way of doing business in order to
Faculty of Business Economics and Entrepreneurship 59
survive and provide to their owners the return of the invested capital. The life of an
organization constantly moves and changes. The ability of changing and adapting to
changes is the precondition for survival and the success of an organization (Stojanovi? et
al., 2013, p. 71). SMEs and entrepreneurs have a much greater ability to adapt. There are
two kinds of entrepreneurs: social and commercial. The difference is seen in the value
that they create and whether it is social or commercial, while the entrepreneurial
characteristic is common for both categories (Zare, 2013, p. 90).
The ability to adapt to changes influences whether the management of an
enterprise defined an adequate organizational structure. Organizational structure is
hierarchical organization of the levels of authority, lines of communication and
responsibility of an organization. Organizational structure of an enterprise is seen
in the way the roles, power and responsibility are allocated, controlled and
coordinated, as well as the way an information flows among the levels of
management (Milos, 2013, p. 84).
For the increase in flexibility the strategy of organizational redesign is
especially useful. It “flattens” the organization by decreasing the number of
organizational levels. You get a “shallow” organization in which the information is
distributed faster. The connection of the strategic top and the first line of an
organization are direct. Lower hierarchical levels get authority to decide, which
increases the speed of decision making. For debureaucratisation of the structure the
best strategy is system strategy. In debureaucratic structures there is a promotion of
team work, which increases the productivity and efficiency.
Large number of organizations in the world that did the downsizing leaves to
other organizations the possibility of learning at their mistakes. It is real to expect
that the organizations have become “more intelligent” in conducting the
downsizing and bad practice will repeat rarely.
LI MI TATI ONS OF DOWNSI ZI NG
Besides positive, downsizing has negative effects like:
? decrease of the number of employees represents a socially unpopular
measure;
? creating the negative atmosphere in the company ( the rest of the employees
feel fear and insecurity, which can result in the fall of productivity);
? when because of the crisis the management starts to let go the employees,
the most experienced and skilled employees can choose to leave the
company, because they do not want to work in an unstable environment;
? possible decrease in developmental potential of an enterprise because of staff
leaving;
? besides the savings, downsizing creates certain expenses, like severance
packages;
60 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? because of the letting go certain number of employees, there is an increased
intensity and the scope of work for the rest of employees, with possible
longer work hours, in order to make up for the lower number of employees.
Decrease of the number of employees is opted for with the goal of the
decrease of expenses of employees’ wages. First step in the decrease of the number
of employees is usually the termination of cooperation with the employees
employed for a specified period of time by not prolonging their contracts. Then the
decision not to hire new staff instead of those who are at sick-leave or are retiring
is reached (Jaško, 2001).
From the aspect of system approach, one can say that these beginning steps are
correct. However it is usually the case that the decrease in the number of
employees is not realized in a systematic way. For example, it is usually the case
that the employers terminate the contract on their own, with a certain number of
employees and give them a severance package. These actions can result in long-
term negative consequences for an enterprise, and is usually in the form of leaving
of the most skilled and most hard-working employees. They will find another job
more easily than others, so that is why they are prone to leaving an organization
that is having problems (Miloševi?, Vuji?i?, 2012, p. 110).
With the goal of the decrease of employees the often decision is to enable
early retirement for older staff, which leads to not being able to change the
employees with the valuable long-term working experience. Another popular
measure is the decrease of the number of business functions, which can lead to
destabilization of an organization if it is not done in a planned way. Linear letting
go, which is an even dismissal of employees in the entire organization, can
decrease the developmental potential of an enterprise if this measure is not based
upon thorough analysis of staff (Miloševi?, Vuji?i?, 2013, p. 107).
In order for the process of decreasing the number of employees to be
considered justified, it is necessary to fulfil several terms (Jaško, 2001, pp. 29-34):
? not to be done in a linear way throughout an entire organization;
? not to be done without previous considering of the consequences for the
keeping the employees with the key competencies;
? not to make decisions of letting go generally, according to general criteria,
but individually;
? for the criteria and the flow (depth and dynamics) of letting go to be public
even before the letting go begins;
? that the economic feasibility analysis takes into consideration the cost of
letting go and the cost of redistribution of jobs;
? that there is a cooperation of middle and lower management during this
process and in the period of adjusting to the lower number of employees;
? that there is cooperation with the trade unions or at least the exchanging of
information etc.
Organizational crises during downsizing are underestimated. We should have
in mind that downsizing can be the way into a crisis, and not a way out of it.
Faculty of Business Economics and Entrepreneurship 61
Direct expenses of letting go are the following htt (//proorg.fon.rs/Files/
MuksDown.pdf):
? separate payrolls for the currently let go;
? remaining vacations and sick leaves;
? additional severance payments;
? assistance in finding a new job;
? pension payments and premiums;
? administrative costs of processing;
? the costs of re-employment of laid-off workers.
Indirect expenses of letting go are the following
(http://www.proorg.fon.rs/Files/ MuksDown.pdf):
? the costs of seeking and hiring new people;
? low morale and insecurity among remaining employees;
? lack of staff when the company recovers;
? possible claims of employees;
? reduction in productivity due to fear and uncertainty of the remaining
employees;
? loss of organizational knowledge and confidence in management.
Impacts for the organization during downsizing
(http://www.proorg.fon.rs/Files/ MuksDown.pdf):
? over burn of the employees (reduction of the commitment at work, reducing
the positive feelings towards the job, fitting the crisis of the individual and
his work);
? increase of cases of domestic violence;
? a significant number of companies have shown that after the layoffs they did
not increase profit;
? according to one research, employees worried about their family finance
spend 13% of working hours telephoning to bank concerning loans or other
business.
J OB I NSECURI TY AS A RESULT OF DOWNSI ZI NG
Application of downsizing strategies in practice, has led to changes in the field
of employment. Model of life employment in one company is outdated. Earlier, in
practice it was popular to have the so-called silent agreement of employees and the
management, which basically meant that the employees were spending entire
careers in one organization (“from the internship to retirement”), but they were
obliged to be loyal and dedicated to the company. However wide usage of
downsizing strategies changed this practice. Mass letting go have created the
climate of general job insecurity.
62 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Old model of employment is substituted by a new model that does not offer to
employees “life employment” in one enterprise in exchange for their loyalty and
dedication to an enterprise, but they are offered to learn and develop their skills in
an enterprise for a while. In return employees are expected to be completely
dedicated to their job. It is no longer expected for employees to be dedicated to an
enterprise as a whole but only to the job (Stojani?, 2012, p. 39). Employees are
interested in being completely dedicated to the job while they have the possibility
to learn and develop in that company. As soon as that is no longer an option, they
will try to change an employer and to find a job at some other enterprise where
they will be able to continue learning and developing professionally. This model of
employment is useful to employers and employees. Employers have workers who
are productive and devoted, and employees get the opportunity to acquire new
knowledge, which increases their chances for future employment. In developed
countries this model of employment is so developed that the “situational”
employment arose. This implies that employees realize short-term employment in
some company, e.g. while a certain project is realized. After that their employment
at that company stops and they are looking for another job.
Job insecurity in an enterprise exists only if in the past there have been letting
go that had nothing to do with the work performance of employees. In that case,
employees have no possibility of controlling their employment in the company.
They feel powerless, because it is not up to them whether they will keep their job.
If the management decides to proactively realize downsizing with the goal of
improving of performances of an organization, some employees can be let go, even
though they have realized satisfactory work results and had a good relationship
with the colleagues and superiors. Every employee can make his own subjective
assessment of job security based on various sources of information.
The most important sources of information about the loss of jobs are (Same, p. 38):
? official notification that employees receive from management;
? Unpublished information that are highly presumed to be true (e.g.,
assumption on the closure of certain parts of the company);
? rumors that occur when the official notifications are scarce.
? Lack of possibility of control of employment especially increases in the case
of (Same, p. 39):
? lack of protection (e.g., in case of contract breach, disobeyance of unions’
demands etc.);
? vague expectations (employees do not always know exactly what is expected
of them in order to keep their jobs );
? authoritarian organizational culture ( authoritarian cultures increase the
awareness of the inability to influence and control the job security);
? lack of objectivity of management while solving the issue of excess
employees.
? The researches have shown that the following reactions to job security are
the most common:
? tendency to leave the company;
Faculty of Business Economics and Entrepreneurship 63
? resistance to change and
? reduced work engagement.
The results of empirical research done by J. Brockner have shown that with the
increase of job insecurity to a certain level, work efforts and engagement of
employees are increased. After that, further increase in job insecurity, the work
efforts and engagement of employees is reduced.
EXAMPLES OF WELL-DONE DOWNSI ZI NG
Example 1: Consulting company „Charles Schwab&Company“
This company had a crisis in 2001. At the end of the second quarter of 2001
they had the following negative indicators:
? Turnover fell by 57% in relation to the period from 15 months ago;
? Loss was 19 million dollars, and the value of shares fell by 75%
The situation was critical. The company was shaken to the core and was about
to go bankrupt. Managers realized that it is necessary to take radical measures in
order to save the company, so downsizing was a logical solution. Management of
the company had in mind that the measures have to be done in a systematic and
planned way, and that this was the only way that this consulting company will
survive. Before letting the employees go, management took the following five
steps:
1.Frozen projects and drastically reduced costs, such as delivery of lunch for
staff, travel and recreation etc.;
2.The wages of senior management were reduced (top managers by 50%,
executive vice presidents by 20%, senior vice presidents by 10% and by 5% to vice
presidents);
3.Employees were encouraged to use their time off and take unpaid leave for
up to 20 days;
4.Management decided that some of the Fridays would count as willingly free
days, unpaid, if employees do not have clients;
5.Only after all of this they let go 2,000 employees from 25,000 employed, with the
following benefits: from 500 to 1,000 shares to every employee that was let go, payment
in cash because of the increased health insurance costs and all services for re-
employment and a voucher for a scholarship in the amount of 20,000 dollars.
After these measures, the remaining employees introduced an innovation in
doing business: Internet trade system that charges for variable provisions
depending on the usage of services. Company changed the name into CEO. The
price of shares was increased ten times.
64 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 1: Logo of the company „CHARLES SCHWAB“
Source: Google Images
Example 2: company „Compaq computers“
In the beginning of 90s of the last century this company, that produced
computers, was faced with fierce competition that produced and sold cheaper
products. After conducting thorough analyses, the company’s management decided
that it should implement downsizing in order for the company to become more
competitive. Having that goal in mind, they thought and planned the way to let go
15% of employees. Before letting go of employees they did the following:
? Managers went through training whose goal was to make them capable and
prepared to provide support for the let go and help remaining employees;
? The list of possible questions of employees was put together along with the
instructions how to answer them;
? The let go were treated with maximum dignity;
After letting go of the employees, sales were tripled in relation to the period
before the letting go of employees.
Figure 2: Logo of the company „COMPAQ“
Source: Google Images
Besides the mentioned, there are also other examples of proper implementation
of downsizing, like the example of American company „Cisco” that deals with the
development of Internet technologies. While it was letting go the employees in the
process of downsizing, this company paid one third of wages to the employees.
Because of the human treatment of the employees „Cisco”, even though it let go
5,500 people, remained at the 15th place on the Fortune magazine list of 100
companies that are best to work for.
Famous multinational company „Procter and Gamble“, which deals with
production of cosmetic products, beauty products, detergents etc., had a big crisis
in 2001 when they had to close down 5.600 positions in the USA. The company’s
management took the following steps:
Faculty of Business Economics and Entrepreneurship 65
? 20,000 employees got offered a package of measures (severance package,
specialization, health care);
? Employees had 20 days to decide and 7 more to eventually change their
mind;
? There were meetings held daily with the best employees in order for the
manager to convince them that they do have a future in „Procter and
Gamble“.
Mutual termination of employment gave to the workers the sense of personal
control. Although the direct expenses were higher and the program lasted for
several months, organization remained stable, and the productivity did not fall.
Another positive example is a multinational company „Accenture” that deals
with consulting, technology and outsourcing. The company was facing high
expenses, so through the thorough analysis, management came to a conclusion that
the best thing would be to decrease the number of employees. In June 2001 the
company let go 600 employees. From that number, 100 highly educated employees
got 20% of their wage in the following 6-12 months, they kept their benefits like
business number, lap-top and e-mail. In this way they succeeded in reducing the
costs and to keep the employees in which they have invested a lot of time, effort
and money through various trainings and education.
The famous company „Motorola” was in a crisis in 2001, so it was forced to
dismiss 30,000 employees out of 147,000, which it did in January that same year.
Every employee that was let go got a minimal wage for eight months. The
company actively sponsored the employment fairs. When the company got to its
feet again and gained financial stability, it began hiring the same people that it had
let go.
The mentioned examples show how a company should behave while realizing
downsizing. By a humane relation to the employees that are let go, the company is
being socially responsible, it protects its reputation and sends the message to the
employees and the public that it is the company that is serious and responsible,
despite the crisis. Also it prevents the leaving of the best experts in this way.
CONCLUSI ON
Based on the used methods of deduction and research of relevant literature in
printed and electronic form, it can be concluded that the hypothesis: Downsizing
represents an effective measure for increase in efficiency and flexibility of an
enterprise is confirmed.
Managers are advised, in the case that their company gets into crisis, to
consider the application of downsizing, but to approach it in a planned and
systematic way and to make decisions based on the conducted relevant analyses.
Otherwise, they will only deepen the crisis in the company.
66 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Cameron,K:S:, Freemen,S.J.,Mishra, A.K. (1995), Downsizing and redesigning
Organizations, in edited by George P. Huber and William H. Glick,
Organizational Change and Redesign: Ideas and Insights for Improving
Performance, Oxford University Press.
[2] Dewettinck, K.,Buyens D. (2002),Employment implications of downsizing
strategies and reorientation practices: an empirical exploration, Working Paper,
Faculteit Economie, Gent.
[3] Dulanovic, Ž., Jaško, O.(2005),Organizational structure and changes. Belgrade:
Faculty of organizational sciences.
[4] Gandolfi, F., Neck, P.A. (2003),Organizational downsizing: a review of the
background, its developments and current status, Australian Journal of
Business & Social Inquiry, Vol. 1.
[5] Maši?, B. (2009), Strategic management. Bijeljina: University Synergy.
[6] Miloševi?,D.,Vuji?i?, S. (2013), Management of small and medium enterprises.
Belgrade: Faculty of Business Economics and Entrepreneurship.
[7] Milos, R. (2013), Influence of organizational structure and management style
on the business success: example Nike Inc. International Review (2013 No.1-
2). Belgrade: Faculty of Business Economics and Entrepreneurship. p. 84
[8] Ondrej, J. (2001), Downsizing and changes in organizational structure.
[9]Strategic management, vol. 5, no.3Slavkovi?, M., (2006) Downsizing –
organizations’ response to global trends. Faculty of Economy, University in
Kragujevac.,http://markoslavkovic.com/uploads/ media/ Downsizing_01.pdf
[10]Stojani?, M., (2012), The role of leadership in the strategy of reconstruction of
the company with a short overview on business operations of company Simpo
(Master thesis) Belgrade: University Singidunum.
[11]Stojanovi?, T., ?oki?, A., ?oki?, S., (2013), Organizational behavior – creative
tool for creating the value. International Review (2013 No.1-2). Belgrade:
Faculty of Business Economics and Entrepreneurship. p. 71.
[12]Zare, B., S., (2013), Measuring of performance of social entrepreneurial
institutions: case of Iranian company UNESCO. International Review (2013 No.1-
2). Belgrade: Faculty of Business Economics and Entrepreneurship. p. 90.
[13]http://www.proorg.fon.rs/Files/ MuksDown.pdf
[14]http://www.Google Images.
Faculty of Business Economics and Entrepreneurship 67
MARKET ORIENTATION AND BUSINESS
PERFORMANCE
Vlado Radic, PhD
7
,
Jovanka Popovic, PhD
8
ABSTRACT
The global market environment is growing in complexity. The recent past has
been characterised as technologically turbulent. The accelerated rate of
technological innovations is affecting all business activities from the development
of new product concepts to marketing communication and the rate of new product
introductions has increased. The availability of large quantities of data has made it
difficult for a business manager to conveniently convert the data into action-
oriented information in order to make appropriate key marketing decisions. The
level of corporate failures has increased, time for making decisions has become
shorter, and the negative results of wrong business decisions have become more
severe. The competition in some industries has become more intense and
sophisticated.
In this market environment, that can be characterised as growing in
uncertainty and risk, organizations that are unprepared to change in reaction to
market dynamics will have little opportunity to survive.
The importance of market orientation is in its potential contribution in
influencing the achievement of organizational objectives. The literature on market
orientation reflects findings by many researchers that being market orientation,
potentially, improves organizational long-term business performance. The market-
orientation firms with concentration on the entire customer experience are better
positioned to achieve a higher rate of business success.
Key words: Market Orientation, Business Performance, Competition,
Organizational Objectives
J EL Classification: D24, L11, L25
UDK: 005.21:339.137.2
7
Vlado Radic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
8
Jovanka Popovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
68 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
In a time characterized by increasingly rapid change in consumer preferences,
even faster technological progress, and growing competitive rivalry, it becomes
essential for companies to develop mechanisms within their organizations to
generate market information, analyze it, and respond accordingly. The set of
activities developed by companies permanently to monitor, analyze and respond to
these market changes is referred to in the marketing literature as "market
orientation".
Over the last decade there has been a growing interest in the construct of
market orientation and its usefulness in increasing companies’ economic
performance. However, it is still not well understood why there is such an effect
and – particularly – how it operates. More research is clearly needed in this area.
Two streams of research have developed aimed at filling this gap. One stream of
research has focused on the effects of market orientation on innovation. The other
has investigated the links between market orientation and relationship marketing.
Marketing theorists such as Kohli, Jaworski (1990), Narver, Slater (1990),
Carr and Lopez (2007) have argued that market orientation traces its origins from
the market concept (also labeled marketing concept) and has noteworthy
consequences to overall business strategy. The market concept is concerned with
customer-orientation, innovation and profit as an inducement for creating satisfied
customers (Narver, Slater, 1990, 1994; Kohli, Jaworski, 1990).
Theories on market orientation have been widely accepted by scholars and
academics either as the implementation of the market(ing) concept, as an
organizational culture, or as a mix of those two (Greenley, 1995). Through the
years, numerous scholars have found that market oriented behavior in marketing
new products or services leads to better performance, has positive effects on
customer satisfaction and loyalty as well as innovation, employee satisfaction and
cooperation (Deshpandé et al.,1993; Rapp et al., 2008).
Naturally, the many definitions given to the marketing concept have common
trends such as the customer orientation, the implication of all functional areas of a
firm, and being a means to achieve long term corporate goals and objectives. On
these grounds, we can now deduce that the market orientation is an organizational
culture that places the customer in the center of the strategies or even at the top of
the company’s considerations.
HI STORI CAL BACKGROUND AND DEFI NI TI ON OF MARKET
ORI ENTATI ON
Market orientation is not a new concept in the marketing and management
literature. Scholars argued that the postulation by Drucker (1954) that the customer
Faculty of Business Economics and Entrepreneurship 69
must be the focus of organization’s operations and the subsequent support given to this
idea by Levitt (1960) that the customer is the reason for the organization’s existence
were all pointing to the fact that market orientation behavior was necessary at that time.
This idea was extended to become known as the marketing concept.
Following these developments, the subject market orientation has received a great
deal of attention from marketing scholars who have developed, tested and refined market
orientation scales for measuring the degree of market orientation that organizations
exhibit (Kohli, Jaworski, 1990; Narver, Slater, 1990; Hooley et al., 2005).
Businesses aim to maximize their profit to shareholders by creating a sustainable
competitive advantage over rivals on the market. But where competitive advantage was
once based on structural characteristics such as market power, economies of scale, or a
broad product line, the emphasis today has shifted to capabilities that enable a business
to consistently deliver superior value to its customers. After all, this is the meaning of
competitive advantage. Research shows that a market-oriented culture provides a solid
foundation for these value-creating capabilities.
We can reason that market orientation builds on the same foundations as the
market concept, as that concept is believed to have three facets that are customer
focus, coordinated marketing focus and profit focus (Kohli, Jaworski, 1990;
Wrenn, 1997). Customer focus implies that companies need to have intensive
knowledge and understanding of customer needs, demands and expectations. In
order to be able to fulfill those demands and expectations with goods and services
those must be carefully charted. This is done with marketing planning, surveys,
market intelligence dissemination and generation. Focus on integrated marketing
means that all marketing efforts of the company are in sync and support each other.
Profit focus is an important measurement in all strategy-making and management.
The marketing concept can be classified into two parts, being the "old"
marketing concept and the "new" marketing concept. According to Gunay (2002)
the "old" marketing concept is concerned with customer-orientation, innovation
and profit as an inducement for creating satisfied customers. The "new" marketing
concept is more a business culture than a philosophy. Philosophic questions cannot
be answered empirically by observation or experiment, while it is possible to
measure the level of culture, and then describe its characteristics.
Market orientation can be defined as a form of organizational culture where
employees throughout the organization are systematically and entirely committed
to the continuous creation of superior customer value (Narver,Slater, 1990;
Kohli,Jaworski, 1990; Desphandé et al.,1993; Day, 1994).
Kohli and Jaworski (1990) argued that the market orientation of an
organization is one of degree rather than one of presence or absence. Narver and
Slater (1990) confirm the view that market orientation cannot be turned on or off.
Being marketing orientated is more than just being customer-led. It requires the full
support of the organization to be fully implemented in the long term and, in most
cases, may need a complete change in an organization’s culture.
Narver, Slater and Tietje (1998) state that market orientation is an
organizational culture where culture, management and market orientation are
70 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
interwoven. For an organization to be market oriented, leaders within that company
must have a clear vision that is continuously mediated to employees. Market
oriented companies must communicate their mission, vision and values in such a
way that every employee knows his/her role. Companies must be able to change
and adapt to new market situations such as increased competition, needs and
expectations of customers and new technologies.
Bisp (1999) defines market orientation as a series of actions to obtain, analyze
and apply information about current and new customers, consumers and
competitors. According to Bisp, the form and intensity of market oriented activity
is a behavioral manifestation of elements of corporate culture and strategy. He
emphasizes the importance of organizational learning and states that the ability to
attract and develop staff with the needed knowledge and skills drives market
orientation.
Farrell (2000) also emphasizes that organizational learning is of great
importance when installing a market orientation. Other scholars prefer to view
market orientation as proactive business actions that take place in a certain
sequence.
Kotler (2001) points out that market oriented companies must balance between
customer orientation and competitor orientation when installing a market oriented
culture in the company. Logically, a company that only focuses on either the
customer or the competition will end up performing poorly.
The last decade the field of marketing has grown tremendously and many
books and articles about the subject have educated business people across the
globe. Before market orientation became the general term for this a well-known
concept within marketing, many scholars had described the concept in different
ways.
Terms such as market-oriented, market-driven and customer-focused have
become synonymous with proactive business strategy in organizations all over the
world. The notion that the customer needs to be at the origin of business planning
processes seems a very contemporary one, as is the idea of organizing the firm´s
activities around a thorough understanding of customer needs and demands
(Desphandé, 1999).
The first books on marketing were printed in the years 1911 to 1915 and they
were mainly based on basic economic theory. The first empirical research papers
on marketing and connected issues were printed around 1920 (Converse, 1945 and
1951). The first academic journal about marketing was published in 1936 in the
USA as "Journal of Marketing". In 1948, The American Marketing Association put
forward the following definition of marketing: "The performance of business
activities directed toward, and incident to, the flow of goods and services from
producer to consumer."
Paul Converse was one of the first academics that created a comprehensive
overview of the concepts of marketing in 1945. He made a list of text books and
articles about marketing, reviewed the offer of marketing courses taught in
American universities and lectures about the subject until the forties.
Faculty of Business Economics and Entrepreneurship 71
Many management theorists cite Peter Ducker’s statement from 1954 that
marketing is not a specialized functional activity but rather "the whole business
seen from the point of view of its final result, that is, from the customer´s point of
view."
The market orientation concept builds on the marketing concept which is a
relatively new academic. A definition of the marketing concept from the American
Marketing Association website (AMA, 2008) is: "Marketing is the activity, set of
institutions, and processes for creating, communicating, delivering, and exchanging
offerings that have value for customers, clients, partners, and society at large."
According to both the old and the new definition, marketing is considered a
specialist function managing certain decision-making areas to create exchanges
that satisfy the customers´ and the firm´s goals alike (Grönroos, 2006).
Several studies have found a consistent positive relationship between
businesses’ degree of market orientation and their economic performance
(Greenley, 1995; Jaworski, Kohli, 1993; Narver, Slater, 1990; Selnes et al., 1996;
Slater,Narver, 1994). As stated previously, many studies have been conducted to
assess the market orientation and its relation to performance. Gounaris and
Avlonitis (1997) compiled a summary of empirical studies done in this field and
their relation to performance (Table 1). From this table, we can safely say that
market orientation has a positive influence on performance.
Table 1: Summary of empirical studies
Empirical study Marketing orientation/ performance
association
Narver and Slater (1990) Positive
Hooley, Lynch and Shepherd (1990) Weak positive
Kohli and Jaworski (1990) Positive
Kohli and Jaworski (1992) Positive
Slater and Narver (1992) Positive
Diamantopoulos and Hart (1993) Weak positive
Wong and Saunders (1993) Positive
Greenley (1995) None
Source: Avlonitis, Gounaris, 1997, p. 388
In 1987, the Marketing Science Institute (MSI) in the USA organized a
conference on the topic "Developing a Market Orientation". According to
Desphandé (1999) the main purpose of this forum was both to showcase some
early learning from market orientation implementation and, more importantly, to
articulate the need for strong, scholarly research to better define, measure, and
model the construct. This conference marks a major development in market
orientation research. In 1990, a second conference was organized, this time it
featured both academic speakers and practitioners that summarized their
72 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
companies´ experiences with instilling a market orientation. In 1994, market
orientation was anointed to be a capital research topic by MSI. After that, market
orientation became a very popular area for research.
Two research papers, both published in 1990, have established the concept of
market orientation firmly into the academic of business research. The first paper by
Kohli and Jaworski (1990) put forward antecedents to and moderator effects of
market orientation and the second one that came later in 1990 by Narver and Slater
proposed a market orientation framework with three dimensions. Most studies on
market orientation revolve around three components that were first defined by
Kohli and Jaworski (1990) and later established by Narver and Slater (1990).
KOHLI 'S AND J AWORSKI 'S VI EW ON MARKET ORI ENTATI ON
The scholars Ajay K. Kohli and Bernard J. Jaworski published their article
"Market orientation: The construct, research propositions and managerial
implications" in July 1990. They viewed market orientation as the implementation
of the marketing concept. The model they propose emphasizes the collection of
marketing data, dissemination of this data across functions within the organization
and the action that is taken based on this intelligence. The model is built on the
results of interviews with 62 managers in both marketing and nonmarketing
positions in US companies. A main finding was that profitability is a consequence
of market orientation, and not a component of it. Kohli and Jaworski did not
suggest that market orientation is an aspect of organizational culture.
Their definition of market orientation: "Market orientation is the organization-
wide generation of market intelligence pertaining to current and future customer
needs, dissemination of the intelligence across departments, and organization-wide
responsiveness to it."
In other words: Market orientation is the implementation of the market concept
and a firm with a high degree of market orientation is one whose actions are
consistent with this concept. Market intelligence is said to be the starting point of
market orientation, and refers to the collection and assessment of data on
customer´s current and future needs plus competitor data and government
regulations that could influence those needs.
Organizational learning plays a major role in the creation of a market
orientation: managers/employees must continually gather, disseminate and
communicate information around all departments of the company in both a formal
and informal manner. It is important to acknowledge that this vital function is not
the exclusive responsibility of the marketing or sales departments.
Kohli and Jaworski propose three sets of antecedents for market orientation
and they are senior management factors, interdepartmental dynamics and
organizational systems.
Faculty of Business Economics and Entrepreneurship 73
Senior management has an important role to foster market orientation. Kohli
and Jaworski state explicitly that the commitment of top managers is an essential
prerequisite to a market orientation. Their job is to facilitate communication and
data flows between organizational levels. Important characteristics that senior
managers should have are a positive attitude towards change and organizational
learning.
Kohli and Jaworski define interdepartmental dynamics as the formal and
informal interactions and relationships among an organization's departments. Their
study findings suggested that departments that have conflicts are not likely to be
willing to share information and as such endanger a high market orientation.
Connected departments on the contrary cooperate and create an atmosphere leading
to a higher degree of market orientation. As such, they are an important antecedent
to market orientation.
The third set of antecedents to a market orientation relate to organization-wide
characteristics. Expectedly, high formality and centralization levels create a barrier
for market orientation because it obstructs information dissemination and
knowledge sharing. Important customer messages or market knowledge that must
travel a long way before they can be acted upon become irrelevant and obstruct
market oriented behavior.
In terms of employee response, Kohli and Jaworski conclude that market
orientation leads to a cohesive product focus, clear leadership, better coordination
of sales activities, a much better job of reviewing products from a worldwide basis
and better differentiation. A market orientation provides psychological and social
benefits to employees. The greater the level of market orientation is, the greater the
esprit de corps, job satisfaction, and organizational commitment of employees.
In terms of customer response Kohli and Jaworski find that that a market
orientation leads to more satisfied customers who spread the good word to other
potential customers and keep coming back to the organization.
In terms of performance, the study suggests that though a market orientation is
likely to be related to business performance in general, it may not be critical under
certain conditions. A greater market orientation is likely to lead to increased
demand and sales, better margins, more market share and increased profits.
In 1993, Kohli and Jaworski published yet another research paper "Market
orientation: Antecedents and Consequences". The goal of this paper was to review
and measure the antecedents that lead to market orientation and the consequences
of it for the company. The hypotheses proposed in the 1990 construct were tested
and results concluded that market orientation builds on three equally important
pillars: Customer focus, coordinated marketing and profitability.
Figure 1 shows the interaction between intelligence generation, dissemination
and responsiveness. Intelligence gathering is just what the name implies: Gathering
intelligence about customers, competitors and the marketplace. Intelligence
dissemination, however, is what a department, manager or employee chooses to do
with the information after they have it.
74 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 1: Kohli and Jaworski´s view on market orientation
Source: Kohli, Jaworski, 1990
Responsiveness only happens if the formalized process for sharing business
intelligence is not too burdensome. If management emphasized sharing, and if the
organizational system’s reward system provides an incentive to do so or there is no
penalty for doing so. In other words, a department, manager or employee is only
willing to share information if it implies no costs.
NARVER'S AND SLATER'S VI EW ON MARKET ORI ENTATI ON
The renowned scholars John C. Narver and Stanley F. Slater published their now
famous article about market orientation in October 1990, several months after their
colleagues Kohli and Jaworski. Narver´s and Slater´s goal was to shed light on the
components that build a market orientation and propose a useable definition of the
concept. They interviewed managers in 113 strategic business units in one corporation.
Narver and Slater (1990) were the first to highlight and prove the relationship between
market orientation and performance. For the authors, market orientation is one way to
achieve a greater performance. Figure 2 illustrates this relationship.
Faculty of Business Economics and Entrepreneurship 75
Figure 2: Relationship between market orientation, business specific factors,
market-level factors and performance
Source: Narver, Slater, 1990, p.29
Narver and Slater viewed market orientation as an organization culture, just
like Desphandé and Webster (1987). However, they took the definition further and
argued that market-oriented firms focus not only on customers but equally much on
competitors. Additionally, they placed emphasis on inter-functional coordination
that is meant to create unison between all functions in the organization and become
part of the organizational culture. So they developed this definition: "Market
orientation consists of three behavioral components – customer orientation,
competitor orientation, and inter-functional coordination- and two decision criteria
– long-term focus and profitability."
Narver and Slater define three equally important behavioral dimensions of
market orientation, them being customer orientation, competitor orientation and
inter-functional coordination. They add two decision criteria that are long-term
focus and profitability to their model.
Research shows that the consequence of market orientation materializes in all
tasks performed by a firm. The degree of market orientation shows through
employee- and customer satisfaction, as well as content shareholders. Customers of
a company with a high degree of market orientation experience great value for
money and excellent service that is gladly delivered by skilled and professional
employees of that company.
Competitor orientation is the second component of market orientation and
states that organizations should identify, analyze and use the strengths, weaknesses,
opportunities and capabilities of both current and future competitors. This is very
logical although not entirely new. Levitt (1960) said that parallel to customer
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analysis, companies must do competitor analyses and contemplate possible
solutions that might fulfill current and future customer needs and expectations.
Inter-functional coordination or integrated marketing means that all
departments within the company play a critical role in satisfying customers.
According to Narver and Slater, competitor and customer orientation include
all activities that involve generating market intelligence about customers and
competitors, analyzing it and distributing that knowledge throughout the
organization. This means that the market oriented company must provide adequate
business processes and systems for data input and coordinate the communication of
disseminated business info in order to create superior value for customers.
Market oriented organizations typically have a long term focus related to
profits and to implementing a high degree of market orientation. A short-run focus
on profits is not inconsistent with long-run profit performance. According to Levitt
(1960), the relationship between them is as follows: At all times a business
attempts to create superior value for buyers. As competitors respond and diminish
business´s buyer-value superiority, the business discovers and implements
additional value for its customers (i.e. it augments its product). To grow and
survive in a competitive environment they must focus on long term investment
strategies that are important for building the market orientation. Market orientation
is not a business mode that can be switched on or off, which also implies a long
term focus.
As discussed earlier, the first rigorous study of the effect of a market
orientation on business performance done by Narver and Slater (1990) found a
significant relationship between market orientation and return on investment in a
sample of business units belonging to one corporation operating in the forest
products industry. However, another study did not show the same results. In two
broad samples of businesses, Jaworski and Kohli (1993) found no significant
relationship between their measure of market orientation and managers’
assessments of either return on equity or market share. These finding of "no
results" in a broad sample were found troubling, because it raised concerns about
the generalizability of Narver and Slater’s (1990) result. It is possible, based on the
Narver and Slater study from 1990 that the market orientation – profitability
relationship does not apply in all organizations or business sectors.
Therefore, in 2000 Narver and Slater decided to repeat their research from
1990 and retested the hypothesis "market orientation and business profitability are
positively related". To address the limitations of the original study, this time they
used a broad sample of businesses and different respondents’ assessment of market
orientation and business performance in a business unit. Again, they found a
positive relation between market orientation measures and performance. Actually,
the positive relationship was even stronger in 2000. However, market orientation is
said to be influenced by the business environment and competition levels. Paul D.
Ellis (2005) say that the strong relationship between market orientation and
performance materializes in strong economies like the United States (Kohli,
Faculty of Business Economics and Entrepreneurship 77
Jaworski, 1993; Slater, Narver, 1994) but not at all in weaker economies with less
knowledgeable consumers, less competition and less capitalism.
Figure 3 below shows the interaction between the three behavioral components
customer orientation, competitor orientation and inter-functional coordination.
According to Narver and Slater, continuous innovation is implicit in each of
these components. If there is no innovation and continuous data generation,
employees will not have the right prerequisites to offer that extra service to the
customer.
The two decision criteria shown in the figure are a long term profit focus and
profitability. It is through the continuous creation of superior customer value that a
business creates its long-run profit performance. A short period marketing
campaign or sales action might boost sales, but the organizational image and
generation of repeat-customers only evolves over time along with reputation and
"good word of mouth".
Figure 3: Narver and Slater´s view on market orientation
Source: Narver, Slater, 1990
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SI MI LARI TI ES AND DI FFERENCES OF VI EWS
On the whole, the two views on market orientation are quite similar and
complementary and very useful to anyone seeking to learn the meaning of the
market orientation concept. Both research papers view market orientation as a
concept that (if well implemented) leads to a greater competitive advantage for the
company. Both duo´s agree that business intelligence about customers and
competitors is a key prerequisite to build market orientation; that all managers and
staff must participate in creating and maintaining the market orientation; that
market orientation is a construct with three equally important components.
However, the two views have important differences. Kohli and Jaworski do lay
a bit more emphasize on customers than Narver and Slater do. They viewed market
orientation more like the implementation of the market concept as discussed
earlier. Narver and Slater emphasize the human role and explain market orientation
as a corporate culture, which leads to certain custo-mer/competitor oriented
behavior throughout the organization creating this specific atmosphere that leads to
better performance.
It is not possible to prefer any of these theories above the other, but it is
advisable to critically review both of them and use the best from both when
building a market orientation. A mix of the theories might lead to the optimal
degree of market orientation.
The enhanced model (Figure 4) is divided into four layers: 1) antecedents (as
defined by Kohli and Jaworski, 1990), 2) moderators of market orientation (as
defined by Narver, Slater, 1990; 3) Kohli, Jaworski, 1990) and 4) consequences (as
defined by Narver, Slater, 1990; Kohli, Jaworski, 1990).
Until recently, scholars either followed Narver and Slater´s view, or Kohli and
Jaworski´s view on market orientation leading to rather imperfect studies.
Faculty of Business Economics and Entrepreneurship 79
Figure 4: The enhanced model of market orientation
Source: Kohli, Jaworski, 1990; Narver, Slater, 1990
With the new millennium came a new awareness that the two concepts are not
exclusive but rather complementary. Evidence shows that both the market concept
view and culture view are equally important pillars when building a market orientation.
Cervera, Molla and Sanchez (2002) agree to this and state that the two views are not
mutually exclusive and in fact show different facets of the same concept. When
combining the Kohli and Jaworski framework with that proposed by Narver and Slater,
a two-dimensional model appears. Figure 5 visualizes this model.
80 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 5: Two-dimensional approach to market orientation
Source: Kohli, Jaworski, 1990; Narver, Slater, 1990
As shown in the outer circle of figure 5, customer orientation, competitor
orientation and integrated marketing must exist in all company operations. To
empower management and staff with business intelligence, companies must also
have systems in place for intelligence generation, dissemination and distribution of
this information. This is shown in the inner circle in figure 5. Obviously,
management and staff must act upon the intelligence that they have access to. The
task of top management is to install the market oriented culture through strategy
making and implementation on all levels (Kohli, Jaworski, 1990; Narver, Slater,
1990). The integrated model showing two views suit the definition that a market
orientation is the implementation of the marketing concept; a form of
organizational culture.
Cultural differences and opinion forming might have effect on the link
between market orientation and performance measures. A relevant question is
whether the relationship between the two can be strengthened or weakened by
changes in the geographic situation, economic situation and business environment
of a firm. Research shows that market orientation is less likely to have impact on
performance in some environmental conditions such as a very strong demand (Day,
Wensley, 1988; Bisp, 1999). In such an environment, companies can get away with
not being market oriented at all. In a market with scarcity where products are
rationed to consumers, market orientation also does not matter at all. Kohli and
Jaworski (1990) concluded that market turbulence and competition turbulence will
Faculty of Business Economics and Entrepreneurship 81
strengthen the relationship between market orientation and performance, while
technology turbulence will weaken this relationship.
The effects of market orientation on business performance might be moderated
by the turbulence in the environment (Kohli,Jaworski, 1990, Slater, Narver, 1994).
In more turbulent environments, a high level of market orientation will be more
beneficial as firms can better follow, sense, and use changes in the environment.
Kumar, Subramania and Yauger (1998) found that in a high market turbulence
companies need a higher level of market orientation in order to perform well. This
relationship worked both ways and therefore we could say that in an easy market
with little change the level of market orientation is not relevant. Slater and Narver
(1994) found limited support that the competitive environment influenced the
relationship between market orientation and performance in any way. They found
that market turbulence does have impact on the rate of return on assets, whilst
technological change has impact on the success of newly marketed products. Hence
they conclude that companies should not adjust their level of market orientation to
match environmental conditions. Being market oriented is never harmful in their
opinion.
CONSEQUENCES OF MARKET ORI ENTATI ON
Having read different definitions and opinions about the market orientation
concept we have a good idea of what it means to be market oriented. We have
learned that it is both a business culture and an implementation of the market
concept. That being clear, we can now move on and discuss what the consequences
of market orientation can be, and how they can be influenced. Main consequences
of market orientation derived from literature are great esprit de corps (team spirit),
greater organizational commitment, greater competitive advantage and better
performance. Other (indirect) consequences include clarity of focus, more
innovation and increased organizational learning.
Kohli and Jaworski (1990) discussed the organizational consequences of
market orientation. They stated that greater market orientation should lead directly
to one consequence in particular, more esprit de corps (later supported by Jaworski,
Kohli, 1993; Rose, Shoham, 2005), and to another consequence, greater
organizational commitment. They suggested that marketing orientation’s positive
impact on performance might be greater than previously assumed because of its
indirect impact on performance through organizational commitment and esprit de
corps. The word "through" suggests that organizational commitment and esprit de
corps could both be causal antecedent variables and consequences of a market
orientation. The management literature has a rich collection of research suggesting
that organizational commitment develops from many other aspects of the firm’s
environment and culture other than market orientation. Kohli’s and Jaworski’s
(1990) supposition was that marketing orientation fosters company spirit and
employee commitment, when, in fact, the exact reverse may be the case.
82 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Many scholars that have researched market orientation and its consequences as
well as its effects on performance and have concluded that it leads to a competitive
advantage, if well implemented (Narver, Slater, 1990; Slater, Narver, 1993; Kohli,
Jaworski, 1990, Martín-Consuegra, Esteban, 2007). Respected economics and
business authors also state that market oriented companies perform better and gain
competitive advantage that is sustainable (Desphandé, 1999; Webster, 1988). The
positive link between the degree of market orientation and organizational
performance has been found in many countries and business sectors disregarding
company size, culture or product/service (Kohli, Jaworski, 1990; Narver, Slater,
1990; Ruekert, 1992; Jaworski, Kohli, 1993, 2000; Slater, Narver, 1994;
Desphandé, Farley, 1999, Slater, Narver, 2000).
Market oriented business culture facilitates clarity of focus. This focus
becomes evident through the mission statement, the common vision of
management and staff and the overall attitude of the company towards the
customer. This creates a high degree of employee satisfaction, better morale, and
greater commitment to the job and loyalty to the organization.
The relationship between market orientation and performance is a cornerstone
in the market orientation literature. A positive relationship between the level of
market orientation and diverse performance measures was found by Narver,Slater
(1990), Kohli, Jaworski (1990), Ruekert (1992), Deshpandé,Farley (1999); Rose,
Shoham, (2005); Martín-Consuegra,Esteban, 2007; Skerlavaj, et al.,(2007). A few
empirical studies do not measure this positive relationship, which raises concerns
about whether or not the most market-oriented firms are the best performers
(Diamantopoulos and Hart (1993), Greenley (1995), Appiah-Adu (1998). Greenley
(1995) developed an empirical study of 240 firms in the United Kingdom to test the
relationship between level of market orientation and performance. His findings
showed no significant effects on return on investment, sales growth or new product
success.
Scholars have mixed opinions on the relationship between market orientation
and business performance. Is it moderated by other environmental factors such as
economic situation, market turbulence, technology and competition, or does
geographical situation matter the most?
The consequences of market orientation seem not to be sector specific. A high
extend of market orientation not only benefits companies that sell to consumers,
but also to service companies that exclusively sell business-to-business and even
not for profit organizations and the public sector.
The most common measure for performance is business profitability. Slater
and Narver (2000) found that market orientation is indeed positively related to
business profitability, measured by return on investment. Other measures include
sales growth and new product success and those were used in Narver´s and Slater´s
research of 1994 and also showed a positive relationship. Castro et al., (2005)
found that market orientation links with customer- and employee satisfaction.
Market orientation has several indirect effects on performance. Research
provides evidence that a high level of market orientation will lead to increased
Faculty of Business Economics and Entrepreneurship 83
innovation and organizational learning that in turn lead to better performance, as
the company obtains more knowledgeable employees that make better products and
provide better service (Rapp et al.,2008; Shepstone, Currie, 2008; Laforet, 2008).
Jaworski and Kohli (1993) connected innovation with market orientation because
they believed that the concept was driven by creating change and introducing new
ways of doing business in order to differentiate and build a competitive advantage.
Skerlavaj et al (2007) propose that organizational learning culture might be the
missing link between business process change and organizational performance.
Results from Laforet (2008) show that medium-sized and small companies are
more innovative and market-oriented than larger companies.
The majority of research on market orientation is conducted in the Unites
States of America. In general, American researchers conclude a positive link
between market orientation and performance. When the same studies are replicated
in non-US countries however, they yield mixed results. Often a weak or non-
significant relationship between market orientation and business performance is
found (Diamantopoulos and Hart, 1993; Greenley, 1995; Appiah-Adu, 1998). In
their study of the effects of market orientation in the United States of America,
Denmark, Sweden and Norway, Selnes, Kohli and Jaworski (1996) say that the
findings indicate that (1) organizational antecedents are affected by national
context; (2) the effects of the antecedents of market orientation are similar in U.S.
and Scandinavia; (3) market orientation affects overall performance in both the
U.S. and Scandinavia; and (4) strong effects of market orientation on esprit de
corps are evident in both cultures.
SCOPE AND STATUS OF MARKET ORI ENTATI ON
The marketing concept can be classified into an "old" marketing concept and a
"new" one (Gunay, 2002). The shift in focus becomes clear with the new
millennium. Before 2000, scholars mainly focused on the direct effects of market
orientation that were found to be diverse business performance measures, while
after 2000, the focus shifted to the numerous indirect effects of it such as the effect
on learning, employees satisfaction, and innovation. For example, Farell (2000)
was one of the first to come with new evidence that the level of marketing
orientation goes hand in hand with organizational learning. The "old" marketing
concept emphasized customer-orientation, product innovation and profit as drivers
to creating happy customers while the "new" one emphasizes culture, innovation
and the importance of organizational learning. Today´s marketing concept
comprises customer orientation, distinctive advantages, market intelligence, value
or quality delivery, continuous improvement in goods and services, customer-
oriented business culture, and coordinated and integrated business activities in the
whole organization creating a competitive advantage.
In order to get this job done, organizations must gather and analyze market
knowledge and empower their people with it. Market orientation involves an outward-
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looking perspective from a firm, meaning that it should not only focus on customers
but also on competitors, the development of their business sector and the work
environment as a whole (Narver, Slater, 1990). As the definitions of market orientation
suggests, there is quit a strong market-related information aspect to market orientation.
Hence, its fit within an organization is related to the ability of that organization to
effectively manage its business information systems and make sure that all data is
analyzed and developed into useable knowledge. Desphandé (1990) poses that the fit
of market orientation within a firm is threefold: as part the development of strategic
competence as a learning organization; as part of a market knowledge management
system and as a foundation for corporate strategy.
It has become clear that the traditional perspective of market orientation sees
the concept as a business philosophy. However, contemporary approaches to
market orientation see it as a dimension of a firm’s culture; a guiding
representation to a firm’s tendencies; a differentiating capability; and an array of
business behaviors (Varela, Rio, 2003). Market orientation has, also, been seen as
both a behavioral and cultural business philosophy (Gounaris, Avlonitis, 2001).
Figure 6 visualizes the nature and scope of the marketing over time.
Figure 6: Scope of marketing and its focus over time
Source: Hunt, 1995
From literature we learn that market orientation is not an operating mode that
can be turned on or off but rather a state of being that evolves over time (Narver,
Slater, 1990). It will manifest itself through the organizational culture where
employees strive to continuously provide outstanding service to internal and
external customers. The higher the degree of market orientation, the more skilled
employees become to integrate all processes in order to maximize performance for
the company as a whole (Laforet, 2008).
Faculty of Business Economics and Entrepreneurship 85
There are a number of steps that must be taken in order to install a market
orientation. What follows is a rough road-map that is grounded in theory. To install
the market orientation process, one should start with thorough analysis of the
company and its environment, the markets on which it operates, competition,
customer demands and expectation and the satisfaction level of customers and
employees to name a few. Kohli and Jaworski (1990) write about the antecedents
in this context.
Marketing theorist have provided a number of simple tools such as SWOT
(analysis of strengths, weaknesses, opportunities and threats), PESTEL (analysis of
political, economical, social, technological, environmental, legal issues) to do this
analysis. The next step is to systematically and continuously mediate the obtained
knowledge and information to all employees (Kotler et al, 2001). This
organizational learning process will mix with the corporate culture and as such
create market oriented behavior that will have a positive effect on employees and
customers and lead to better overall performance. The third step is continuous
learning and adapting.
MARKET ORI ENTATI ON AND ORGANI ZATI ONAL CULTURE
Having reviewed relevant literature about market orientation, its ins and outs,
models and effects, we now discuss how organizational culture and market
orientation interact. To begin with, literature concerning organizational culture is
reviewed. Next, the cultural model by Denison is explained in more detail and
linked to the theories of Narver and Slater and Kohli and Jaworski. Furthermore,
this chapter explains why organizational culture can be an effective way to measure
market orientation.
Organizational culture is a concept that is hard to describe distinctly. One
could say that organizational culture is the personality of the organization (Schein,
2004). In that perspective, culture is viewed as a set of shared beliefs and values
that are reflected in habits and traditions as well as in more tangible manifestations-
stories, symbols, or even buildings, brands and products. It is an organization's
self-identity: What members really think about what the company is and where it is
going. Another perspective poses that companies are comparable to ethnical
societies with respect to culture, where different people have different opinions of
what norms and values are perceived prudent.
Deal and Kennedy (2000) introduced the concept of organizational culture.
They say that organizational culture, broadly defined, is a collective understanding,
a shared and integrated set of perceptions, memories, values, attitudes and
definitions that have been learned over time and that determine expectations
(implicit and explicit) of behavior that are taught to new members in their
socialization into the organization. Culture is comprised of the assumptions, values,
norms and tangible signs or artifacts of organization members and their behaviors
(Mobely et al., 2005).
86 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Culture is particularly important when attempting to manage organization-
wide change, which is often necessary when implementing a market orientation.
Practitioners realize that, despite the best-laid plans, organizational change must
include not only changing structures and processes, but changing the corporate
culture as well. Despandé, Farley and Webster (1993) recognized this fact and were
the first scholars to connect market orientation with company culture. O' Regan et
al. (2006) propose that innovation is driven by a company's culture, leadership and
strategic planning. They conclude that high performing firms have stronger and
more defined leadership and culture styles compared with low performing firms.
This is in line with the findings of Narver and Slater (1990) that suggest a strong
relationship between organizational culture and market orientation. So, an
empowerment culture where all employees encourage and assist each other
associates with successful innovation, leading to a stronger market orientation and
better performance.
There has been a great deal of literature generated over the past decade about
organizational culture, particularly in regard to learning how to change
organizational culture. Organizational change efforts are rumored to fail the vast
majority of the time. Usually, this failure is due to lack of understanding about the
strong role of culture and the role it plays in organizations (Laforet, 2008). That is
one of the reasons that many strategic planners that want to install a market
orientation now place as much emphasis on identifying strategic values as they do
mission and vision. A market orientation can only build upon a strong
organizational culture, and has to become a part of that culture (Desphandé et
al,1993).
There is much evidence that links organizational culture with market
orientation (Denison, 1990; Denison et al., 2004; Gainer, Pandanyi, 2005;
Skerlavaj et al., 2007; Laforet, 2008). The first scholars that connected market
orientation with organizational culture were Desphandé, Farley and Webster
(1993). Their study found that corporate culture is positively related to business
performance through the market culture, which is the organizational culture that
includes a high goal achievement orientation stressing competitive advantage. In
such a culture, managers and staff are aware of the fact that the company exists to
continuously produce great service and therefore they behave in a customer
oriented way. A strong organizational culture that empowers employees is one of
the most valuable resources to be found within a company (Denison, 1984).
Organizational culture plays a critical role in creating a work environment
where employees are committed and contribute to the success of the organization
(Shepstone, Currie, 2008). So this is where the implementation of a market
orientation should start.
One of the most frequently cited studies of culture and performance is
Denison's research (1990). It showed that organizations with a participative culture
experience better performance than organizations that have a more formal culture
with less room for employee participation in decision- and strategy making.
Denison suggests that studying organizational culture provides a way to capture the
Faculty of Business Economics and Entrepreneurship 87
impact that culture has on organizational performance. In other words, Denison's
study provides hard evidence that the cultural and behavioral aspects of
organizations are closely linked to both short-term and long-term survival. In
further research, Denison and his colleagues (Denison, 1990; Denison et al., 2004)
developed and empirically supported a theory of organizational culture and
effectiveness that identifies four cultural traits that are positively related to
organizational performance.
Denison (1984) proposed a model to evaluate the shape of organizational
culture and an instrument to measure it that he called DOCS (Denison
Organizational Culture Survey). The methodology origins from research by
Denison (1982, 1984, 1990). Initially, Denison studied 34 companies and found
that results were significantly different depending on behavioral issues. Denison
and Mishra (1995) expanded the database to 756 companies and now this database
includes results of over 1500 companies of different sizes (Mobley, Wang and
Fang, 2005). The main focus of this method is to connect several different
cultural/behavioral dimensions to company performance. Those dimensions are
involvement, consistency, adaptability, mission and cultural traits. Figure 7 shows
the Denison model and its dimensions graphically.
Figure 7: The Denison model to measure organizational culture
Source: Denison 1984, 1990
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The model scales the four dimensions on a horizontal axis showing internal vs.
external focus and a vertical axis that depicts flexible vs. stable focus. The
dimensions "adaptability" and "mission" belong to the external environment and
"involvement" and "consistency" to the internal environment of the organization.
The dimensions "mission" and "consistency" also belong to the stability side of the
axis while "adaptability" and "involvement" belong to the flexibility side of the
axis.
The Denison culture model is a tool which helps organizations, divisions, and
teams, and the individuals within each attain a baseline assessment of current
cultural strengths and weaknesses. A high score on any of the 12 dimensions is
regarded to be positive, a strength, for the organizational culture, while the
opposite is true for a low score. The center of the model (Figure 7) shows the
underlying beliefs and assumptions that are the foundation for the human behavior
and the actions taken by the organization. A run with the Denison model will
provide managers with an understanding of bottom-line related performance such
as profitability, sales/revenue growth, market share, quality, innovation, and
employee satisfaction, with direct links to cultural elements which may be
supporting or hindering these performance areas.
The outcome of a measurement with DOCS defines the shape of the
organizational culture. At the same time, the outcome of the adaptability dimension
shows the level of market orientation of that organization. Knowing that the right
research instrument has been chosen for the purpose of this study, we can now
proceed to the research questions connected to the main research question: what are
the effects of the bank´s level of market orientation on its business performance?
SI TUATI ON I N SERBI AN COMPANI ES
In almost all previous studies in this field, the primary emphasis has focused on
the market orientation of manufacturing firms in developed economies. Despite the
importance of market orientation in the modern business world, the need for market
orientation investigations in the developing countries is still ignored by researchers.
In mature economies characterized by prevalence of buyer’s markets, stable
growth and intense competition, firms that are more oriented towards customers’
needs and competitors action will do better as per the claims of market orientation
scholars. In contrast, in developing economies characterized by ill-defined market
boundaries and strong or burgeoning demand, firms may be able to "get away
with" a minimal amount of market orientation. Until recently; however, there has
been relatively little research into the applicability of the market orientation
construct in developing economies.
Although various conceptualizations of market orientation appear in literature,
researchers in general agree that market orientation encompasses three key
dimensions, i.e. customer orientation, competitor orientation and interfunctional
Faculty of Business Economics and Entrepreneurship 89
coordination (which means a coordinated utilization of resources for creating
superior value for customers). A market oriented firm is supposed to be one which
successfully applies the marketing concept. What is not so clear is whether the
market orientation concept is appreciated by small firms. According to some
authors, small business owners have a problem with marketing and often see it as a
peripheral to small firms' requirements.
The reason why market orientation has received a great deal of attention from
many researchers is because it is believed that a high level of market orientation
can provide a solid basis for a sustainable competitive advantage. In this paper, we
hypothesize that market orientation has a positive effect on performance.
Over 95% of companies in Serbia are small and medium-sized companies and
represent important part of our society and economy. From the perspective of the
researchers small and medium-sized companies are big (and unexplored) field of
potential clients – users of researcher’s services. Theory, research and everyday
experience suggests that small and medium-sized companies have problems with
marketing and that they don’t consider it particularly useful.
Therefore the objectives of this paper were: a) to examine the degree of market
orientation exhibited by small firms, and b) to investigate the impact of market
orientation on business performance of small firms.
Market orientation implies usage of marketing concept as a business
philosophy. In the center of most definitions is the customer – importance of
reacting to customer, but also to the other participants (competition, employees in
the company). Behavioral conception (Narver & Slater, 1990) defines market
orientation as business culture or behavior that reflects in the activities of the
company in three aspects: 1) orientation to customers, 2) orientation to
competition, and 3) inter-functional coordination. MKTOR scale is created for
measuring market orientation, with claims of situation in company in every of
given aspects.
Orientation to customers
Orientation to customers reflects orientation of company on satisfying the
needs of customers and creating added value. MKTOR scale has six claims for
measuring this aspect of market orientation.
Orientation to competition
Orientation to competition reflects monitoring and understanding short-term
strengths and weaknesses as well as long-term abilities and competition strategies.
It represents reacting to competition activities and orientation to creating
competitive advantage. MKTOR scale contains four claims for measuring this
aspect of market orientation.
Interfunctional coordination
Aspect that reflects the degree of information exchanging and knowledge
inside the company, as well as the common action of all departments and
employees in achieving companies goals. MKTOR scale has five claims for
measuring interfunctional coordination.
90 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ANALYSI S OF THE EXAMI NATI ON
Analyzing the examination of 200 top managers of small and medium-sized
companies throughout Serbia (Brakus, Aleksi?, 2008), we have tried to check our
market orientation assumptions. In examination was using CATI (Computer Aided
Telephone Interviewing) method, and sample was random, with quotas for size of
the company, sector and region. MKTOR scale is used for measuring market
orientation. Claims are presented using the Likert 5 degree scale (1 – strongly
disagree, 5 – strongly agree). In table 2 presents the data relating to the size of
companies, sectors in which they work, and regional distribution.
Table 2: Sizes, sectors and regional distribution of companies
Size Number %
1-5 employees 57 28,5
6-15 40 20,0
16-50 41 20,5
51-250 62 31,0
Sector Number %
Trade 72 36,0
Services 55 27,5
Production 73 36,5
Region Number %
Belgrade 56 28,0
Vojvodina 55 27,5
Central/West Serbia 45 22,5
South/East Serbia 44 22,0
Total 200 100
Source: Author's view, 2014
In table 3 presents MKTOR scores according three aspects.
Faculty of Business Economics and Entrepreneurship 91
Table 3: MKTOR scores
Orientation to customers Mean
We are carefully measuring the degree of our employees dedication in satisfying the
needs of the customers
4,60
We are very dedicated to our customers 4,75
Satisfaction of our customers is the main goal of our business 4,79
We are regularly monitoring satisfaction of our customers 4,71
We are always trying to find a way to create added value for our customers 4,66
We are dedicating a lot of attention to the services after the sale 4,49
Orientation to competition
Our dedicated staff regularly monitors and exchanges information about strategy of
the competitors
4,22
We are quickly reacting to the competition activities 4,30
Management of our company is regularly considering the strategy, strengths and
weaknesses of our competitors
4,18
We are creating our offer so that we can achieve competitive advantage 4,41
Interfunctional coordination
Top management regularly visits our key customers 4,04
Information about the customers is freely distributed throughout the whole firm 4,40
All of our employees and departments understand the needs of the customers 4,52
All of our departments are taking part in the preparation of business plans and
strategies
4,10
Activities of our departments are well integrated 4,36
TOTAL MKTOR SCORE 4,42
Source: Authors, 2014
Using the K-Means cluster analysis, SMEs are grouped by the way of
evaluation MKTOR claims. Companies differ little in orientation to customers –
the biggest differentiation is in claims about competition and coordination. Four
different segments have singled themselves out:
Competitive ("ideal") market orientation includes companies that have
significantly higher score on claims about competition. And scores for every other
aspect are very high. This is the biggest segment, with 54% companies.
Balanced market orientation represents companies that gave relatively high
scores for all claims and on less extreme – well-balanced way. This is the second
segment in size, with 27% companies.
Non-competitive oriented are companies that have significantly lower score on
claims about orientation to competition. They represent 12% of entire sample.
Non-coordinated companies that have scored the lowest in claims about
coordination inside of the company. This is the smallest segment, with 8% of the
companies.
92 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 8 shows relevant data relating to the first segment.
Orientation to customers and competition is almost ideal in this segment, while
the interfunctional coordination is little less. These companies often have more
than 50 employees, and work in trading industry. Some departments that they have,
or better, do not have, cast doubt on their "ideal" market orientation.
Figure 8: Competitive ("ideal") profile
Source: Author's view, 2014
Figure 9 shows relevant data relating to the second segment.
Companies in this segment dedicate equally a lot of attention to every market
orientation segment. They also have bigger number of employees, but mostly in the
production sector. In comparison to companies in the previous segment, difference
in the structural level is especially significant – it is more probable to have
departments for marketing, planning, research and development.
Figure 9: Balanced market orientation
Source: Author's view, 2014
Faculty of Business Economics and Entrepreneurship 93
Figure 10 shows relevant data relating to the third segment.
In this segment are mostly micro companies, with up to 5 employees, that
work in area of services. Their strongest focus is on customers, while the
competition is less important. They rarely have the departments or persons that are
in charge for marketing, planning, research and development.
Figure 10: Non-competitive oriented profile
Source: Author's view, 2014
Figure 11 shows relevant data relating to the fourth segment.
These are mostly micro companies, in sector of services and production –
rarely in trade. Unlike the previous segment, they dedicate equal attention to
competition and customers. Having in mind the number of employees, it’s a
surprisingly little coordination – so one can assume that "keeping the information"
is a reflection of influence of the personal characteristics.
Figure 11: Non-coordinated profile
Source: Author's view, 2014
94 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
FI NDI NGS
As opposed to expectation, MKTOR score suggests that most of the small and
medium-sized companies in Serbia are market orientated. Yet, behind the total
score, there are different types of orientation – especially in their relation to
competition and coordination inside company. Second segment (Balanced Market
Orientation) is theoretically closest to market orientation, while the last two
segments represent companies that are the least market orientated.
The biggest part of SMEs has strong focus on competition and customers, and
a bit weaker on internal coordination. This kind of external focus could reflect
specific organizational culture, and maybe internal problems. Structure of "ideally"
oriented companies suggests that there really exists a difference between theory
and practice – claims and realization.
Most of the small and medium sized companies in Serbia are strongly
orientated to customers and competition. Market orientated companies are more
open to research, because of their integration in their business philosophy – they
take in consideration both the customers and the competition, and also imply
intensive exchange of information.
CONCLUSI ONS
The emerging consensus is the concept of a market orientation constitutes a
fundamental strategic approach to understanding markets. This orientation can be
described as an organisational culture focused on understanding the market which
helps firms to develop customer value strategies that take advantage of
opportunities and repel threats. Through the years, numerous scholars have found
that market oriented behavior in marketing new products or services leads to better
performance, has positive effects on customer satisfaction and loyalty as well as
innovation, employee satisfaction and cooperation.
One important fact to consider is that a firm‘s entrepreneurial orientation is
positively related to the firm‘s performance. This suggests that the firm and its
managers may benefit from implementing strategy to encourage and increase the
firm‘s level of entrepreneurial orientation, which has been shown to be the
propensity of the firm to be innovative, proactive to marketplace opportunities, and
be willing to take risks. Porter (1996) posits that an entrepreneurial orientation may
be the mechanism for firm survival and success.
Market orientation which is, broadly speaking, understood as the
implementation of the marketing concept as a business philosophy has received a
strong attention in the marketing literature. However, there has been little research
on market orientation within the small business sector. The same can be stated for
Faculty of Business Economics and Entrepreneurship 95
Serbia, despite the fact that Serbian firms are prevailingly considered to be small
and medium businesses.
Serbia is, as is well known, a country in transition and based on analyses of
situation in SMEs can be concluded that most of SMEs are strongly oriented to
customers and competition. Thus, managers should acknowledge that the primary
function of market orientation might be to act as an impetus that fuels the
development of market-based capabilities.
For better understanding of situation in Serbian small and medium-sized
companies it is necessary to conduct more thorough research. As it is already said,
this is still unexplored field with great challenges, so it is expected that, use of
scientific methods and knowledge, provide a more realistic view of the state.
Orientation to market reflects on position, development and growth of these
companies, and better performance is expected with changes in organization,
orientation to learning, exchange of information and introducing the innovations.
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98 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BUSINESS IMPROVING WITH CLOUD COMPUTING
TECHNOLOGY
Djordje Ilic, MA
9
,
Marija Markovic Blagojevic, MA
10
ABSTRACT
More and more small and medium business managers are thinking seriously
about their data protection and storage strategy. They know their businesses are
dependent upon the computers and storage that handle customer orders. Sharing
and protecting that information is vital. At the same time, the increasing pace of
business and the need to speed operations makes sharing information among teams
critical to customer satisfaction and efficiency of business. Cloud Computing offers
reliable service to its customers at flexible prices. However, as creative and
innovative Cloud Computing may be, it doesn't necessarily mean that Cloud
Computing is good for all businesses. In most situations, small businesses reap the
most benefits of cloud computing. Finally, looking to the future of cloud computing,
we will see how Cloud Computing can be used in business in the future. Analyzed
parameters and conclusions in the paper were given and based upon the conducted
desk research.
Key words: Cloud Computing, Small and Medium Business, Protection,
Sharing, Efficiency
J EL Classification: M15
UDK: 005.5:004.72
9
Djordje Ilic, Graduate school of proffesional studies "Prof. dr Radomir Bojkovi?", Krusevac, Serbia,
[email protected]
10
Marija Markovic Blagojevic, Faculty of Business Economics and Entrepreneurship, Belgrade,
Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 99
I NTRODUCTI ON
Whenever we think of clouds, one of the association that comes to mind is that they
are a phenomenon that is always present and which always follows. Using this association,
software companies recently launched the concept of cloud computing, Figure 1.
In its most simple description, Cloud Computing is taking services ("cloud
services") and moving them outside of the organization’s firewall on shared
systems. Applications and services are accessed via the Web, instead of via the
hard drive. In cloud computing, the services are delivered and used over the
Internet and are paid for by cloud customer (business) - typical "as-needed, pay-
per-use" business model. The cloud infrastructure is maintained by the cloud
provider, not the individual cloud customer.
Cloud Computing networks are large groups of servers and cloud service
providers that usually take advantage of low-cost computing technology, with
specialized connections to spread data-processing chores across them. This shared IT
infrastructure contains large pools of systems that are linked together. Virtualization
techniques are often used to maximize the power of cloud computing.
Currently, the standards for connecting the computer systems and the software
needed to make Cloud Computing work are not fully defined at present time,
leaving many companies to define their own Cloud Computing technologies.
Figure 1: Illustration of Cloud Computing
Source:http://bodhost.com/blog/cloud-computing-principles-and-paradigms/
(11.4.2014)
100 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
They connect users in a virtual world, enabling access to email, creating
profiles on social networking sites, uploading photos or performing everyday tasks
in banking, electronic commerce, shopping or reading a newspaper.
WHAT I S CLOUD COMPUTI NG
Cloud Computing is a Web-based computing. Computer has been simply
defined as any electronic gadget that enables the input of data for processing into a
predetermined format that can be dispensed through an output media.
Cloud Computing is a term that describes the use of the internet to perform
functions that could have been done in the past by a PC. Information, data, files,
videos, photographs etc. can be stored in the cloud for processing instead of the
regular movement of a computer system before gaining access to such information.
The main requirement is access to the internet and understanding how it works.
Many people have heard about the advantages of doing business in the cloud, but
they are not sufficiently informed about the system usage. It is true that business in the
cloud has the potential for development of small and medium-sized enterprises. The
advantages are: low cost, savings, increased productivity and efficiency.
Simply put, clouds allow business to rent IT and hosting services instead of
investing in new infrastructure, training new personnel or licensing new software. It
differs from traditional hosting in three key things: the cloud service is rented on request,
allows the user to take as much space of a service as they want at any time and provides
full service provider. Business in the cloud offers easy operating cost that doesn’t burden
the budget so much. Companies using this service, pay monthly rent, so there is no
longer need for current and large capital investment in own hardware and software that
will be amortized in the future. Because of this, more companies from the world are
deciding (instead of the traditional IT) using cloud computing, Figure 2.
Figure 2: Example of use cloud computing in the world
Source:http://community.amd.com/community/amd-blogs/amd-
business/blog/2011/06/01/amd-2011-global-cloud-computing-adoption-attitudes-
and-approaches-study-infographics/ (11.4.2014)
Faculty of Business Economics and Entrepreneurship 101
Although some commentators categorize Cloud Computing services somewhat
differently, the most common approach segregates services into three-part
taxonomy (Mell, Grance, 2009). Software as a service (SaaS), probably the most
popular category, offers software for conventional operating functions such as e -
mail (Microsoft Exchange mail) and desktop applications (Microsoft Word and
Excel). It is also suitable for specialized functions such as accounting, payroll and
customer relationship management (CRM). Infrastructure as a service (IaaS) is
offering remote access to IT resources such as servers, processors, storage devices
and other devices and networking equipment. Business owner and IT team are
exempt from the management and maintenance of hardware. Platform as a Service
(PaaS) provides shared resources (including hardware and software) which are
available on request. In combination with the advantages of IaaS, this category of
services allows subscribers to download and management software of your choice
and can be used for design applications, development, testing and deployment.
In traditional model of software delivery, software is purchased in advance
under permanent license agreement. They usually pay an annual maintenance fee to
remove any bugs or bring some improvements. Software is the data center of the
company. Implementation services must engage the partner companies that have
the expertise in the application software. This model is still prevalent with large
application vendors, making these applications available to SMB (Small and
Medium Business) sector, due to the high cost and scope of the implementation.
Today we recognize a different approach when using a licensed software.
Before, the license of the software vendor and the buying additional service
provider (ASP) was required. ASP is a peak in the late nineties and the early years
of the 21st century, but hosting fees, costs of licenses and ongoing support made
the total cost of ownership extremely high. Software provider quickly identifies a
better method of delivery of software from the data center and this is the way wa
SaaS was born. The SaaS approach is a software solution whose delivery is made
via the Internet using a common web browser. SaaS applications are typically
hosted in discrete data centers that are owned or leased by the seller. SaaS model
uses a complex architecture, which means that SaaS users share common parts of
the application and their data and configuration of business processes are specially
kept. In SaaS model, customer paid subscription price includes the use of software,
support and access to all updates and service packs. From the user perspective, it is
less important whether the application of a dedicated data center or cloud, although
the cloud offers increased reliability and reduced downtime due to possible falls.
Nowadays, the concept of SaaS includes applications which are delivered as a
service via the web browser, either from the data center manufacturers, public or
even from a private cloud.
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CLOUD COMPUTI NG SERVI CES
Cloud Computing providers offer their services according to several
fundamental models, Figure 3:
? infrastructure as a service (IaaS),
? platform as a service (PaaS), and
? software as a service (SaaS).
Figure 3: Structure of Cloud Computing
Source:http://deletemalware.blogspot.com/2011/07/paas-cloud-computing.html
(11.4.2014)
Other key components in anything as a service (XaaS) are described in a
comprehensive taxonomy model published in 2009, such as Strategy-as-a-Service,
Collaboration-as-a-Service, Business Process-as-a-Service, Database-as-a-Service,
etc. In 2012, network as a service (NaaS) and communication as a service (CaaS)
were officially included by ITU (International Telecommunication Union) as part
of the basic Cloud Computing models, recognized service categories of a
telecommunication-centric cloud ecosystem (WikiPedia).
Faculty of Business Economics and Entrepreneurship 103
CHARACTERI STI CS OF SAAS
THE OBVI OUS ADVANTAGE
This is a small model of the evolution of software delivery and an attractive
option specifically for the SMBs sector. The main advantage is that SaaS allows
SMBs to gain access to features that was previously available only to large
companies with high capital. Hence, when they eliminate capital expenditures and
expenses to be paid in advance, any organization can pay a fee and obtain an
application as a service. Besides these obvious advantages, SaaS provides
numerous additional benefits. For example, every company in Benchmarks
portfolio uses Amazons cloud infrastructure in one way or another (Ha, 2009).
LOW FI NANCI AL RI SK
Many traditional applications include initial fees and periodic fees for support
and maintenance. SaaS is different. There is not only initial investment in IT
infrastructure and technological development. There are predictable and recurring
costs. There are no hidden costs for upgrades and maintenance. Everything is
included in the subscription. This results in a lower total cost of ownership and
avoiding large capital expenditures for the benefit of lower operating costs. Upon
termination or completion of the contract, the user is free to choose whether to
extend them or not. The US federal Chief Information Officer Vivek Kundra has
argued that Cloud Computing is economical. They are flexible, can be rapidly
implemented, can improve consistency in service, can be more energy efficient,
and can increase an organization's ability to focus on its mission since it can spend
less time and fewer resources on information technology (Kundra, 2010).
EASY APPLI CATI ON
It is assumed that the implementation can be expensive and a time-consuming
task. In addition to investments in technology infrastructure to run the application,
they must earmark funds for the installation and customization of the application.
Fee for advice may further increase costs. However, today's organizations who
want to be competitors cannot afford a long and complex projects in which there is
an interruption or disturbance of the basic work processes. The advantage of SaaS
in the fact is – in the most SaaS instances, it can be provided in a few minutes.
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COMPREHENSI VE SUPPORT
Many SaaS vendors establish rates for different levels of support and service.
In this way, they can choose the best package without paying for more or receive
less service than you need. Unlike traditional software license, SaaS model
includes subscription for comprehensive support and product maintenance and
upgrades. So, there are no hidden costs or additional costs, they do not have the
need to take care of the maintenance of the hardware or loss.
RELI EF FOR STAFF
In most organizations, IT staff is already overburdened. It is very important
that SaaS doesn’t set new demands on the IT team in the company, because there is
a technological infrastructure and application environment to support it. For small
and medium companies, which often lack dedicated IT resources, SaaS
applications are an attractive solution. If you need additional assistance, SaaS
vendors will often offer their services directly.
HI GH SECURI TY
When you relocate important data to a service provider, there is a firm belief
that the system is safe. SaaS vendors place their applications in world-class data
centers with the most reliable power supply system and security. They also use the
latest security protocols for ensuring the security and protection of data integrity.
This also goes for the cloud vendors, whose servers are located in the same data
center. Sellers who use public cloud application delivery also incorporate security
features to protect data in transit. Crucial point for the eventual acceptance of
Cloud technology in business industries will be the safety of critical data, both in
transfer as in storage. Large enterprises will not be willing to support the Cloud
concept as long as there is not more transparency available at which geographical
location the data is stored and protected (Henschen, 2008). Reasons for that are
foreign laws, which would possibly allow foreign governments to access these
data, or domestic insurance contracts, demanding the data to be stored only in
certain regions. But providing this required transparency would in some ways
contradict the whole idea of Cloud Computing itself, and it remains to be seen how
the large Cloud vendors will tackle this concern.
Faculty of Business Economics and Entrepreneurship 105
CROSSI NG AND ACCESS TO SAAS
Virtually, every type of application can be delivered as a SaaS. Customer
relationship management, document management, accounting and finance, human
resources - all of these critical applications are available from the SaaS provider.
But the question is how many of them are willing to do this transition. SaaS
application allows you to gain access to data and documents from any place that
has Internet connection. People who work in the field or travel, can effectively
collaborate with colleagues and share information using any mobile device. In
some case, offline workers cannot use this technology, because it is solely offered
online (Miller, 2009).
SMART I NVESTMENT
If a company has to elicit only a recommendation and group them in one place
as unique tips to help someone recognize their need to move to SaaS and decide
easier to take this step, the following questions may help:
If the business has grown, are the applications geared towards small and
medium sized enterprises?
Is more power and more functionality needed to assist in the growth of the
company?
Is there a growing number of workers in the field and those who are mobile
and who have trouble connecting via VPN (Virtual Private Network) and is there a
concern about safety in these connections?
Is the technology infrastructure up to the task to run today's applications and is
there the ability to invest in updating equipment?
If IT staff is overwhelmed by tasks of providing support or resources that
might not have been intended and who in that case pays for the job?
Those who answer yes to more than two of these questions need to think about
the basic SaaS applications as a possible solution for their organization. A further
recommendation is to start with one application, such as for example stacking
documents and trying how it works. Many providers offer a SaaS trial period of
thirty or sixty days, so that a small team can assess the application. And if they are
satisfied with reliability, security and ease of use of the application, they can
include other applications that are integrated with other front and back - office
systems. For sure, SaaS has many strengths and very few weaknesses. For small
businesses looking to grow and remain competitive, SaaS is a smart investment.
106 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
PUBLI C OR PRI VATE CLOUD
Company management often faces the dilemma of whether to take advantage
of the public or a private cloud, Figure 4. The decision to create a private cloud, or
use a public or hybrid cloud is based on various factors. It is important to define the
differences between private and public clouds. However, these businesses should
be mindful of the uses of Cloud Computing, as well as of the fact which services
provide suitable public or private clouds (Staten, 2008). In Figure 5, the percentage
of used Cloud Computing types around the world is given.
Figure 4: Private and Public Cloud
Source:http://blogs.msdn.com/b/arunrakwal/archive/2012/08/16/what-is-cloud-
computing-public-cloud-v-private-cloud.aspx (25.5.2014)
Figure 5: Representation of Cloud Computing in the world
Source:http://community.amd.com/community/amd-blogs/amd-
business/blog/2011/06/01/amd-2011-global-cloud-computing-adoption-attitudes-
and-approaches-study-infographics (25.5.2014)
Faculty of Business Economics and Entrepreneurship 107
PUBLI C CLOUD
The public cloud is provided as a service over the Internet. In the virtual
premises of Cloud provider, the customer does not have the visibility and control to
cloud services. The core infrastructure is shared between many organizations, but
data and usage are logically separated so that only authorized users can access
them. Public Cloud reduces the complexity and time testing, as well as the
implementation of new applications. It allows companies small or virtually no
capital expenditures. Public Clouds have their advantages over the private cloud
services.
PUBLI C CLOUD - ADVANTAGES
The simplicity and efficiency are the overall benefits of a Public Cloud
service. Public Cloud offering their services is usually over an Internet connection.
This type of technology provides a higher capacity of memory storage, so the users
do not have to worry about their PC memory storage (Miller, 2009). Host is to
manage the system and the users are to connect to the system via the web. Public
Clouds charge month or annual subscription. By keeping the public cloud,
organizations can reduce their IT budgets, because they don’t have to buy
hardware. The organization doesn’t have to spend money on employees who keep
track of the system, because they are taken care of by the host. If the hardware or
software configuration needs to be changed or if there is a server crash and the
process needs to be restarted, that would take several hours or days depending on
the situation. In Public Clouds, all the virtual reconfiguration takes a minute. If one
server fails, another can immediately be activated by reducing the time of arrival.
Due to the fact that the Cloud serving is the host, employees are responsible for
maintaining the system. The design allows users to update or introduce the tools
into the system more quickly. There are no contracts and no long-term
commitments. In general, the ease of use and price of Public Clouds usually wins
private ones.
PUBLI C CLOUD - DI SADVANTAGES
Companies need to have in mind the lack of public clouds before making a
decision. Due to the fact that a third party is responsible for maintenance of data,
many organizations feel they have little control over their personal data. Public
Cloud services are based on the Internet connection, which means slower data
transfer. If the organization keeps or carries a large amount of data, public cloud
may not be the best solution. For example, many users will not tolerate slow
108 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
loading. Poor security is seen as a major drawback. Google addresses this by
storing government data only within the US, but it doesn't guarantee for Public
Cloud customers like small businesses (Krishnan, 2010). This doesn’t mean that
public cloud has no security. Most of them have great actions, but for customers
with sensitive personal information, such as financial, it is difficult to trust a third
party. As with any technology, such benefits are partly offset by the existence of
risks, and in particular for cloud computing, security tops the list of concerns for
most organizations (Gens, 2008).
PRI VATE CLOUD
A Private Cloud can also be called an internal cloud. This means that
accounting and other infrastructure hosted on a private platform are not shared with
other organizations. The key is that technological innovation helps organizations in
the Private Cloud virtualization. Virtualization helps organizations achieve cost
savings by using the existing hardware infrastructure. Virtualized systems run
multiple virtual machines on a single physical host and as such, virtualized servers
will be more vulnerable than physical servers for the next few years until
organizations learn more about securing their systems (Gartner, 2010). It is
important to note that private cloud offers the opportunity to the customer to
quickly add new applications.
PRI VATE CLOUD - ADVANTAGES
Due to the fact that the hardware is owned by them, organizations have more
control over their data. The organization is responsible for monitoring and
maintaining the data taking in the full control over the data. A Private Cloud is
dedicated to one organization and the network can be designed to ensure a high
level of security. It is deployed inside the firewall on the network organization,
which means that the transmission rate is increased in relation to the use of the
Internet. Hardware performance and storage can be customized to Private Cloud,
because it is owned by the company.
Faculty of Business Economics and Entrepreneurship 109
PRI VATE CLOUD - DI SADVANTAGES
Private Clouds are generally more expensive than the public ones, because
they both require hardware and maintenance. In order to build a Private Cloud
service, organizations must invest in hardware or use existing systems. They
require system administrators, which leads to higher costs of administration. If a
company has multiple data centers, maintenance costs also increase significantly.
Due to the limitations of the hardware in the data center of the organization, there
are limitations in the capacity of data, which is considered their biggest flaw.
HYBRI D CLOUD SERVI CE
A hybrid Cloud service, Figure 6, is the combination of a Private and a Public
Cloud. It refers to an organization that keeps some of its operations in house
(Private Cloud) and also utilizing a cloud service from an outside provider for its
other operations (Public Cloud).
Figure 6: Hybrid Cloud
Source:http://www.nirix.com/cloud-solutions/(11.4.2014)
For example, if an organization has both sensitive and non - sensitive
applications, it can use a hybrid cloud to get the best of both worlds. The Hybrid
approach can allow business to take advantage of the cost effectiveness that a
Public Cloud service offers while keeping mission-critical applications within a
Private Cloud. A company can keep each aspect of its business in the most efficient
environment possible. The downside is that you have to keep track of multiple
different security platforms and ensure that all aspects of your business can
communicate with each other.
110 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
RETURN ON I NVESTMENT BY USI NG CLOUD COMPUTI NG
The cost of Public Cloud is dropping fast, so how can they make sure that the
value is in accordance with the money spent? It is not a secret that the cost of cloud
services is dropping as more choices become available and the providers battle for
the customers, but it is not always easy to ensure them. Although it may seem
clever to go for the cheapest option in terms of balancing the books, it is more
important to go for an option that will give you the highest role and this can
sometimes mean paying that little extra in the beginning, to make it the best value
for money offering in the future. In the SMB segment, the fastest adoption of
Cloud services is in the UK and Europe and that is because many of the SMB firms
are growing fast and looking to use cloud for cost saving. SMBs also want agility
and the ability to reach new markets that other, larger, companies are not able to do
because they already have investment in non-cloud-based real estate.
The first important step in identifying which service provider to go for and
whether to go for a Public, Private or Hybrid Cloud is to approach a local trusted
provider for help and identifying what should be moved into the cloud and for
advice on whether everything should be moved to a Public, Private or Hybrid
service.
Although the Public Cloud is cheaper, it may be more appropriate to focus
more on creating a Hybrid Cloud and understanding what workloads are best
deployed where and not automatically thinking everything is the best concerning
the Public Cloud. It may be that they only need to use a service part-time and in
that case, there is no need to pay for server space full time. The world is getting
more dynamic in the sense that volumes of transactions are not predictable from a
business point of view. The world is automated. Everything depends on IT and
infrastructure. They must run and implement business processes.
Already at present, many consumers use Cloud services for private purposes –
although possibly without knowing that they are doing so – for example through
the usage of certain e-mail providers or social networks. Apart from data
management advantages, consumers can be motivated to use cloud services by
means of financial and ecological benefits, for example if they learned that cloud
usage could reduce their energy bill and help them protect the environment (Jaeger
et al. 2009). The IT devices of private households in Germany consumed 60 % of
the total energy consumption of IT in 2007, and the ratio is expected to further rise
until 2020 (Stobbe et al. 2009). Thus, even small energy savings in each household
may lead to a significant overall impact (Kumar, Lu, 2010). However, these
favorable prospects again rely on customer knowledge and acceptance of the new
IT infrastructure.
Faculty of Business Economics and Entrepreneurship 111
EXAMPLES OF CLOUD COMPUTI NG
Before the advent of the various developments in the parlance of Cloud
Computing, the majority of internet users were used to the email, which could be
stored in the cloud and remain if deleted ( in case the person has an account like
Yahoo mail, Hot mail, Gmail etc). But the idea of massive storage of data,
synchronization of such data, word processing, gaming and a bulk of what the
computer could hitherto perform physically in the past, is now done in the cloud.
There are typical examples of Cloud Computing.
? Microsoft SkyDrive (Microsoft Cloud Computing) is a cloud based storage
device for personal and corporate files, data, information etc. which is
accessible from anywhere through an internet connection. Microsoft Word,
Power Point, Excel and a great deal of other products of Microsoft can be
accessed for free. SkyDrive application can be downloaded and installed in a
PC if the system supports it. Otherwise, it has to be accessed directly in the
clouds. In order to access SkyDrive, you need a SkyDrive.com account,
through which the cloud is accessed. Microsoft provides up to 7GB free
storage for documents, photos, files, data etc. Users of Windows 8 are at
advantage as SkyDrive application is integrated into the operating system
and by implitation, it can be accessed easily when the system is online. This
is one of the advantages of Windows 8.
? Google Drive (Google Cloud Computing): This was known as Google Docs
until recently, when it was changed to Google Drive. Google Drive is an
example of Cloud Computing where videos, photographs, files, documents
and data can be stored and organized whether for an individual or a
corporate organisation. Google offers up to 15GB free storage for users.
There is a periodic payment plan for additional storage as the demand grows
for clients. Google account is required to access this facility. For easy access,
Google Drive can be downloaded into a PC or into a similar form.
? Dropbox (Dropbox Cloud computing): This one is the Cloud Computing
giant and a front line outfit in the industry. Since its inception in the year
2007, it has made some remarkable landmark achievements worth emulation
by others in the same competition with respect to quality of service. By
implication, Dropbox offers Cloud storage for its clients for files,
documents, Videos, data synchronisation and much more. Apart from the
free storage offer, more storage as referral bonus is available. For additional
storage demand, a competitive payment plan is available.
? iCloud (Apple Cloud computing): iCloud is cloud based and owned by
Apple incorporated for the storage and sharing of files, music, documents,
applications, videos, photographs, data etc, built into every compatible
Apple and other form. The iCloud application can be downloaded from
Apple store and installed into your form if compatible. This can be accessed
anywhere, as long as the device is compatible via an internet connection.
112 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
WORKI NG I N A VI RTUAL OFFI CE
However, Google’s online suite of office applications is probably the best
known,but by no means the only solution or offer. Rather than having a system and
space hogging suite of applications like a word processor, a spreadsheet creator and
a presentation or publishing platform sitting on computer, they could opt to work
online instead. Accessibility, potential for collaboration and perhaps even online
storage are just some of the benefits of satisfying your office suite needs by
working online. Examples of online suite offer include: Ajax 13, Think Free and
Microsoft’s Office Live. When somebody needs to meet with a customer, sending
him a meeting request in Outlook that includes a link to an online meeting hosted
in Lync Online, that is very impressive. Online meetings are much easier to arrange
and enterprises use them extensively. In addition, online conferences can host up to
50 people at a time (O’Reilly, 2012).
ACCOUNTI NG I N THE CLOUD
Painless bookkeeping: brings all your finances together into one place, tax
payment and invoice dates to calendar, free support and regular software upgrades,
bank-level security and data protection. They build professional estimates and
proposals which can be tracked through to approval and converted to invoices. Charts
of invoice payments show month-by-month when payments are due, overdue or have
been paid. Electronic bank statements and building monthly balanced charts are
obvious advantages, as well as tracking what the company owes to the user, by adding
out-of-pocket expenses, including scanned expense receipts.
FLEXI BLE ENTERI NG
If you need complete visibility on how your time is being spent, FreeAgent lets
you easily log timeslips for work done on active projects. Switch between weeks and
months and see at a glance where your time is going. When the project is complete,
generate an invoice from all unbilled time and send this to the client in minutes.
TI MESHEET REPORTI NG AT YOUR FI NGERTI PS CLOCK I CON
At any stage in a project, they can generate flexible and professional time
tracking reports, broken down by contact, project, user and tasks. If necessary,
these can be printed off as high quality PDFs and submitted to the client. This is
something especially useful for contractors.
Faculty of Business Economics and Entrepreneurship 113
I NVOI CI NG SOFTWARE THAT HELPS GET PAI D FASTER
The FreeAgent traffic system instantly shows the status of invoices, allowing
quick determination what has been paid, what payments are outstanding or what
still needs to be sent. Also, it is possible to filter invoices by status or invoice date,
including tax years. Once the invoice has been paid by clients, FreeAgent will
reconcile the invoice and payment into bank account. This provides a more
accurate picture of money used in business. Integration with PayPal means that
PayPal links could be included in emails so clients can settle the invoice online
immediately. It's all about getting paid faster. Invoicing with FreeAgent means
getting paid faster and with less effort. They can create invoices with a company
logo or even create their own design.
EXPENSE TRACKI NG
For expenses such as magazine subscriptions or web hosting, it is possible to
set them to automatically recur. A comprehensive list of expense categories helps
building accurate accounts which are priceless at tax time. For complete
accountability, FreeAgent allows uploading of scanned expense receipts as
attachments to expense records. These can be viewed as individual expenses or be
downloaded as the original files again, at any time.
ACCOUNTANT FRI ENDLY
By giving access to account, the clouds are able to give you instant, better and
more relevant advice, Figure 7. It's a completely new way of working with your
advisor that benefits both parties.
Figure 7: Year and Month Profit and Loss
Source:http://www.freeagent.com/tour/accounting (25.5.2014)
114 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Track income and outgoings to get a true picture of business over time.
FreeAgent alsp builds month and year Profit and Loss statements. FreeAgent builds
a fully balanced sheet for business with a comprehensive list of your company's
assets and liabilities. Year-end accounts can be handled as soon as the books are up
to date. Some Cloud-based systems allow accepting many forms of payment and
have the funds deposited directly into business bank account, to help firms in
maintaining a healthy cash flow (Bates, 2011).
SI MPLE SALES TAX
Everybody can set the appropriate sales tax for any country and FreeAgent
applies this to all required sales and purchases. Additional sales taxes can also be
added for regions where multiple sales taxes are needed and can mark these sales
taxes as compound, as is required in certain places. Quick, easy and configurable
reports show all the sales tax charged on invoices.
CLOUD ACCOUNTI NG
FreeAgent's cloud accounting software is completely web-based - there's
nothing to download, update, or install and you can access it from your regular
browser. Everybody can use it anytime, from any computer - no more sharing
spreadsheets or lugging around your laptop. It is not needed that the user worries
about computer crashing and losing all of your business's books - with FreeAgent's
cloud accouting, all of data is securely transferred at backup servers several times
an hour.
SECURE CONNECTI ONS
The security of data is of biggest concern. FreeAgent uses 256-bit SSL
technology to encrypt all transactions between firms and servers of vendor. It is the
same technology that banks use to protect data. Redundancy and resilience is built
into hosting infrastructure. They operate out of two geographically isolated data
centres (DCs), so they can offer full DC-level failover in the unlikely event that an
entire DC becomes unavailable. As well as maintaining real-time copies of vendor
database across two separate data centers, they additionally run a full database
backup every four hours with additional incremental backups several times an
hour. These backups are encrypted and transferred to a secure offsite location.
They also allow downloading all data from within FreeAgent account at any time.
Faculty of Business Economics and Entrepreneurship 115
MOBI LE PHONE
Whether on iPhone, an Android handset or Windows Phone, FreeAgent will
just work on browser. It’s free and there’s no application to be installed.
DI SCUSSI ON
Cloud Computing is a challenge to many analysts. Most people think that
solutions must be created within the organization as well as its own product, based
on its needs and capabilities. Management companies do not need to waste
valuable time on managing and maintaining servers, database or application
infrastructure, they should be more devoted to their primary business. Opponents
of Cloud Computing mainly deal with security issues and legislation.
In the transition to Cloud, it is necessary to check the performance that the
vendor offers. Applications that use large data base or require a fast processor and
capacity of RAM may not be the best choice for the Cloud, since it would run them
and the use itself would be too expensive. It is the best to check the details with the
Cloud provider. Caution is needed with providers that have a minimum price for a
monthly service fee, because it can directly affect the level of support that the
provider offers.
It is necessary to determine precisely which security issues are the
responsibility of the organization, and which security issues are the vendor’s
responsibility. It is necessary to estimate the time and cost of transferring large
amounts of data on the Cloud, as well as to inform on the business continuity and
the training of employees. Along with that, it is needed to pay special attention to
internal business issues, especially to those related to human resources, because a
large number of organizations is faced with the discontent of employees who may
feel threatened.
Cloud computing is definitely a new age in the era of computing that tags
along a number of benefits. They can be classified into several different categories,
namely:
? virtualization,
? democratization of computing (small and medium enterprises operating in
the infrastructure that has already been available only to large companies),
? scalability,
? commodification of infrastructure (IT department is able to deal with the
strategic aspects of the business).
116 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON
Cloud Computing has numerous advantages, but also some disadvantages. It
can be seen that the benefits of cloud accounting outweigh its negative aspects.
When firms use cloud correctly and efficiently in a business, they cannot only
increase profits for a company by allowing fewer employees to work remotely,
they can also increase the productivity of a company. As more and more companies
turn to Cloud Computing to save money and to increase business value, the future
of Cloud Computing becomes more uncertain. The popularity of these services will
only continue to increase, especially while companies are continually forced to
adjust to decreased budgets.
REFERENCES
[1] Bates, C. (2011). Cloud Computing Is Changing the Way Small Businesses
Work, OPEN Insight Guide
[2] Calvey, J. (2013), Cloud Computing principles and paradigms,http://bodhost.com/blog/cloud-computing-principles-and-paradigms/
(11/4/2014)
[3] Gartner (2010) Gartner says 60 percent of virtualized servers will be less
secure than the physical servers they replace through 2012.http://www.gartner.com/it/page.jsp?id=1322414.
[4] Gens, F. (2008). Cloud Services User Survey, pt.2: Top Benefits & Challenges.http://blogs.idc.com/ie/?p=210.
[5] Ha, A. (2009). Who uses cloud computing? Startups do, VCs don’t. Retrieved
December 2, 2010, fromhttp://venturebeat.com/2009/06/25/who-uses-cloud-
computing-startups-do-vcs-dont/
[6] Henschen, D (2008) Demystifying cloud computinghttp://www.intelligententerprise.com/blog/archives/2008/06/demystifying_cl.ht
ml. Accessed 2009-03-30
[7]Jaeger, PT., Lin, J., Grimes J.M., Simmons S.N. (2009) Where is the cloud?
Geography, economics
[8] Kumar, K, Lu, Y.H/ (2010) Cloud Computing for mobile users: can offloading
computation save energy? IEEE Computer 43(4):51–56
[9]Krishnan, K. (2010). Introducing Google Apps for Government. Official Google
Blog,http://googleblog.blogspot.com/2010/07/introducing-google-apps-for-
government.html.
[10]Kundra, V. (2010). State of Public Sector Cloud Computing. Chief Information
Officers Council
[11]Miller, M. (2008).Cloud Computing: Web-Based Applications That Change the
Way You Work and Collaborate Online, Indianapolis: Que Publishing, 2008.
Faculty of Business Economics and Entrepreneurship 117
[12]Mell, P., Grance, T. (2009, October 7). The NIST definition of Cloud
Computing (version 15).http://www.csrc.nist.gov/groups/SNS/cloud-
computing/cloud-def-v15.doc
[13] Published with the authorization of Microsoft Corporation by: O’Reilly
Media, Inc. 1005 Gravenstein Highway North Sebastopol, California 95472,
2012.
[14] Stobbe S., Nissen N., Proske M., Middendorf A., Schlomann B., Friedewald
M., Georgieff P.,Leimbach T. (2009) Abschätzung des Energiebedarfs der
weiteren Entwicklung der Informationsgesellschaft. Fraunhofer Institut für
Zuverlässigkeit und Mikrointegration, Berlin
[15]Staten, J. (2008). Is Cloud Computing Ready For The Enterprise? Forrester.
[16]WikiPedia,http://en.wikipedia.org/wiki/Cloud_computing#Service_models
(25/5/2014)
[17]http://deletemalware.blogspot.com/2011/07/paas-cloud-computing.html, PaaS -
Cloud Computing, (11/4/2014)
[18]http://blogs.msdn.com/b/arunrakwal/archive/2012/08/16/what-is-cloud-
computing-public-cloud-v-private-cloud.aspx, What is Cloud Computing -
public cloud v private cloud (25/5/2014)
[19]http://www.nirix.com/cloud-solutions/ Cloud solutions (11/4/2014)
[20]http://www.freeagent.com/tour/accounting (25/5/2014)
[21]http://community.amd.com/community/amd-blogs/amd-
business/blog/2011/06/01/amd-2011-global-cloud-computing-adoption-
attitudes-and-approaches-study-infographics/ (11/4/2014)
[22]http://firstmonday.org/htbin/cgiwrap/bin/ojs/index.php/fm/article/view/2456/21
71. environment and jurisdiction in cloud computing. First Monday 14(5).
Accessed 2013-03-10
118 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
APPLICATION OF BUSINESS INTELLIGENCE AND
OLAP TECHNOLOGY IN BUSINESS DECISION-
MAKING
Jovan Zivadinovic, PhD
11
Zorica Medic, PhD
12
ABSTRACT
Basic goal of this paper is application of business intelligence and OLAP(On-Line
Analytical Processing) technology in development of decision-making process in a way that it
should facilitate, as much as possible, decision-making based on the knowledge which is hidden
in the transaction systems. Managerial decisions that are made in business systems, determine
their competitive advantage, so obvious is the need for decision-making to be free of subjective
impressions, and to be based upon knowledge more. Having in mind the area and the goal of the
research, the methods that will be used in researches are: inductive and deductive method, as
primary logical method, which during research enables drawing of certain conclusions on the
research subject and methodology of objectively oriented development of business intelligence
system, which includes: defining the demands, analysis, design and implementation of business
processes. Analytic processing of data can be done directly over relational data base (ROLAP)
or over the prepared data base (MOLAP). OLAP gives the opportunities to users to individually
pose questions, which significantly increases the possibilities to do analysis necessary for
decision-making. In this paper the authors used exam results as indicators of efficiency of
educational process, by analysing them according to the examination period. This paper uses
the exam results as indicators of efficiency of educational processes, analysing them according
to the exam periods, terms, subjects, grades... The application of instruments of business
intelligence and OLAP technologies enables the users to individually set demands, which
significantly increases the possibility for executing the necessary analyses in decision-making,
providing the conditions for better and faster reactions to spotted problems. The contribution of
this paper can be seen in application of business intelligence and OLAP technology, to the
following and advancing the teaching processes, improving their standards, developing the
scientific and research work, more quality decision-making and management of educational
processes. Also, the significance of this paper can be seen in application of very efficient
standardized tools like Microsoft programs, MS EXCEL and MS Query for quality and
successful business analysis; it makes the decision-making processes shorter and decisions
better and more rational.
Key words: Business Intelligence, Data Base, Multi-Dimensional Analysis
J EL Classification: D80, I21
UDK: 005.94:004.9 005.311.6:004.65
11
Jovan Zivadinovi?c Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
12
Zorica Medic, Graduate school of proffesional studies “Prof. dr Radomir Bojkovi?”, Krusevac,
Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 119
I NTRODUCTI ON
Complete and precise information at the right time represents one of the basic
resources of business and the key for best business decision-making. During data
processing one finds hidden relations, sees new business possibilities which
contribute to making quality managerial decisions.
Quality management of a business system and its processes represents a
critical factor of business success. Making the right decision directly and indirectly
depends upon the quality and the right time of information that the decision-maker
has. For obtaining such information it is necessary to have appropriate data in
every moment. The gathering of raw data does not represent the solution of the
problem of decision-making process, nor the quality management. Great amount of
unstructured and unprocessed data can represent the difficult circumstance during
decision-making, because it can easily blur the essence of a problem and „getting
lost in the sea of data that do not have a purpose“ (Balaban, 2006).
Operational information systems are mostly oriented towards executing
business and transactions and less towards the issue of decision-making.
Information of one enterprise is mostly inconsistent and unavailable. The problem
is finding the necessary information as well as uncertainty of the information's
accuracy, which results in poor business decisions. Additional problem in
managing large systems is the inability of the managers to individually and in a
simple way access the necessary data and shape them into necessary information.
Even in the cases when wanted information exists, it is often hidden in the huge
mass of data and cannot be used. Obtaining the necessary data from such a
complex systems is very expensive and sometimes impossible. That is the reason
why the larger and larger number of companies develops and uses the systems for
business intelligence, in order to use the existing data better and faster in creating
information needed for the decision-making process.
The application of business intelligence process enables using only that
information that is necessary, at that moment, to make the managerial decisions.
The advantage of this concept is the increase in information quality, to show it in a
simple way as the reduction of large number of information that the employees are
usually exposed to.
The main purpose of business intelligence is generating the quality
information that will enable making the best possible business decisions.
120 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DEFI NI TI ONS
Business intelligence is an area within the information technologies, whose
goal is to put all the information potentials of an enterprise into function of making
the top quality decisions, with the ultimate goal to realize the determined strategic
goals of an enterprise.
Intelligence: intelligence is inborn ability to understand properly the things and
notions in life and everything else, reason, mind, the ability to understand, as a
collective noun, all people that have this trait, classier and better world in general,
educated people (Vujaklija, 1980).
The notion of „business intelligence “that signifies the systems for support in
decision-making process, in the respect of a separate part of information
technologies comes from English language. (Business Intelligence, BI). "Business
Intelligence" as a notion was suggested by Howard Dresdner (A Brief History,
2014.), in order to categorize the concept and methods that help in easier business
decision-making by using the facts based systems.
Business intelligence represents the data analysis, reporting and tools for
setting demands that can help business users to make their way through multitude
of data and to synthetize the right information. Those tools are today called
business intelligence (Gartner Group report, 1996).
There are many definitions of the notion of business intelligence that are
different according to the author, and the point of view that is used to approach this
subject. Even though there is no unique definition, what is in common to all the
definitions is that the business intelligence is seen as a group of methodologies, i.e.
the concept that brings the qualitative progress of decision-making process. A
positive effect of the decisions made by using this concept is greater because it
implies obtaining the quality information on time, systematization of information,
clearer identification of the right information and easier access to information.
When one uses data to make quality information on time, i.e. knowledge, the
probability that the decision made based on them will be right and on time and largely
free from subjective impressions (in the sense of assumption on missing information)
and uncertainty with making decisions ( decision-making needs decisiveness).
Business intelligence represents the group of new application formed in such a way
that they can organize and structure data on business transactions in a way that enables
the analysis useful for the support to the decision making and operational activities of an
enterprise. Or simply said, business intelligence represents the process of gathering of
available internal and significant external data and their turning into useful information
that help business users with decision making (Kalakota, 2001. p. 349).
According to Larisse T. Moss's and Shaku Atrea's (The Origins of Business
Intelligence 2014) definition, business intelligence represents an architecture and
the collection of integrated operational applications, then the applications for
support to making decisions and data bases that enable the business systems easy
access to information.
Faculty of Business Economics and Entrepreneurship 121
From the technical point of view, i.e. from the point of view of information
technologies, business intelligence is a process of multiple levels, where a large
amount of information is stored in information systems of an organization and the
application systems, turns into useful information. Business intelligence system
consists of three wholes, the first one is made of data sources, central point is the
data base where data from the source systems are collected and adjusted and the
third component is the analytic tools (Rajkovi? et al., 2012).
RESEARCH METHODS
The setting and developing, as well as the general researches, are based on
certain scientific and research methods:
? modelling method as a systematic research action which is used to build
simulation model that is capable of substituting the subject of the research,
? observation method which enables gathering, from the real system, sufficient
amount of data which will be used as entry data for researches the
simulation models in order to draw the conclusions on the system that the
model represents,
? methodology of objectively –oriented system development of business
intelligence which includes: demand defining, objectively –oriented analysis,
objectively –oriented design and implementation,
? inductive and deductive method, as basic logical methods, that enable the
drawing some of the conclusions on the research subject.
? With the goal of comparative analysis and forming the personal attitudes and
conclusions we used comparative method is the process of comparison of
obtaining information by a classic process and process by using the business
intelligence and OLAP technologies.
KEY FI NDI NGS
''Business intelligence is some kind of business radar. It warns for threats,
points to the business opportunities, foresees that something is going to happen,
adequately prepares for the inevitable, expands the manoeuvre space for decision
making, to sum it up, it increases the controllability of success that you want to
achieve by doing business“ (Kukrika, 2011).
Business intelligence is a necessity and an imperative of every successful
business, managerial idea with clearly defined tools, without which the quality
management is an illusion. The conditions of doing business are constantly
changing and becoming more complex, and the changes demand faster reactions.
In order to manage the right way, management needs quality information, directed
122 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
towards managing, that encourage activity. Such information are delivered by
business intelligence.
Considering the spectrum of activities of business intelligence which implies:
analyses of the set goals of an organization, constant comparison of planned and
realized, coordination of activities of different organizational units in the business
system, assessing the current state, making decisions, information transfer etc. it
can be concluded that the business intelligence represents the means of efficient
realization of business results.
Frequent question is: Can we predict what the future holds? If our business
system has a modern information system, well-developed management control and
uses the elements of business intelligence, we will surely have quality information
based on which we will no longer fell insecurity in making decisions and we will
have a better vision of future business (Medi?, 2013).
When an organization gathers the data and organizes them into databases, data
warehouses and local data warehouses, then it can use them for further analysis
(Figure 1).
Figure 1: Principles of business intelligence operations
Source: Authors
Business intelligence implies applications and technologies for consulting,
analysis and securing the access to a vast amount of data that help users to make
better strategic and business decisions. Business intelligence system unifies the
methodologies, technologies and platforms for data warehousing, OLAP data
processing (Online Analytical Processing) and data mining, enabling the
companies to create useful managerial information from the data on the business
found in various transaction systems and come from different internal and external
sources.
Raw data and
corporate database
Sales
Supply
Buyer
Point of
sales
Supply chain
Center for
providing
information
Data
warehouse
Tools for
business
analysis
Results
Insight
Charts
Reports
Warnings
Predictionsa
Data
mining
P= X
2
- Y
Web store
Faculty of Business Economics and Entrepreneurship 123
DATA WAREHOUSE
Base of the support system to decision making is analytic data base Data
Warehouse (DW), whose one of the primary functions is to maintain the processes
and regulations of business of an organization as a whole. As an effective and
efficient support to management, DW cleans and aggregates the data from the
operational systems and places them into so-called dimensional data bases, which
represent the repository of consistent historical data, easily accessible and subject
to effective manipulation. Data organized like this are used for assessing the state
of business situations, trends, projections and alternatives with the purpose of
support to decision-making process (Balaban, 2006.).
DW contains a large amount of data which are organized in smaller logical
wholes that are called Data Marts. Data Warehouse systems use denominalized
data, which enables faster execution of the demands over such data. According to
the definition set by William H. Inmon (Inmon, 1995), data warehouse represents
subject-oriented, integrated, time-variant and non-volatile group of data, and the
ultimate goal is support given to the managers in decision-making processes:
? subject-oriented – directed towards specific organizational activities or
decision processes instead on the current operations.
? Integration – centralized database which contains data from different sources
internal, external and personal.
? Invariability - DW does not change permanently, but it only periodically
adds new data depending on the business needs.
? We can say that the key characterises of DW are time dimension and ability
to transform business, operational and other data into data warehouse, in a
quality way.
Data in data warehouses are time-variant, which means that every data that is
in the warehouse is connected to some moment. In the end, data in warehouses are
invariable i.e. when a data is written in the warehouse he can only be accessed.
Ralph Kimball defines the data warehouse as a copy of transactional data
structured in such a way that it enables setting the demands and data analysis
(Kimball, 1996.).
These demands and data analyses are almost impossible to execute in OLTP
systems because in such systems data are constantly changing. Information from a
specific time frame is often called data recordings. For example, if an analytic
database contains data recordings on sales that are taken every evening, it will be
clear during data analysis tomorrow that those data are a day old. Then daily,
weekly and yearly comparisons make sense because we will always have
consistent values which we can compare.
Data Warehouse is formed to enable the users of different levels the solving of
various analytic tasks. It enables:
? reporting and monitoring of business processes,
? analysis and setting the diagnose, finding information in an interactive way
by setting the demands and analysing the obtained results,
124 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? planning and simulation, making and executing models of plan and
simulation,
? access to a large amount of data for the end user,
? creating and demanding different trend reports,
? extraction, transformation and placing the large amount of data.
DATA WAREHOUSE ARCHI TECTURE
Data from the source systems are integrated and transformed before they load
to the data warehouse considering that the data are taken over from various sources
and platforms, they have to be integrated and transformed before they are placed
into data warehouse.
Some of the advantages of data warehousing are:
? simplicity,
? better data quality,
? faster data access,
? separate support processes for decision-making and production processes,
? providing competitive advantage,
? distributed data base,
? possibility of parallel processing,
? platform independence,
? security.
Basic architecture of data warehouse is given in the figure no 2. Basic
component of data warehouse is database
Figure 2: Basic architecture of data warehouse
Source: Authors
Data
transformation
and integration
Sales
Supply
Buyers
Supplier
Data
Warehouse
Faculty of Business Economics and Entrepreneurship 125
Data warehouse architecture has the following characteristics:
Data are extracted from various source systems, databases and folders –
systems found in companies are basic data sources for data warehousing. Data
which are necessary for support system to making decisions are taken from these
systems where their number can be large. Sometimes it is necessary to extract all
the data that are found in these systems. It is most often the case that the data are
taken from different data bases, from different platforms and different formats and
data types.
ON-LI NE ANALYTI CAL PROCESSI NG (OLAP) SYSTEMS
Basic role of OLAP (on-line analytical processing) tools is to find and answer
to the users questions as quickly as possible, their usage is for n-line analysing of
data and reporting. In the beginning the users' questions were relatively simple.
However, in time they have become complex so that the relational tools (OLTP
tools - On-Line Transaction Processing), (by definition OLTP systems represent
the transactional systems for updating of databases and transactions' processing),
were not able to provide answers in an acceptable timeframe. This is exactly the
purpose of OLAP tools. They enable a simple synthesis, analysis and consolidation
of data. They are being used for intuitive, fast and flexible manipulation of
transactional data. OLAP systems support complex analyses that are done by
analytics and enable data analysis from different perspectives (business
dimensions).
When we say OLAP we think of the program tools that are being used for
manipulation of multidimensional data that come from different sources. In order
to use fully the OLAP's potential it is necessary to have as large amount of data as
possible. This is why along with OLAP we talk about data warehousing. In order
for an OLAP product to be considered an application, it has to have three key
characteristics:
? multidimensional view of data,
? possibility of using complex computer operations,
? possibility of time data analysis.
Analytic systems are the systems that provide information which are used for
problem analysis and are primarily done by using comparison or analysis of
patterns and trends. For example, analytic system could show how a certain type of
product is being sold in different areas of the country. It could also show how one
type of product is being sold now in relation to the period when the product
appeared at the market for the first time. Analytic databases are developing for
analytic systems.
The question of what the end user needs?
? He must be able to pose any business question,
126 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? Able to use any data from the business system for analysis,
? Able to get indefinite number of reports.
Business decision-makers need answers to the questions that directly influence
their ability to be competent at the fast changing modern market. They need clear
answer no matter how difficult the question is, as soon as possible. This is why we
use OLAP analytic systems that provide information that are being used for
problem or situation analysis. Analytic processing is primarily done by using the
comparisons or pattern and trend analysis.
Figure 3. shows the place of OLAP systems in decision-making process.
Figure 3: Place of OLAP system in decision-making process
Source: Authors
Analysing the data patterns and trends demands the existence of large number
of historical data. That is why the analytic data bases do not contain newest data,
but they keep information from a specific moment. For example, it is possible to
determine if the sales in one month has significantly fallen only if the system has
the data on sales in the previous months, so that the data can be compared.
OLAP systems use characteristics of multidimension and denormalization of
data and it can be said that they represent the upgrade of data warehouse.
Interface of OLAP system should enable the user to work comfortably, to
individually preform the analytic operations and getting the overview and business
graphics, without the skills of programing and knowledge of database structure.
OLAP tools very efficiently enable moving from the tables to
multidimensional charts by using the dynamic screens. This defined OLAP or
hyper cube contains tens of thousands of possible reports that are easily changed,
quickly defined and executed even faster.
- Data presentation
- Visualization
B u s i n e s s I n t e l l I g e n c e
OLAP
Extraction
Filtrating
Transformatio
n
- Demands
- Generating reports
- Foreseeing
- Analysis
- Modeling
Internal
data source
Personal
data
External
data
sources
Data sources
Faculty of Business Economics and Entrepreneurship 127
Demands that OLAP system has to fulfil are:
? Possibility of working with a large group of data and users,
? Short response time,
? Integrated data that connect OLAP server and relational database,
? Possibility of working with data with various levels of details,
? Ability to calculate the complex mathematical functions,
? Support for what-if analysis modelling and planning,
? Simplicity of introducing and maintaining the system,
? Data protection,
? Possibility of working with a large number of tools with which oe can access
the data, do analyses and show data.
ARCHI TECTURE OF OLAP SYSTEM
Under OLAP system architecture we imply the way in which OLAP system
works with the data from data source.
? Some of OLAP tools physically transfer all connected transactional data
from the relational database and other sources into multidimensional
database, using meta level, and fill data warehouse over night (batch
approach), i.e. they do complete renewal of data in certain time intervals.
? Another approach, the so-called on-line, transfers every individual change of
relational into multidimensional database i.e. it updates the warehouse only
with the data which have changed between two intervals of updating.
However, middle solution is often used, where batch method is the basic one
while only some changes at the old data are transferred individually.
Previously defined approaches provoked the appearance of two basic architectures:
? multidimensional OLAP (MOLAP) and
? relational OLAP (ROLAP).
MOLAP is a solution when multidimensional databases are being used, and
ROLAP emerges as the upgrade of relational databases. MOLAP and ROLAP are
different in the way they physically store data. With MOLAP systems data are kept
in multidimensional structure and in the case of ROLAP system data are kept in
relational databases.
Based on what we have just said, we can conclude that the cubes in OLAP
tools store in three different models:
? relational storing model is called relational on-line analytic process or
ROLAP, and
? multidimensional on-line analytic process is called MOLAP.
? When the dimensions are kept as a combination of these two variants, then
such a model is known as hybrid on-line analytic process or HOLAP.
128 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
RELATI ONAL OLAP (ROLAP)
ROLAP or relational OLAP systems are done based on the data that are in the
relational database, where the databases and dimensions charts are kept as
relational charts.
This model allows the multidimensional data analysis considering that it
enables the users to use traditional OLAP functions of cutting and turning. This is
achieved by using any of the tools of SQL system for reporting the system to
separate directly over the data warehouse.
Figure 4: Architecture of ROLAP system
Source: Authors
The advantage of ROLAP model of OLAP analytic tools is that it is more
stable when managing a huge amount of data. Another advantage of ROLAP tools
is that they are efficient in managing the numeric and textual data. It also enables
the users to get the details of data that are found at the lower level of hierarchical
structure (drill down). The picture 4 shows the architecture of ROLAP system.
Lack of ROLAP applications is slower performance in relation to other styles
of OLAP tools because the calculations are done inside the server. Another lack of
ROLAP tools is that it is dependent on using the SQL for data manipulation.
ROLAP systems are optimized for data access, while MOLAP systems are
optimized for data gathering. Advantage of the ROLAP systems is that the
summary tables are created directly in relational system for database management
(RSUBP), which provides short response time, and the tables are very clear.
Basic reasons for using the ROLAP system is that there are already developed
and checked tools for them for data storage. Also ROLAP systems are created
because they provide a direct approach to data from tables so there is no need to
duplicate the data like MOLAP systems do.
Processed
information
Base data
Transactional
system
Data warehouse (RSUBP) Relational OLAP OLAP interface
? Parallel demand
? Parallel loading
? Parallel indexing
? bit-map indexing
? hashing
? Star schemes
? Detail data
? Backup and recover
? Expense optimization
? SMP and MMP support
? transformation
? dynamic consolidation
? complex filtering
? prediction
? exceptions' process
? background processing
? division of demands
? allocation
? flow management
? aggregation
? kontrola
? tables
? charts
? maps
? warnings
? drill down
? cutting
? searching
? ranking
? printing
? integrating
N
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v
o
b
a
z
e
p
o
d
a
t
a
k
a
N
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v
o
a
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l
i
k
a
c
i
o
n
e
l
o
g
i
k
e
P
r
e
z
e
n
t
a
c
i
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o
Faculty of Business Economics and Entrepreneurship 129
MULTI DI MENSI ONAL OLAP (MOLAP)
Multidimensional OLAP – MOLAP is considered a classic form of OLAP.
One of the main differences between MOLAP and OLAP tools are the data, With
MOLAP they are summed and kept in an optimized form of multidimensional
cube, instead of in relational database.
Main advantage of this model is that it provides excellent performances of the
demands because the cubes are designed for a fast data access. While using this
model, data are structures in such formats in accordance with the clients’ demands
for reports with already calculated data in cubes.
MOLAP model is considered to be the best OLAP tool for creating reports
considering that it enables the users to reorganize easily or rotate the structure of
the cube in order to see different data aspects. MOLAP analytic tools are in
condition to do complex calculations. Considering that the calculations are
previously defined during the creation of the cube, it results in faster access to
calculated data in relation to ROLAP. MOLAP systems also enable users to
quickly forward the data into a group of data. Also, in relation to ROLAP, MOLAP
is significantly less demanding when it comes to hardware because of the data
compression technique. In short, MOLAP is optimized for demands and access to
summary data.
Figure 5: Architecture of MOLAP system
Source: Authors
There are certain limitations in MOLAP system's application. Basic weakness
of MOLAP tools is that they are less scalable in relation to ROLAP tools. MOLAP
approach also introduces data redundancy. In the end, MOLAP demands additional
investing because cube technology has to be specially built in an organization
which demands investments in people and resources. Picture 5. shows the
architecture of MOLAP system.
Transaction
systems
Multidimensional data base
? Demands
? Indexing
? Consolidation
? Percentages
? Ranking
? Predicting
? Finding exceptions
? networks
? charts
? warnings
? drilling
? searching
? ranking
? printing
? integration
? rotiranje
Database level
Application level Presentation level
Processed
information
Base data
OLAP interface
130 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
MOLAP databases have a limitation of physical size of data groups with
which they can operate. In order to do any kind of analysis, it is necessary to load
the data first into multidimensional structures. Various calculations are done in
order to create the aggregations and complete the data, which can last for a long
period of time. After the process is completed, the user can start the analysis.
Lack of MOLAP systems is the difficulty to add new dimensions. According
to that MOLAP systems are good to use in cases when it is impossible to divide a
large group of data into smaller groups of data (Tot, 2009).
We can see in picture 4 that the data from different transactional systems are
loaded into multidimensional database with the help of batch routines. When data
loading is done, creation of aggregations begins, after which database is ready to
work. Users make their demands for OLAP reports via interface.
CONNECTI ON DATA WAREHOUSE - OLAP- DATA MI NI NG
Creating Data Warehouse and using OLAP tools enables the aggregation of
historical data and data manipulation through interactive approach to
multidimensional information. Through previous models and methods one can get
the answer to the questions like what the last month's income was, what the
fluctuation was in the observed period, what region the highest growth was
achieved in. Identifying the observed fact (e.g. income) in relation to certain
previously defined factors (place, time, buyer, product, price etc.), conditions for
further analyses is created based on which the decision will be made.
Analysis should give answers to why the situation is like that and in which
way business actions should be directed in the future in order to improve the
business result. Data Mining is a process of automatic finding of hidden relations
and patterns in behaviour among data, which implies using various statistical
techniques, artificial intelligence and creating the predictive models based on
discovering the relations among the data. Data Mining gives the possibility of
receiving an answer to the question without setting of any assumption in the
influence of a certain factor.
As a data source that is processed through Data Mining one uses databases and
data warehouse. Data warehouse is not necessary for data mining, because data
mining technology can be applied to the operational and transactional databases.
Data Mining and OLAP are complementary systems because before the
relations among the data are determined (data mining), the certain assumptions
based on which the relations are made have to be set (OLAP):
? OLAP is a part of system tools for decision-making process support and it
gives answers to the questions if some assumptions that are taken from the
database are true. OLAP analysis is basically a deductive process.
? Data Mining access tries to find some relation between data. Data Mining is
an inductive process.
Faculty of Business Economics and Entrepreneurship 131
EXAMPLE OF APPLI CATI ON OF BUSI NESS I NTELLI GENCE I N
EDUCATI ON
There are several approaches or methodologies for designing and development
of business intelligence concept. However, there is no consensus over which
technology is best, but it depends on the characteristics of and actual system.
Methodology of object-oriented development of business intelligence system
was born form the analysis of standards IDEF0 (Integration Definition Function
Modelling), IDEF1X (Integration Definition Information Modelling), UML
(Unified Modelling Language) and methods for creating data warehouses. This is a
contributing to the development of methodology of object-oriented development of
business intelligence system, because it integrates the known classic methods of
functioning (IDEF0) and informatics (IDEF1X) modelling with object approach
(UML), (Stanojevi?, 2008).
Figure 6. shows the structure of the built methodology of object-oriented
development of business intelligence, which was applied in writing this paper.
Figure 6: Structure of methodology of object-oriented development of business
intelligence system
Source: Authors
Object-oriented methodology consists of the following steps:
? Defining the demands,
? Object-oriented analysis,
? Object-oriented design,
? Implementation.
Development of
database
Preparation of data
analyses
Development of
user interface
Development of
model system use
cases
Development
Of conceptual
model
Development of
interaction
diagram
Collecting the
demands
Creation of
models of
business use
cases
Preparation of data
for analytic
information
processing
Development of
dimensional model
Development of
class diagram
OBJECT-ORIENTED
DEVELOPMENT OF SYSTEM OF
BUSINESS INTELLIGENCE
0
DEFINING THE
DEMANDS
OBJECT-ORIENTED
ANALYSIS
OBJECT-ORIENTED
DESIGN
IMPLEMENTATION
4 3 2 1
132 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DEFI NI NG J OBS' TREE
Based on the defined limits of the system, we go over to the activity of
defining the jobs' tree where it is necessary to determine the vertical (hierarchical)
connections among jobs. Jobs' tree is defined by application of the method of
solving problems top-down, when a complex job is separated into many sub jobs,
and then one should solve simple sub jobs.
Defining of the diagram of decomposition jobs – Faculty of Business
Economics and Entrepreneurship from Belgrade.
Figure 7. shows the decomposition diagram of jobs in the school.
Figure 7: Decomposition diagram of jobs in school
Source: Authors
Following IDEF0 standard, appropriate arrows show the sets of documents
that are defined as information. All information at every next level is divided up to
the level of activities, where they are defined through arrows as actual documents.
1
MANAGERIAL
JOBS
2
ORGANIZATIONA
L JOBS
3
EDUCATION
PLANNING JOBS
4
EDUCATION
AND TRAINING
JOBS
5
STUDENTS’
JOBS
Law on higher education of RS
Law on scientific and research institutions
School’s Statute
School's management
Students’ applications
Application of standard members
to the competition
Information from legal and physical entities
Principle's information
Department’s information
Students’
information
Decisions
Report
Department’s documents
Principle of the school Teachers Heads of departments Students
NPP
Timetable
School management’s information
Faculty of Business Economics and Entrepreneurship 133
PROBLEMS WI TH TRANSACTI ON SYSTEMS
Basic source of data for the Faculty of Business Economics and
Entrepreneurship are transaction systems. Their basic purpose is to enable
everyday collection of the data on business transactions, with as low time delay as
possible, in order not to slow down the business processes.
Figure 8: Inadequate attempts of IT sector to provide information
Source: Authors
Transaction systems are practically developed to perfection and have enabled
current evidencing of business transactions and storing vast amounts of data.
However, because of high complexity of the structure of these systems, obtaining
the analytic reports is very hard and demands involving information technologies
experts. Besides this, this kind of structure demands great time delay while
receiving the analytic reports, and they are often unable to respond to information
demands of the strategic nature (Figure 8).
OLAP cube solves the problems of complexity of reporting from transaction
systems by introducing the new so-called dimensional data structure, which is intuitively
clear to business users (decision-makers) as well and not only to information
technologies experts. Dimensional data structure consists from dimensions and measures.
Dimensions represent the structure of the cube’s heading of report, while measures
represent the aggregated data according to dimensions and dimension members.
Besides the problem of complexity of reporting OLAP cube solves the
problems of time delay while obtaining reports, by keeping in its structure
previously aggregated data according to dimensions and dimension members.
OLAP takes up larger data warehouse space in relation to transactional systems but
it significantly speeds up the process of creating complex reports which often
cannot be obtained from the relational structure.
User needs
information
IT creates
ad hoc
demands
User asks
for IT’s
report
IT puts the
demand on
hold
IT sends the
demanded
reports
User expects
answers
Usual
information
flow 4-6 weeks
134 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
OLAP SYSTEM FOR STUDENTS' SUCCESS ANALYSI S
OLAP or multidimensional analysis signifies the analytic data processing that
is done in real time, interactively. OLAP is the only business intelligence
technology. It enables to analysts and control managers to have an insight in
business indicators by a fast, consistent and interactive approach to analyses.
Through analyses, information got via data transformation from operational
sources, is seen from various angles of business context.
OLAP as one of the technologies of business intelligence, through consistent
and interactive approach, enables the following and analysis of students' success.
The purpose of this system is following the number of students that:
? have the right to apply for exam,
? apply for exam,
? sit an exam,
? pass the exam,
? fail an exam,
As well as the percentage reports of all parameters like for example. Sat /
passed, at the level of:
? exam period,
? term,
? year (or more years),
? every subject, or
? cumulative, per department and at the level of the entire school,
? for Bachelor and Master studies.
These reports are being analysed at the end of every exam period, term and
year. Without OLAP system for obtaining these reports it would be necessary to
create dozens of complex demands, which are usually inflexible, so even the
slightest change in the demand would cause creating new demands.
Additional problem is that the data needed for creating of new demands are
physically kept at different places. That is why a data warehouse is created, which
unifies all extracted data and automates the flows for transfer and integration of
data into the warehouse.
We will show the way in which the demanded reports are being got, with the
help of OLAP cube. As a software tool for reading the data from the cube we used
Microsoft Excel. If there are only three dimensions according to which the data are
analysed, OLAP structure can be represented graphically as a three-dimensional
cube (Figure 9).
Faculty of Business Economics and Entrepreneurship 135
Figure 9: Three-dimensional OLAP cube for monitoring the pass rate
Source: Authors
In the case shown in the picture 9, every cube represents the number of
students from a certain department that have passed the exam in a certain exam
period.
In the picture 10, we showed the report on basic parameters of students that
passed exams according to subjects in one term in 2013. These reports can be very
important to decision-makers in analyses of results, number that sat an exam and
number that passed it, number of students applied, comparing results among the
subjects, terms etc. We wanted to be concise so the rest of the subjects per term
have not been shown, but such results are got by just one click to the wanted term.
In this case the parameters refer to all the students that took exams and all exam
periods that are noted in OLAP system.
Figure 10: Report on the number of students that took exams per terms and
subjects at the yearly level
Source: Authors
Pass rate – number of students from a certain department,
that passed an exam in a certain exam period
Exam
Direction
Time
- exam
period
Dimension
136 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
However it is often necessary to analyse the number of the students who
passed or failed an exam, but only of those who enrolled at that year of studies for
the first time. This is achieved by dragging the dimension Student in the field for
data filtering. If it is necessary to get a report only for certain exam periods the
dimension Exam Period is dragged in the field for filtering and one can choose a
specific exam period.
By introducing the dimension Group in the columns of the report, one would
get a report that shows the number of students that passed and failed an exam per
every department for every subject, while choosing different parameters of
dimensions Year and Exam Period one can get different reports (for one of more
years and exam periods). It is generally possible to create a large number of reports
that are structurally different, as well as the values of parameters, without
information technologies expert knowledge.
The advantages of Microsoft Excel as a tool for report creation from OLAP
cube is that it shows the desired reports in the format favourable for presentation,
and further formatting of data showed is possible as well as calculation of derived
values based on data got in the report.
Further, we showed a pivot chart connected to the exam analysis, which was
created for the needs of this paper.
The figure 11 shows pivot chart which shows the average grade at the exam
per year of studies (2010, 2011, 2012 i 2013) for subjects, Business informatics
(BI), Management of information systems (MIS) and Electronic business (EB).
Table 1: Pivot chart which shows the average grade of selected subjects,
Year (AII)
Exam period (AII)
Student (AII)
Subjects and average grade per year of
study
2010 2011 2012 2013
Business informatics (BI) 7.63 7.86 7.92 8.12
Management of information systems (MIS) 7.22 7.18 7.33 7.33
Electronic business (EB) 6.78 7.34 7.89 7.95
Source: Authors
Faculty of Business Economics and Entrepreneurship 137
Figure 11. Gives a graphic overview of data from pivot chart, Table 1.
Figure 11: Average grade of selected subjects - graphic overview
Source: Authors
Pivot tables and charts enable insight into some value's movement trend like it
is shown in table 1. And figure 11., which enables predicting the results for the
following period. We can notice the growth trend of the average number of passed
exams of Business informatics, Management of information systems and Electronic
business, so we can predict that in the following year this average number will be
even better. This can be a signal to decision-makers to specially monitor the
process of realization of lectures from subjects with this trend, so that it can serve
as a positive experience. It is more important for the decision-makers to spot a
trend of fall in the exams passed, in order to fix the educational processes by
appropriate measures.
In general it is possible to create a great number of reports that are different in
structure and values of parameters, without information technologies expert
knowledge. The result of this paper is a developed business intelligence system that
contains data warehouse, OLAP cubes and appropriate pivot tables for data
analysis which decision-makers need. OLAP cubes and pivot tables enables the
exam analysis to be done using many dimensions, different levels of details,
depending on the current need.
2010 2011 2012 2013
138 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON
Economic globalization, constant and radical changes in business
environment, imposes the need to change the current management style. New
technologies and tools that enable fast and efficient approach to data become
inevitable in such circumstances. Business intelligence transforms data into
information ad information into knowledge, which leads to decisions based on
information and actions that follow them, and that is the value that it brings to the
business world in fighting the competition.
Business intelligence tools enable the process of gathering internal and external
data and their turning into useful information which help business users with making-
decisions. Data based on using these tools of business intelligence provide the
possibility to see not only the advantages but also the problems, so the causes can be
analysed on time, instead of just solving the consequences. Business intelligence
systems are focused on improving the possibilities for access and distribution of
information, to those who make them as well as to those who use them.
Efficient process analysis in educational institutions is essential for control and
improvement in their operations. Modern education systems at all levels should
have a function of satisfying the students' needs for knowledge. At the same time,
educational institution must develop, adjust to the circumstances and thus improve
educational processes in the conditions of global competition.
This paper describes the advantages of application of OLAP systems for analysis
of students' success at a higher education institution (picture 6 and 7). We shortly
presented the procedure of implementation of one of OLAP systems by using the
object-oriented methodology of development of information system on the example of
analysis of the students' exams. As a base for building OLAP system, we used OLTP
information system which is implemented in the School, we defined OLAP cube
(picture 9) and completed the creation of user application in pivot tables and charts
(table 1 and picture 11). Pivot tables enable analysis and comparison of data according
to various criteria. It is also possible to create large number of reports that are different
by their structure and the value of the parameters.
Created user interface provided, through OLAP system, a detailed analysis of
students' success per selected subject, measures and comparisons of success per
term and year of studies, which enables an adequate analysis of all educational
processes and comparison of success with all the educational systems in the
environment. Information got by the process analysis of the School is a base for an
efficient work of the management of the School.
For successful management of educational processes of high education
institutions in the conditions of fast development of advanced information and
communication technologies, we suggest using business intelligence tools. In this
way by application of OLAP system technologies, through business intelligence
one can provide taking the corrective measures in case of deviation from set goals,
which enables the decision-makers to have an optimal control of all educational
processes in all scientific areas and it is applicable in all educational institutions.
Faculty of Business Economics and Entrepreneurship 139
Combining of various business intelligence techniques, OLAP cube,
development of Data Mining methods, and usage of data from the external and
internal sources as well as expert knowledge contributed to improvement of
performances of all components of business intelligence system showed in this
paper, which had as and ultimate goal to increase the efficiency and effectiveness
of educational processes as a whole.
The applied models of business intelligence and OLAP technologies provided faster,
more precise and flexible reporting, which enables fast and quality decision-making of all
interested decision-makers. Optimized ILTP systems, applied for business analysis of
operations of higher education institution, enabled the decision-making process to be
shorter, better and more rational. Application of business intelligence, OLAP technology
contributed to understanding the necessity of using knowledge, as the most important
resource for fast and efficient decision-making in the process of successful business
systems’ management. We believe that, very soon, business intelligence and OLAP
technologies will find their wider application in our region.
REFERENCES
[1] A Brief History of Decision Support Systems by D. J. Power Editor, www.
DSSResources.COM (18.05.2014)
[2] Balaban, N., Risti? Ž., (2006) ''Business intelligence'', Faculty of Economy, Subotica
[3] Gartner Group report, (1996) September
[4] Inmon, W.H. (1995) '' What is a Data Warehouse? '', PRISM,,http://www.cait.wustl.edu/ cait/papers/prism/vol1_no1/
[5] Kalakota, Ravi, Robinson, Marcia. (2001) ''E-business 2.0 Roadmap for
Success'' Addison-Wesley, Boston, str. 349,)
[6] Kukrika, M. (2011) ''Business intelligence- from information to profit'', E- magazine.
[7] Medi?, Z. (2013) „Optimization of control management system by introducing
on-line analytical processing (OLAP) business intelligence system“PhD thesis,
Business academy, Novi Sad
[8] Rajkovi?, B. ?uki?, S. Kastratovi?, B (2012) ''Business intelligence- practical
manual“ Faculty of Economy, Podgorica
[9] Kimball, R. (1996) “The Data Warehouse Toolkit – Practical Techniques for
Building Dimensional Data Warehouses”, John Wiley & Sons,
[10]Stanojevi?, Lj. ,Veljovi? A. (2008)“Development of methodology of business
intelligence projecting“, monography, Belgrade
[11]The Origins of Business Intelligence,http://searchsap.techtarget.com/searchSAP/downloads/ McDonald_Chp1.pdf
[12]Tot, I. (2009) „Dvelopment of on-line analytical processing (OLAP) decision-
making support system“, PhD thesis, VA, Belgrade
[13]Vujaklija, M. (1980) Lexicon of foreign words and phrases, Prosveta,
Belgrade.
140 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
LEAN LEADERSHIP AS A PRECONDITION FOR
SUCCESSFUL BUSINESS OPERATIONS OF
ENTERPRISES
Saveta Vukadinovic, MA
13
Jovanka Popovic, PhD
14
ABSTRACT
Lean is a process-focused management concept that seeks to increase customer’s
value by reducing waste and continuously improving processes. Majority of
enterprises, when implementing Lean concept, puts emphasis on tools and methods,
although a full commitment of employees to continuous process improvement is crucial
for the successful operation of Lean enterprises. This is accomplished through a
special management style - Lean leadership, so we can say that leadership is a key
success factor for accelerating the adoption of Lean concept and the missing link
between theoretical solutions and its application in practice.
This paper suggests that enterprises implementing Lean should focus on the
leadership behaviors that are crucial for Lean to progress beyond the standard
limitations, and have a significant impact on business of enterprises and the whole
industry. The paper is based on a systematic literature review that examines how the
application of Lean leadership contributes to the creation of value in the organizational
processes and achieving operational excellence. The starting point is defining concepts
and key features of Lean and Lean leadership, given by the prominent authors. The next
step is clarifying the basic principles of Lean leadership, the main objectives of its
application and possibilities for further improvement. Further, we have discussed the
relationship between traditional and Lean leadership, as well as the process of
knowledge management in Lean enterprises. Finally, the aim of the paper is to attempt to
offer some original consideration to what Lean leadership is and why it is important for
management and business. By doing so, the authors hope to bring more clarity to the
subject of Lean leadership, which will be beneficial for people studying Lean, as well as
for Lean practitioners and the body of academic knowledge.
Key words: Lean Concept, Lean Leadership, Continuous Improvement, Employees
J EL Classification: L21, L23
UDK: 005.346 005.336.1
13
Saveta Vukadinovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
14
Jovanka Popovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
Faculty of Business Economics and Entrepreneurship 141
I NTRODUCTI ON
Lean is a philosophy derived mostly from the Toyota Production System
(TPS), and has two fundamental elements - process improvement by removing
waste in order to maximize value for customers, and a commitment to respecting
and developing people in order to create a culture of continuous improvement. The
main purpose of Lean manufacturing is to increase productivity, improve product
quality and manufacturing cycle time, reduce inventory, reduce lead-time and
eliminate manufacturing waste.
Today, there are already many organizations trying to implement Lean philosophy
in everyday business. This paper suggests that the enterprises implementing Lean
should not be overwhelmed with the toolbox of Lean tools and techniques, but should
focus on the leadership behaviors that are crucial for Lean to progress beyond the
standard limitations, and have a significant impact on company business and the whole
industry. Lean is much more than just techniques; it is a way of thinking which
involves everyone in a culture of continuous improvement. It is a human system,
customer focused and customer driven approach, where the employee are the
customers of their upstream colleagues (Liker, 2004, pp. xi).
The most contemporary organizations are managed and led by thoughtful,
hardworking people who want success of their enterprises, but problem lies in
finding leadership system that will make this possible. Leadership, nowadays, is
the well-known and often discussed process of influence exerted by one person,
accepted and followed by all, over the other factors (human resource) that he works
with, in order to reach the organizational goals (V?car, Miricescu, 2013, pp. 430).
Leadership is the critical success factor for accelerating the adoption of Lean in the
organizations. Bearing in mind a growing interest in the importance of Lean
leadership, this paper attempts to offer some original consideration to what Lean
leadership is and why it is so important in management and business.
LEADERSHI P - THE CONCEPT AND FEATURES
Any group of people, that wants to work together and achieve a shared
objective, need to march in the same direction. People need to know where the
enterprise is going and what they are supposed to do to contribute in reaching
enterprise goals. Leadership is the process by which leader sets goals or direction
for that group of people and motivate them to act with competence and
commitment in achieving goals. Leadership is one of the defining elements of
successful enterprises and it is linked to the leader's personality, his ability to
influence, to generate interest, expectations and emotions, and his ability to arouse
the interest of employees. This involves creating the vision, setting goals,
determining the values and principles of action.
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Leadership is actually an observable set of skills and abilities that are
accessible to any person, at any level, in any organization. With this in mind, the
term leader is used to describe anyone with the ability to influence the work of
others (Kouzes, Posner, 2007). Burns (1978) saw the leadership in relationships
and developed the concepts of the transactional and transformational leadership.
He described the transactional leadership as a relationship between leader and
follower where they exchange values, and the transformational leadership as an
engagement between leader and follower based on an increased level of motivation
and morality. Glynn, DeJordy (2010, pp. 122-125) have summarized different
theories of the leadership. They began with the trait or great-man theories, which
claim that leaders were born, not made. These are followed by behavioral theories,
in which leaders have certain properties and features. In contingency theories,
leadership is treated as a change process, and leaders are adjusting to different
situations becoming a catalyst of change. The most current leadership theories are
based on behavioral and contingency theories.
The definitions of the leadership can also be organized into five approaches.
Yukl (2010) defines them as a trait, behavior, power-influence, situation and
integrative. The each approach has its merits and contributes to the application and
practice of leadership. The trait approach assumes that great leaders are born, not
made and determines which personality traits were important for effective
leadership. Traits that are common for most of leaders are intelligence, self-
confidence, determination, integrity, and sociability (Northouse, 2013). In behavior
approach, the focus is on behaviors that individuals demonstrate, not on innate
characteristics of the individual (Yukl, 2010). This approach attempts to map
leader’s behaviors to their effect on subordinate satisfaction and performance
(Bass, 2008). The power-influence approach examines the influence process
between a leader and the group members. The essence of leadership is the realm of
power, the capacity to influence (Bass, 2008), and sources of power are reward,
coercive, legitimate (position-based), and expert and referent (person-based). In the
situation approach, the leader’s effectiveness is dependent on the situation, in
particular of competency and commitment of subordinate workers (Yukl, 2010). At
the end, integrative approach involves more than one of the above approaches
(Yukl, 2010). Despite the difference in perspectives, Northouse (2013) identified
some common elements of leadership, which all approaches share: 1. it is a
process; 2. it occurs in a group; 3. it involves influencing; and 4. it is concerned
with goal attainment.
The role of the leader is to articulate a common vision and then marshal
management and organizational resources to build the necessary systems and
structures to insure the smooth accomplishment of the mission (Shim,Steers, 2012).
A good leader must be a good communicator who cares about his employees and
an expert in his field, a good strategist who thinks ahead and a promoter of change,
because change is vital for future success. By the continuous adaptation to market
changes, a leader helps his organization to continue to grow and thus become more
competitive, by employees whom they have available. He must encourage
employees to come up with new ideas to involve them in planning and
Faculty of Business Economics and Entrepreneurship 143
implementing change and such change will not be only accepted, but also
implemented by the team (V?car, Miricescu, 2013, pp. 431). For this reason, some
theorists suggest that the essence of leadership is the leadership of change (Yukl,
2010). The leadership of change is important for Lean philosophy because the
adoption of Lean practices is fundamentally about managing an organization-wide
change.
NEED FOR A LEAN LEADERSHI P
Lean leadership is the missing link between theoretical solutions and
application in practice. It can also be considered as the missing link between the
toolbox Lean and continuously improving organizations (Mann, 2009, pp. 16).
Developed as a production system, eliminating wastes in the Toyota’s plants in the
1960’s, Lean is evolving into a management approach that improves all the
processes at each level of an organization. Many eminent authors have studied this
phenomenon, but a unique and generally accepted definition of Lean leadership has
not been adopted yet.
The crucial element in transforming an organization from traditional to Lean is
leadership.The contemporary researchers argue that the lack of understanding
which leadership style is preferred is a problem for management in implementation
of Lean practices. In Lean management, the people bring the system to life:
working, communicating, resolving issues, and growing together. Lean leadership
goes well beyond by encouraging, supporting and demanding employee
involvement. Lean leadership requires committed management, proper training,
and culture of continuous improvement in the enterprise. Continuous improvement
literally means making things better every day, sometimes by taking big steps and
more often by taking small steps.
The key factor for the success of Lean enterprises are employees (Liker,
Meier, 2007, xvii), and their biggest challenge the change in behavior and mindset
of employees and leaders (Mann, 2009, pp. 17). The essence of Lean can be
described with Liker?s 4P model: philosophy, process, people and partner problem
solving (Liker, 2004, pp. 6).
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Figure 1: 4P model of the Toyota Way
Source: Liker, 2004, pp. 6 (adapted)
According to the 4P model, Lean philosophy and long-term thinking are an
inextricable part of Lean leadership, indicating a need for constant and sustainable
development of employees and leaders. Lean leadership is a precondition to
continuous process improvement, so its task is to create an environment in which
waste will be eliminated, and the great value for consumers will be made. Respect
for people, that is encouraging participation and improving knowledge of
employees, is one of the main foundations for Lean leadership. Finally, Lean
leaders should have the expertise in learning and coaching problem solving.
Most enterprises have focused on the process and elimination of waste by
using Lean methods and techniques, completely ignoring the other three elements
of Lean. Their goal was to improve constantly every process, every day, in order to
achieve continuous process improvement, which is impossible without motivated
and dedicated employees. For the Lean, the core of empowerment is workers
participation in Kaizen – the ability to participate in decision-making and problem
solving. In the past, management instructed the workers in their improvement
actions. Now, operative employees have to point out improvement possibilities,
too. Therefore, leadership needs more employee participation and employees need
basic knowledge about the Lean production systems (Dombrowski, Mielke, 2013,
pp. 570).
For a Lean initiative to succeed in an entire enterprise, leaders at three
organizational levels must play complementary roles and be closely related.
Effective Lean leadership comes from both, the top and lower in organization, but
Faculty of Business Economics and Entrepreneurship 145
senior leaders play a central role in Lean management. Their contributions are
essential in (Mann, 2009, pp. 16):
? Developing and implementing structures and processes that anticipate and
respond to the difficulties of a Lean initiative that crosses internal
boundaries;
? Transforming commitments to change into actual change, supporting and
sustaining new behaviors and practices;
? Increasing the odds that process improvements survive the transition from
project mode to the ongoing process;
? Establishing and maintaining new, process-focused measures alongside
conventional measures of results;
? Creating conditions in which a sustainable Lean culture of continuous
improvement can develop.
Successful sustained Lean conversions often involve changes in culture.
Proper use of Lean is to create a Lean management system to fit the environment
and culture, rather than forcing the environment and culture to fit a Lean
management system. Therefore, it follows that success in Lean implies a change in
what leaders reinforce - a change in leadership behaviors and practices. The failure
of most Lean initiatives can be pinned on a failure to change leadership practices
(Mann, 2009, pp. 17). Lean success requires a change in mindset and behavior
among leadership, and then gradually throughout the organization. Throughout the
continual effort to decrease inefficiency, the Lean leader strives to create a more
efficient organization.
PRI NCI PLES OF LEAN LEADERSHI P
Lean leadership is a methodical system for the sustainable implementation and
continuous improvement. It describes the cooperation of employees and leaders in
their mutual striving for perfection. This includes the customer focus of all
processes, as well as the long-term development of employees and leaders
(Dombrowski, Mielke, 2013, pp. 570). Although there is no consistency among
authors about defining Lean leadership, the majority agrees about five of basic
principles inherent to this concept.
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Figure 2: The five principles of Lean leadership
Source: Dombrowski, Mielke, 2013, pp. 570.
Improvement culture contains all the attitudes and behaviors that result in
continuous striving for perfection in the enterprise. Perfection is most often
described as a state with zero waste, zero inventory, zero defects and losses of any
kind. A distinct feature of improvement culture is observing current problems as a
chance for learning and future advancement. The goal is to discover the root cause
of failure and make an effort it does not happen again, not to find the culprit for the
failure. Operational workers have the best insight into the weaknesses and
shortcomings of the process, but they need management support in order to
implement improvements in all processes and at all levels. Continuous
improvements essentially do not function without formal rules and regulations and
the active role of leaders in improvement activities. Lean leaders need to hear the
ideas of employees and help them to carry out those ideas in practice.
The self-development is an important principle of Lean leadership, since some
attributes depend on the leader?s personality, but others have to be learned and
developed (Liker, Convis, 2012, pp. 47). Transformation into Lean leadership
requires new knowledge and leadership skills, and both leaders and workers are
guided by a sensei, who is a kind of teacher or mentor. Sensei uses short learning
cycles based on Deming cycle (Plan-Do-Check-Act) to achieve self-development.
Qualification of employees is a crucial task of Lean leaders, because in this way
workers can actively participate in the continuous improvement. As Liker, Convis
(2012, pp. 228) impose, continuous development of processes must go along with a
continuous development of people. Developing skills and qualifications of employees
does not imply only conventional education using courses and trainings, but also the
everyday training through the problem solving in a specific workplace. That is the
famous Toyota kata method, presenting particular behavior routines, habits or patterns
of thinking and conducting oneself, that are practiced over and over every day (Rother,
2010, pp. xvi). Toyota Kata is a structured way to create a culture of continuous
learning and improvement at all levels.
Faculty of Business Economics and Entrepreneurship 147
Gemba is a Japanese word that signifies an actual place, ie workshop or a place
where value is added. It is also known as go-to-Gemba or genchi genbutsu. According
to the Gemba principle, Lean leaders should go to the workshop frequently, in order to
truly understand the processes and to make the right decisions. They need to spend a
couple hours observing processes, until they realize, from the first hand, critical points
and opportunities for improvement. With this approach, the Lean leaders can identify
the root cause of a failure without being misled by inaccurate data collection or
interpretation (Liker, Convis, 2012, pp. 35). They should even get their hands dirty by
working on process improvement. Doing so, Lean leaders will have an insight into the
importance of operational workers and appreciate more their contribution to the
enterprise success.
In order to implement these behaviors in their daily practice, Lean leaders
should follow the five golden Gemba rules:
? Go to Gemba first. Lean leaders should go to the place where the problem
occurrs.
? Check. Lean leaders should urgently analyze everything - products,
processes, people etc. until they find out the cause of the problem.
? Take temporary countermeasures. Find some countermeasures that will
satisfy the customer immediately and provide extra time for the next rule.
? Find the root cause. It is very important to identify the root cause of the
problem. Otherwise, the solution will not have long-term effectiveness.
? Standardize. After finding the root cause, the permanent countermeasures can be
taken. The current process is being revised and new standard must be found.
Hoshin Kanri or target management is the fifth principle of Lean leadership
and it implies that is necessary to have a superior system, which directs individual
activities on the path to continuous improvement. It seeks to improvement
activities do not have opposite directions and to contribute the big-picture strategic
goal. Hoshin Kanri is the process of setting goals and targets and, most important,
the concrete plans for reaching those targets. It’s another example of personal
leadership being guided by institutional leadership (Liker, Convis, 2012, pp. 148).
Hoshin Kanri is a leadership development tool, not just a tool for achieving
business objectives. As leaders develop and follow good problem-solving
processes, achieving the business objectives will come more naturally (Liker,
Convis, 2012, pp. 249).
The above principles are developed into practical behaviors that can be
demonstrated, understood and replicated using rapid learning techniques, with
particular focus on team leadership.
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CHARACTERI STI CS OF LEAN LEADERS
Lean management is surprisingly different from the conventional leadership
practices. The next table shows some essential differences between the traditional
and Lean leadership.
Figure 3: Traditional leadership - Lean leadership comparison
Source:http://www.leanvs.com/lean-coaching.htm
In addition, we can say that traditional leader is proud and quickly achieves
objectives through the people. Unlike him, the Lean leader is humble and patiently
develops people throughout the process improvement. Furthermore, as Figure 4
underlines, the main difference lies at the interface, the interaction, between manager
and subordinate (Rother, 2010, pp. 225). Some authors talk about the empowering
leader, which is a leader, that actually does not lead, but supports and helps teams and
people to learn and lead themselves. The traditional leader gives clear orders, well-
defined tasks and seemingly tight control from top to bottom. Quite the opposite, the
empowering leader is a developer of people, teams and the organizational structures
that support them.
Figure 4: Lean leadership
Source: Rother, 2010, pp. 225.
Faculty of Business Economics and Entrepreneurship 149
It takes a deep commitment and usually about 10 years of time to become a
true Lean Leader. Key factors for achieving this are patience, a focus on long-term
rather than short-term results, reinvestment in people, product, and plant, and an
unforgiving commitment to quality.
We know that Lean leaders must possess the general characteristics and skills of
effective leaders, such as creating a vision, knowing what drives the people they lead,
active listening, empathetic questioning, helping people to satisfy their needs, etc.
Apart from that, Liker and Convis (2012, pp. 35) indicate five core values of a Lean
leadership. These values are having the spirit of challenge, having a continuous
improvement mind, going to where the work happens, embracing teamwork, and
having respect for the people. Lean leader takes responsibility for other people
reaching their objectives. He encourages engaging people through their contribution to
team performances and strongly believes in developing individuals through team
problem solving. Lean leader has exceptional relationship-building skills and he
focuses on building the trust. Lean leaders are also advocates of change.
Lean leaders, like all other leaders anywhere, want to see measurable results.
However, they know that the financial result is a result of quality of processes and
people. Jon Miller suggests using the PROFITS acronym, to describe some of the
essential qualities of Lean leader that result in profits (Seven Essential Qualities of
a Lean Leader, retrieved from:http://www.Gembapantarei.com/2009/10/seven_essential_qualities_of_a_lean_lead
er.html, June 18th, 2014).
P is for Perspective. The Lean leaders should hold a long-term perspective and
guide their organization to make the best decisions over the long period. The depth of
perspective requires the leader to be curious enough to go see, listen, connect with
people and learn about the work in details. A lean leader sees beyond own horizon, is
aware of the larger impact of actions, and thinks in terms of total costs.
R is for Responsibility. Many leaders have exhibited a high degree of personal
responsibility to gain their position. The further an organization moves from
interacting directly with customers, the weaker the sense of responsibility is (eg
government bureaucracy, internal customer relationships, and financial service
organizations). Therefore, Lean leaders need the quality of strong responsibility in
order to earn lasting results and respect.
O is for Openness. Leaders must be open to change, especially to new ideas.
Lean leader needs to constantly challenge ideas and assumptions, particularly his
own. Taiichi Ohno said that even sages are wrong half of the time, but leaders are
no sages, and need to be open to being wrong so they can mend their ways. With
proper perspective and responsibility, openness should gain a sense of urgency.
F is for Flexibility. A Lean leader must be a skilled two-way communicator,
able to adjust quickly to differences in styles. At best, communication style to
accommodate the leader is only as effective as leader's style. Flexibility for a Lean
leader is the ability to accommodate differences in style, communication, and
circumstance without reverting to type and defining the problem as it fits their
favored personal solution.
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I is for Inertia. Inertia usually means "a tendency to remain inactive", but that
is not the Lean leader's definition. Technically, inertia is the tendency of a body to
maintain its state, speed and direction, unless acted upon by an external force. The
essential quality of a Lean leader is steadiness, confidence, persistence, constancy,
sticking to the principles and process, unless a sufficient external learning
influences him to change his ways. Leader should have more of inertia.
T is for Teamwork. An effective Lean leader must be willing to identify,
influence and be influenced by the needs of his team. A Lean leader effectively
links one's own goals with the goals of the group, removes barriers to enable
teamwork, and identifies strongly with the team. It is all about the people, since
that is what leaders lead. A combination of flexibility, a strong sense of purpose
and the ability to work through people will enable the leader's vision.
S is for Self-knowledge. Self-knowledge is an important category of learning.
Before leader takes control of the organization and leads the team effectively, he needs
to get knowledge. Knowledge by itself will not transform or lead to anything, unless it
is properly directed and focused by the prism of effective leadership. The ability to
learn constantly and to accept challenges is the mark of a true Lean leader.
A leader who possesses these seven essential qualities will guide his organization
and his employees towards profits. Of the hundreds of leadership development models
that exist, the Five Practices of Exemplary Leadership stands out as a proven approach
to shaping organizational cultures aligned with the guiding principles of Lean
management. This model is used by over three million people in thousands of
organizations around the globe for developing individual leadership abilities and
building effective teams (Integris Performance Advisors, 2013, pp. 7):
? Model the way. Leaders live their values and lead with respect by establishing
principles concerning the way people should be treated.. They create standards
of excellence and set an example for others to follow. They unravel bureaucracy
when it impedes action, and they create opportunities for victory.
? Inspire a shared vision. Leaders believe they can make a difference. They
envision the future, creating an ideal and unique image of what the organization
can become. Leaders enlist others in their dreams. They breathe life into their
visions and get people to see exciting possibilities for the future.
? Challenge the process. Leaders search for opportunities to change the status
quo. They use Lean thinking to look for innovative ways to improve the
organization. They experiment, take risks, and accept mistakes as learning
opportunities.
? Enable others to act. Leaders foster collaboration. They actively involve
others, and strive to create an atmosphere of trust and respect. They
strengthen others, making each person feel capable and powerful.
? Encourage the heart. Accomplishing extraordinary things in is hard work. To
keep hope and determination alive, leaders recognize contributions that
individuals make. In every winning team, the members need to share in the
rewards of their efforts, so leaders celebrate accomplishments. They make
people feel like heroes.
Faculty of Business Economics and Entrepreneurship 151
LEAN LEADERSHI P I MPLEMENTATI ON
Lean is more than just a kit of tools to improve the flow and quality; it is a
business philosophy, which mainly refers to the appropriate leadership style and
commitment of all management levels. The only way that Lean becomes a
philosophy, rather than a tools-based improvement program, is for Lean leaders at
all levels to encourage commitment throughout the whole organization to achieve
the goals. By creating a philosophy of Lean leadership, more and more
organizations are able to identify problems quicker, design solutions accurately and
implement them at a rapid pace.
Successful Lean implementations require Lean leaders. Although many
leadership teams know what Lean is, most do not know how to coach, guide, and
sustain it. To transform into a Lean organization, an enterprise needs three types of
leaders (Womack, Jones, 1996):
? someone who is committed to the business in a long run and can be the
anchor who will provide stability and continuity - an experienced worker
with long history in the company
? someone with deep knowledge about Lean techniques - Lean specialist
? someone who can be the champion/leader and fight against the
organizational barriers arose as a result of the dramatic change in the
organizational operations.
While the basic principles of Lean are the same in any organization, each
implementation is unique. Different organizational factors such as human resource
practices, management style, organizational strategic vision, organizational culture,
external partnerships have importance in the Lean implementation process. Among
numerous variables, management support plays an important role. Top
management should not only demonstrate commitment and leadership, but it must
also work to create interest in the implementation and communicate the change to
everyone within the organization. Lean initiatives are likely to fail, without
committing leadership who understands Lean principles, and believes it will
deliver benefits to an enterprise. Lacking an implementation plan is also an
important reason for Lean implementation failures. Therefore, an imperative task
of leaders is to come up with a Lean implementation plan with clarity and purpose.
Lean leaders must understand the work in detail and know how to involve
employees. If the top of the organization is not driving the Lean transformation, it
will not happen. Therefore, enterprises struggling with implementing Lean, should
analyze their leadership styles. They need to search for transformational leaders or
to train their leaders to become transformational, because transformational leaders
are most successful in implementing Lean practices. The dramatic transformation
from traditional to Lean requires transformational leadership at all levels, from
office to shop floor, to the executive suite, if the metamorphosis is to survive in the
market.
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Lean leadership helps in reducing costs and increasing the level of trust based
on relationships with customers and employees. Employee involvement is one of
the essential elements of a Lean implementation effort. When employees feel
involved, they are more susceptible to changing their behavior. Leaders must
realize their importance and agree that employee empowerment and involvement in
Lean implantation is a crucial factor for business success. Seeing employees as
capable and valuable for the organization is required if leaders want them actively
participating in Lean implementation. Employees will only contribute to the Lean
goals if believing these goals are aligned with their own individual interests. If
some people have unfulfilled needs for self-expression and personal achievement,
they would not be motivated to participate in Lean implementation programs.
Obviously, personal needs can have a large impact over the attitude and behavior
of employees towards Lean improvement activities.
It is often considered that an effective Lean leadership style involves coaching
and leadership behavior that fosters participation and employee empowerment
within certain boundaries. These are the responsibilities of the leaders and
managers in Lean organizations. Study (Tracey, Flinchbaugh, 2006, pp. 50)
surveying 226 managers and employees, indicated that five key variables that
predict successful Lean transformation are:
? development of teams as a supporting structure of Lean
? calculation and communication of metrics
? communication among organization members, particularly across
organizational barriers
? communication to employees regarding their specific role in Lean
transformations
? acknowledgement and celebration of successes toward Lean transformation.
A successful Lean implementation requires dramatic changes at all
organizational levels and departments involving work organization and culture. If
the company wants to change the culture, it must develop true Lean leaders who
can reinforce and lead the cultural change. The best way to do this, is through
actions to improve the company’s core value streams, supported by committed
leaders who reinforce culture change (Liker, 2004, pp. 305). Culture is both a result
and enabler for sustainable and successful Lean operations. It is a role model,
which guides the employees through the organizational change towards the values
of Lean thinking. Changes of mindset give people an aim in their working life, and
have the potential to change attitudes, so that the employees begin to think
differently, and are more willing to contribute to company’s improvement
initiatives. Motivation and creating a working environment that allows employees
to develop their abilities, is the key for achieving the best condition for
implementing Lean. The transition from decision making to being a coach for the
employees is the lesson that enterprises need to master in their attempt to adopt the
Lean approach.
For many leaders is surprisingly difficult to implement a Lean system. The
leader?s focus should be on teamwork in sharing values of Lean principles. The
Faculty of Business Economics and Entrepreneurship 153
core values of Lean enterprise should be known and lived with both, employees
and leaders, in order to improvement culture be successful. In this regard, Lean
leaders should be a role model for their team members. Leaders also need to praise
team members for a job well done, and show appreciation for people’s
contributions. They should listen to diverse points of view, empower people to act,
and support the decisions others make. Besides developing their team members,
Lean leaders need to communicate their targets. Communication of Lean results
involves the people and keeps them motivated. Leaders talk about the big picture
which company wants to accomplish, and inspire others to share that vision. In
essence, Lean leaders influence their followers by words or actions.
As stated above, one of the key challenges faced by enterprises in Lean
implementation appeared to be the communication of the vision and values of Lean
thinking to all employees. Lean leaders recognize that communication is a two-way
process, encourage a diversity of opinions and see errors as opportunities for
learning. When investigating problems, Lean leaders tackle the process, not the
people. They lead effective root cause analysis and foster a deep understanding of
the problems. Lean leaders deem that it is acceptable to make mistakes as long as
employees learn from those mistakes. They recognize individual and team efforts
and achievements and use integrity, knowledge, openness and honesty as guide in
leadership practice. Finally, the primary task of managers and leaders in
implementation of Lean leadership is increasing the improvement capability of
people. That has to be made in way that enterprises develop people’s knowledge
and qualifications.
LEAN LEADERSHI P I KNOWLEDGE MANAGEMENT
Davenport and Prusak define knowledge as a fluid mixture of framed
experience, values, contextual information, and expert insight that provides a
framework for evaluating and incorporating new experiences and information. It
originates and is applied in the minds of knowers (1998, pp. 5). Communication is
the main method for sharing knowledge and making people understand, which is
included as one of the essential factors of Lean. For structuring and organizing the
knowledge of employees, it is important to implement knowledge management.
Knowledge management is all about continuously creating new knowledge,
disseminating it widely through the enterprise, and embodying it quickly in new
products, services, technologies and systems. Therefore, knowledge management is
a process that creates, disseminates and embodies knowledge.
The role of leaders in success of knowledge management implementation is
very important, if not crucial. Lean leadership acts together with knowledge
management initiatives to ensure that employees’ knowledge can be transmitted to
others. Lean leaders think horizontally, in the direction that value flows through the
organization, and create strong horizontal focus by assigning a responsible person
to manage product flows. At the same time, they create strong functions that focus
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on knowledge capture and career paths. Knowledge management raises the level of
operation with the help of Lean philosophy. While Lean emphasizes teamwork,
eliminates waste, optimizes values and minimizes the time flow, knowledge
management suggests all this through the organization and presentation of
knowledge in a way that recognizes that it is possible to learn without repeating
mistakes from the past. Knowledge management helps the organization to
understand what intellectual potential it possesses, and Lean leadership to use this
potential most effectively. The main advantage of applying knowledge
management in Lean is the reduction of time, reduction of losses, increase in
output and initiating innovations based on the experience and knowledge.
Lean advocates the importance of leader, but claims that a leaders' most
important duty is to teach others. Training, teaching and educating are essential for
every organization that wants to become Lean. In a Lean environment, training is
pivotal in order to develop a workforce, which is capable of shouldering the
increased responsibilities, to develop multi-skilled workers, and to create an
environment in which workers have the skills and ability to push for continuous
improvement (Puvanasvaran et al., 2009, pp. 132). Being an effective leader
requires a willingness to learn. The goal of learning is to provide positive impact
and outcomes, as a result of effective adaptation to environmental changes and
improved efficiency in the learning process. Adaptation includes appropriate
actions in response to technological changes and learning from other organizations
achieved the best practices in the industry. Organizational culture facilitates the
integration of individual learning by influencing the organizations’ ability to learn,
share information and make decisions. In a traditional hierarchical organization,
position establishes authority to make decisions, but in a Lean organization,
position only establishes responsibility to get decisions made. The leaders need to
be fully committed to Lean implementation, to view the problems that enterprise
faces as opportunities, and to turn every challenge into a learning experience.
Leaders within the organization must know and understand how to work and
live the Lean philosophy and tech it to others. Lean leaders do not bring solutions
to organizational problems, just the opposite; leaders give employees a challenge
and an opportunity to learn by making small-scale mistakes along the way.
Experienced and knowledgeable leaders lead and mentor, but also empower
employees to solve problems by themselves. Lean leadership provides the
templates and practices that enable leaders to learn, and then look for, ask about,
and reinforce the leadership behaviors that sustain the gains. Lean leaders
thoroughly understand the everyday operative work, live the enterprise philosophy,
and teach it to employees. Leader’s willingness to seek input, listen carefully and
learn continuously creates an environment where employees feel respected and
motivated.
Lean leadership has evolved as a concept over time. The interest in continuous
improvement led on to the occurrence of a learning organization. A learning
organization is one that actively seeks to acquire knowledge and changes behavior
because of the newly acquired knowledge. Likewise, organizational learning is a
process of improving actions through better knowledge and understanding, where
Faculty of Business Economics and Entrepreneurship 155
experimenting, learning new things and reflecting on new knowledge are the norms. A
learning organization is involving the opportunity of developing knowledge about
employees, suppliers, customers, and competitors. To convert an organization into a
Lean learning organization, the right combination of a long-term philosophy,
processes, people, and problem solving is needed (Liker, 2004, pp. 3).
The organization must develop a learning culture, which should never stop (Liker,
Meirer, 2007, pp. 288). The culture of continuous learning is a great benefit for Lean
enterprises that opens a new potential for future improvements and, in this way,
achieving sustainability in a long run. It is obviously that leaders must create a learning
culture and be well connected to the external environment, in order to learn
continuously. In learning organization, people continually expand their capacity to
create results they truly desire. The new and expansive patterns of thinking are
nurtured, the collective aspiration is set free, and people are continually learning how to
work together. Enterprises need to build improvement experts and group leaders who
believe in Lean philosophy and have the desire to spread it throughout the organization
over time, to transform into a real Lean learning organization. This involves allowing
leaders to observe the work directly, so they can learn from the processes themselves.
Once a leader understands the work, it becomes easier for him to teach it to others.
Thus, the organization has the opportunity to learn more about itself and continually
improve. Essentially, the true Lean leadership is about fostering a continuous learning
environment for their team members.
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CONCLUSI ON
Lean is a process-focused management concept that seeks to increase
customer’s value by reducing waste and continuously improving processes. This is
accomplished through a Lean leadership, as the key success factor for the Lean
implementation and the missing link between theoretical solutions and its
application in practice. In this regard, this paper suggested that enterprises
implementing Lean should focus their efforts and resources on finding the
appropriate leadership style and behaviors, as a precondition for successful
business operations and achieving operational excellence.
Lean leaders must possess the general characteristics and skills of effective
leaders, such as creating a vision, knowing what drives the people they lead, active
listening, empathetic questioning, helping people to satisfy their needs, etc.
Besides, seven essential qualities of a Lean leader can be described using the
PROFITS acronym as Perspective, Responsibility, Openness, Flexibility, Inertia,
Teamwork and Self-knowledge. Lean leader?s role is to create the long-term goals
and shape an organizational culture, to learn and teach continuously on a road to
continuous improvement. Lean leaders must learn and practice the power of
understanding the human aspect of Lean and the significance of emploees?
engagement. Lean leadership is actually encouraging, supporting and demanding
employee involvement. The true Lean leaders nurture the growth of their
employees, bring out their best and inspire support for the organizational goals.
Motivation and creating a working environment that allows employees to develop
their abilities, is the key for business success of Lean enterprises.
The five principles of Lean leadership, namely improvement culture, self-
development, qualification of employees, Gemba and Hoshin Kanri, describe the
cooperation of employees and leaders in their mutual striving for perfection.
Instead of direct leadership, the Lean leader supports and helps employees to learn
and lead themselves. He is a developer of people and teams and has the exceptional
relationship-building skills, focusing on building the trust.
Finally, Lean advocates the importance of leader, but claims that a leaders'
most important duty is to teach others. Lean leadership acts together with
knowledge management initiatives to ensure that employees’ knowledge can be
transmitted to others. The true Lean leadership is about fostering a continuous
learning environment for their employees. Thus, the great Lean leaders are at the
same time the great Lean educators.
Faculty of Business Economics and Entrepreneurship 157
REFERENCES
[1] Bass, B.M. (2008), The Bass handbook of leadership: Theory, research &
managerial applications. New York: Free Press.
[2] Burns, J.M. (1978), Leadership. New York: Harper and Row.
[3] Davenport, T. and Prusak, L. (1998), Working Knowledge: How organizations
manage what they know. Boston: Harvard Business School Press
[4] Dombrowski, U., Mielke, T. (2013), Lean Leadership fundamental principles
and their application. Procedia CIRP CMS 7, 2013, pp. 569–574.
[5] Glynn, M.A., DeJordy, R. (2010), Leadership through an organization behavior
lens: A look at the last half-century of research. Boston: Harvard Business
Press.
[6] Integris Performance Advisors (2013), Achieving Lean Culture in Washington
State: An Implementation Roadmap Based on the Shingo Model for
Operational Excellence. Walnut Creek: A White Paper by Integris Performance
Advisors.
[7] Kouzes, J. and Posner, B. (2007), The Leadership Challenge: The most trusted
source on becoming a better leader. 4th edition, San Francisko: Jossey-Bass.
[8] Liker, J.K., Convis, G.L. (2012), The Toyota Way to Lean Leadership -
Achieving and sustaining excellence through leadership development. New
York: McGraw Hill.
[9] Liker, J.K., Meier, D.P. (2007), Toyota Talent: Developing Your People the
Toyota Way. New York: McGraw Hill.
[10] Liker, J.K. (2004), The Toyota Way: 14 Management Principles from the
World's Greatest Manufacturer. New York: McGraw-Hill.
[11] Lean Management and the Role of Lean Leadership, retrieved fromhttp://www.lean.org/images/october_webinar_project_slides.PDF (June 18th, 2014)
[12] Mann, D. (2009), The Missing Link: Lean Leadership. Frontiers of Health
Services Management, 26(1): 15-26.
[13] Northouse, P.G. (2013), Leadership: Theory and practice. 6th edition,
Thousand Oaks: Sage Publications.
[14] Puvanasvaran, P., Megat, H., Hong, T.S. and Razali, M.M. (2009), The roles of
communication process for an effective Lean manufacturing implementation.
Journal of Industrial Engineering and Management, 2(1): 128-152.
[15] Rother, M. (2010), Toyota Kata: Managing People for Improvement,
Adaptiveness and Superior Results. New York: McGraw Hill.
[16] Shim, W.S., Steers, R.M. (2012), Symmetric and asymmetric leadership
cultures: A comparative study of leadership and organizational culture at
Hyundai and Toyota. Journal of World Business, 47(4): 581-591.
[17] Seven Essential Qualities of a Lean Leader, retrieved fromhttp://www.Gembapantarei.com/2009/10/seven_essential_qualities_of_a_lean_
leader.html (June 18th, 2014).
[18] Tracey, M.W. Flinchbaugh, J. (2006), HR’s Role in the Lean Organizational
Journey. World at Work Journal, 15(4): 49-58.
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[19] V?car, A., Miricescu, D. (2013), Leadership a Key Factor to a Successful
Organization - Part II. Procedia Economics and Finance 6, IECS 2013, pp. 430-
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[20] Womack, J.P., Jones, D.T. (1996), Lean Thinking: Banish Waste and Create
Wealth in Your Corporation. New York: Simon & Schuster.
[21] Yukl, G. (2010), Leadership in organizations. New Jersey: Pearson Education.
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HR.pdf,,HR’s Role in the Lean Organizational Journey,, retrieved from (June
18th, 2014)
Faculty of Business Economics and Entrepreneurship 159
THE RESEARCH OF THE ECONOMIC EFFECTS OF
STANDARDIZATION
Milan Krstic, PhD
15
Ana Skorup, PhD
16
ABSTRACT
Standardization usually represents the way of finding the middle between
similar or opposing ideas and their merging into one overall idea. It is a specific
instrument for the techno-economic self-regulation of business entities. It applies
equally to all participants in the national, regional or global economy, and as such
serves the creation of a "public good", embodied in documents called standards.
Standards are specific "technical language" that meets a number of important
functions, such as: enabling interoperability and compatibility; providing a
minimum level of product quality; reduction of diversity; impetus to innovation
development and technology exchange; providing information, as well as
overcoming cultural and language barriers. Standardization and standards from
an economic point of view can produce externalities, or unexpected external
(positive or negative) economic effects to a third party. From the standpoint of
positive effects, it is of interest to explore the assessment of the economic effects
and the impact which standardization and standards have on the microeconomic
level (the business system level), as well as the macroeconomic level (the national,
regional and global level). Therefore, in this paper we focus on a methodology for
assessing the economic effects of standards on a micro level which is based on an
analytical approach of the value chain as well as at the macro level which is based
on the production and economic function. In conclusion, it is stated how the
policies in the development of standardization and standards adoption can
contribute to the prosperity at the national level.
Key words: Standardization, Economy, Externalities, Methodology, Impact
J EL Classification: A12
UDK: 006:33
15
Milan Krstic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
16
Ana Skorup, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
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I NTRODUCTI ON
Standardization usually represents the way of finding the middle between
similar or opposing ideas and their merging into one overall idea.
Standardization can be defined as “an activity for establishing terms for a
general and repeated use in regards to real or potential problems, in the aim of
achieving an optimal level of planning within a given context” (Popovi?, Živkovi?,
2011).
Standardization is the process of establishing and applying certain regulations
in the aim of coordinating and regulating activities in a given area, to the benefit
and with the participation of all interested parties, and especially in the aim of
realizing overall optimal savings, taking into consideration the functional aim and
the technical security demands (the definition of ISO).
Standardization aims, as a rule, are one of the components of state politics and
include improvement and development in the area of product and service quality,
as well as rationalization of production and consumption.
Standardization can be understood as a specific instrument for techno-
economic self-regulation of business activities of companies, and it relates to all
the participants in the national, regional, that is, global economy, and as such
serves to create a “public good”, embodied in documents called standards.
A standard is a “publicly accessible document, established by consensus and
brought by an acknowledged body, which, for a general and repeated use,
determines the regulations, demands, features, directions, recommendations or
guidelines for activities or their results, in the purpose of achieving an optimal level
of organization in a certain area in regards to the existing or likely problems”
(ZOS, 2009).
Standards mainly have a positive impact on most aspects of our lives, as they
secure the required characteristics of products and services. When products and
services are in accordance with our needs and expectations, this is something that is
implied and we are unaware of the significance and role of standards. However, if
standards ceased to exist, very quickly we would become aware of the deficiencies.
From the aspect of the contemporary consumer, products and services would be of
a bad quality, inadequate for our needs, and incompatible with the equipment we
already possess, or merely unreliable and hazardous.
Standards occur and develop as a result of accomplishments in science and
technology, as well as based on experience and good business practice in all areas.
By using standards in production and services, the efficiency and effectiveness of
all processes are increased, as well as the quality of services, and thus at the same
time the needs of the users of products and services are met and this in turn
contributes to the raising of the general level of satisfaction.
Faculty of Business Economics and Entrepreneurship 161
Standardization as a rule starts and ends on the market, and the process takes
place in two different ways: market exclusion (where only one technology survives
in the market) and joint modification (where multiple technologies survive).
The diffusion of the current technologies, as well as the rapid emergence of
new ones, create a space for profit increase but also raises the degree of
technological uncertainty. Their combining reinforces market forces in the
founding of the standardization process, which also increases the benefits of
standardization (Cowan, 1991).
Thus, it is without doubt that standards and product standardizing produces
have positive external effects, as the beneficiaries of their being introducing are,
along with directly interested parties (such as proposers of standards, policy
creators and other interested users), other factors of the economy as well. Such
effects in economy are known as externalities.
Externalities (or overflowing effects) according to Samuelson and Nordhaus
(Samuelson, Nordhaus, 2000) appear when companies or individuals impose
benefits or expenses on other factors outside the market.
In the aim of a closer determining of externalities ensuing from a direct or
indirect impact of standards on the economy, numerous research has been
conducted which endeavoured to identify externalities – positive or negative
influences of standards on economic effects. Here you can emphasize scientific
papers (Swann, 2007, 2009, 2010).
METHODOLOGY FOR ESTABLI SHI NG THE ECONOMI C
EFFECTS OF STANDARDI ZATI ON
METHODOLOGY FOR ESTABLI SHI NG THE ECONOMI C
EFFECTS OF THE I MPACT OF STANDARDS ON THE MI CRO
LEVEL
In the aim of determining the economic effects on the micro level, that is, on
the level of an individual company which have ensued as a result of standard
effect, a methodology under the following name was developed: ISO Methodology
to assess the economic benefits of standards.
ISO Methodology secures a consistent framework of criteria, guidelines and
instruments for assessing economic benefits (externalities) of standards from the
perspective of individual organizations which are mainly companies (for example,
profit organizations), but it can also be applied on the analysis of externalities in
other types of organizations as well (for example, those the public sector).
The further text gives a short review of the key elements of methodology and
concepts on the steps which are applied in the process of assessing and the methods
for calculating externalities – the benefits from standards.
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ISO methodology helps to systematically assess the economic benefits from
standards, that is:
? to enable the participants from the private and public sectors to successfully
assess the economic and social impact of standards which are based on
voluntariness and consensus,
? to promote the awareness of the policy creators and business leaders of the
significance of standards and standardization.
The methodology focuses the issue of economic contribution in creating
corporative values due to bringing and applying standards. It includes international
standards, regional and national standards, as well as standards developed by other
organizations for developing standards, as well as the standards brought by
consortia if they are open for the participation of interested parties, while internal
(closed) standards of the company are excluded from this assessment.
The basic analytic approach of the methodology for determining the economic
benefit of standards on a micro level makes up a value chain.
A value chain consists of stages (stages 1, 2, 3...), which represent a series of
activities and which relate to creating a certain output in the form of products or
services (Figure 1). In each stage, the output from appropriate activities adds a
certain value. Stages can be organized within a company (then it is called “a
company value chain”) or they can be spread across different companies which
cooperate with each other, in a network supply chain (called a “supply chain” or an
“industry value chain”).
Figure 1: A simple value chain
Source: ISO, 2013,1, pp. 14
The value line of a company represents a logical series of activities which are
carried out within a company in the aim of realizing a product or service. The
activities of a company are divided into a larger number of key business functions
(Figure 2), while a total of nine key business functions from A to I were identified.
Each of these functions is linked with a set of specific activities of value chains.
For example, the activities which relate to the production of components and
assembling final products are undertaken within the business function of
“Production/Operations”.
The business functions from E to I are called primary functions, while business
functions from A to D are called auxiliary functions. In principle, all products
which a company realizes are carried out through basic business functions. Some
of these functions can be very complex, when they consist of several stages, while
others can be simple, when they consist of only one activity. Auxiliary functions
Faculty of Business Economics and Entrepreneurship 163
impact primary functions and help their execution. The value chain of a company
shown in Image 4 is generic, and it is realized from the company production model.
The value chain model can also be applied to other types of organizations (for
example, service companies or social institutions), but in that case adapting may be
necessary in order to reflect its specific type of activity in the right way.
Figure 2: Value chain of a (production) company
Source: ISO, 2013,1, pp. 15
The mentioned access to company value chains can be applied to an individual
company, but it can also be expanded to the industrial sector (backwards or
forwards in relation to the observed company), in which case the supplier as well
as the buyer network of the company is included. This is called the “value chain of
industry”. Figure 3 shows the application of the industry value chain on the
example of engineering for oil and gas production.
Figure 3: Industrial value chain on the example of the oil and gas industries
Source: ISO, 2013,1, pp. 16
An assessment of externalities – the economic effects are carried out in
accordance with the steps which are mentioned in the further text, as shown in
Figure 4.
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Figure 4: Key steps in assessment of standard impact
Source: ISO, 2013,1, pp. 23
Step 1: Understanding a value chain
The first step is to determine the value chain in an industry and locate the
company within the context of that value chain. The value chain of a company
should be understood in the sense of its key business processes which create an
additional value. A decision of key significance concerns the assessment of the
scale of the encompassed activity, that is, whether the assessment should cover the
entire company or it should be limited to one or more of certain business functions,
considering that this causes a certain adapting of the analysis. The decision
regarding the scale of encompassed activities depends on several factors, of which
the most significant are the following: the size and complexity of the company, the
available resources for project assessment, access to key information, as well as the
experience of the project team members of the assessment.
Step 2: Identifying the standard impact
This step consists of determining those business functions (activities) in a
company’s value chain in which standards have a significant role. Here there is an
intensive use of the existing documentation of the company in order to comprehend
the processes, business functions and the main activities included in every business
function. This step includes the consultation with company experts to determine
which standards (or groups of standards) are applied in the activities within the
chosen business functions. For an assessment of the impact, the so-called Standards
Impact Map is used (Figure 5), which identifies those areas in the value chain
where standards can carry out a significant role, and where the impact ensues from
the standards. The map shows the impacts on the main business functions in the
chain and linked activities.
Faculty of Business Economics and Entrepreneurship 165
Figure 5: Map of standards impact, business activities and associated activities
Source: ISO, 2013,3
For further explanation, Image 8, within the framework of the Standards
Impact Map (Figure 5), gives an excerpt as an example of the standards impact
only for one function (production/ operations).
Function Activities Impacts Description
Production /
Operations
All activities Better internal information
transfer
This section of the
impact map
contains
more detailed
description of
each
of the possible
impacts
Better training of personnel
More efficient processing
Processing More efficient assembly
Better quality of equipment and
supplies
Quality assurance Better quality management
HSE (health,
safety and
environment)
Reduced disadvantages from
regulations
Better health /safety/
environmental compliance
Figure 6: Excerpt from the Standards Impact Map for business functions –
production/operations Source: ISO, 2013,2, pp.18
Step 3: Analysis of value drivers and establishing operational indicators
This step analyses company value drivers (that is, drivers of company
competitiveness) and determine the operational indicators, which will then be
applied to assess the standards impact.
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Value drivers are key organizational possibilities which give the company a
competitive advantage. If some business activities are tightly linked with value
drivers, the impact of standards on creating values with this activity can be
significantly larger than with activities which are not closely linked with value
drivers. Thus, for assessing standards impact those activities which are linked with
value drivers should be chosen.
For example, if one of the company value drivers is “low-cost production”, it
is more likely that standards will be used in the production process which will
directly contribute to that ability, and thus have a greater impact. Similarly, if
another company value driver is at stake of an “innovative and superior product
quality”, the standards used in engineering and R&D which contributes to realize
this aim is more likely to have a bigger impact, and so on. In Image 9, the
intersection presents the area where standards contribute to key activities and
support value drivers (ISO, 2014).
Figure 7: Intersection: standards generate larger benefits which support value
drivers
Source: ISO, 2014, pp. 6
The value driver map in Table 1 has been derived from several study cases.
Table 1 gives the connection of business functions (activities) of the company with
value drivers.
Faculty of Business Economics and Entrepreneurship 167
Table 1: Value driver map
Business functions Value drivers
Primary activities/Primary business functions
All Focused value chain coverage
All Continuous improvement
All Efficiency
All Safety compliance
All Flexibility
All Transparency
All Economies of scale
All Qualified workforce
All (mainly: Inbound logistics, outbound logistics) Efficient logistics
All (mainly: Inbound logistics, Production, Marketing and
Sales)
Quality of products
All (mainly: Procurement, Marketing & Sales) Global reach
All (mainly: R&D, Engineering, Production) Knowledge leadership
All (mainly: R&D, Procurement, Production etc.) Partnerships
Marketing & Sales Control over high-margin after-sales markets
Marketing & Sales Sales effectiveness
Marketing & Sales Reputation
Marketing & Sales Client orientation
Marketing & Sales Sales effectiveness
Marketing & Sales Reputation
Production / Operations Quality of production processes
Production / Operations Efficiency of production
Production / Operations Production capacity
After-Sales Service Service quality
Support activities/Support business functions
Management & Administration
Ownership structure of the
company
R&D R&D effectiveness
R&D, Production / Operations Product innovation
Procurement Partnership with suppliers
Procurement Local access to key inputs
Procurement, Inbound Logistics, Production, Outbound
Logistics Pest and disease control
Source: ISO, 2013,4
Operational indicators are used in the aim of impact assessment which ensues
from standards use, and in that sense one or more operational drivers should be
identified. Operational indicators are quantifiable sizes linked with company activities
which show an improvement or deterioration of performances (for example, time and
costs, number of defects, waste, sale, satisfaction of buyers, etc.). The chosen
operational indicators must be relevant, that is, they should cover the relevant aspects
of activities within an analysis, for which the standard impacts can be observed and
measured. Where it is possible, they should be linked with company value drivers.
Thus, it is crucial to gather information regarding operational activities on a level
nearest the location where the standards are actually used.
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In a general sense, it is possible to make a difference between two extensive
categories of operational indicators:
? Indicators which relate to business efficiency, Table 2;
? Indicators which relate to market development, Table 3.
Table 2: Examples of operational indicators of business efficiency
Business
function
Operational
indicators
Impacts of standards
Management &
Administration
Legal compliance
Due to the use of standards, awareness has been built
into management systems so that legal requirements
can be easier traced
Research &
Development
Manpower
Due to the use of standards, the amount of work
needed to develop a new product has decreased. This
means that the cost for design engineers (hours ×
average cost) was reduced
Inbound
logistics
Non-conformant
supplies
Due to the use of standards, specifications for supplies
can be met by more suppliers leading to more
competition: a) rejections and b) product failures.
The value is calculated as a reduction of a certain cost
over time
Production Conformant products
Reduced failures result in higher quality output,
less re-work and less warranty claims
All business
functions
Accidents
Reduced number of accidents and consequent
injuries, deaths
Source: ISO, 2014, pp. 25
Table 3: Example of operational indicators of market development
Business
function
Operational
indicators
Impacts of standards
Marketing &
Sales
Sales
Due to the use of standards for new or modified
products or improvements in production, the company
increased sales revenues and profits
Access to existing
markets that are new
to the company
By meeting certain requirements stated in standards
(regulatory or market expectations), the company can
access markets that were previously closed to it
Creation of new
markets
Using certain standards, the company developed
markets for a new type of product for whichit occupies
a monopoly position for a certain time
Source: ISO, 2014, page 26
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Step 4: Measuring of impact of standards
The purpose of the entire assessment process is the following:
1. Quantifying the impact of standards by applying operational indicators and
aggregating their impact for each of the chosen business functions;
2. Converting the quantitative results which ensue from the use of standards
for each of the chosen business functions, in financial statistics;
3. Summing up the data for all chosen business functions in a given moment,
to establish the total contribution of standards in relation to the gross company
profit or EBIT (Earnings Before Interest and Taxes).
The aim of this step of the assessment process is to determine the impact of
using standards, which is measured through operational indicators – in a
quantitative way. This is achieved in this final assessment stage by determining the
impact of standards in the financial sense. It is the expectation that standards use
leads to a change of values in the chosen indicators in such a way that the realized
effect by the company is manifested through a contribution of cost decrease,
through a contribution of income increase, or a combination of both.
Depending on the operational indicators, the financial impact can be directly
measured, or it can be determined indirectly based on other company data. For
example, “saving” for material procurement and components are an operational
indicator measured directly in financial conditions. On the other hand, the reducing of
“the labour force needed to complete product design” is an operational indicator which
must be converted into assessed savings based on other company data, such as average
prices of staff, project numbers, and so on. For assessing the changes in values
expressed in financial statistics, the key indicator used is EBIT. EBIT is expressed as
the gross company earnings, that is, the income minus the expenses (Figure 8).
If there are not enough data at disposal to calculate the effects, or the data are
not considered reliable enough for such a calculation, the methodology also
disposes with methods of approximation to fill in the gaps, which are based on data
obtained from assessments of similar functions in other organizations.
Figure 8: Impact of standards on company business functions and their calculating
based on creating company values, expressed as EBIT contributions
Source: ISO, 2014, pp. 7
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Along the value chain, that is, within the business functions in the company,
various cases of standards impact can be assessed (Figure 9).
Figure 9: Outline of results – various cases of standards impact assessed
along company value chains
Source: Gerundino D., Hilb M., 2010, pp. 22
The pilot projects for assessing and quantifying the effects which companies
can realize from applying standards have been realized by ISO and its members in
more than 20 countries. These projects have been carried out in close cooperation
between ISO members, academic institutions, companies as well as staff in
member-states, and case studies have been carried out in the period from October
2010 to June 2012. The choice of companies to realize the pilot projects have been
made by ISO members in their countries. The only condition was that the company
in the recent years was a standard user, and that the member had a good
relationship with the company, in order to secure that the project teams have at
their disposal key staff from the company for interviews and consultations. Table 4
presents industrial companies in which 21 international case studies were realized,
according to the presented methodology (ISO, 2012).
Faculty of Business Economics and Entrepreneurship 171
Table 4: Industries and countries covered by case studies
Industries Countries
Agri-food business Cameroon, Peru
Chemical industry Thailand
Construction & construction materials Botswana, Indonesia, Italy, Lebanon, South Africa, Sri
Lanka
Electrical appliances Vietnam
Electrical power transmission Germany
Food retail/food logistics Singapore
Heating, ventilation, air conditioning Jordan
Industrial automation equipment Brazil
Information & telecommunication Germany
Juice production Egypt
Pipes and piping systems China, Colombia, Mauritius
Shipbuilding China
Water supply SenegalWater supply
Source: ISO, 2012, pp. 8
METHODOLOGY FOR ESTABLI SHI NG ECONOMI C EFFECTS
OF THE I MPACT OF STANDARDS ON A MACROECONOMI C
LEVEL
When it comes to reviewing standard externalities on a macroeconomic level,
that is, the impact of standards on economic effects, then the issue of globalization
becomes an unavoidable factor.
Globalization is a phenomenon of the modern age which is represented by the
process of humankind converging in a distinctive common economic, political and
cultural area, and which is featured by an increase of interaction, the growth of the
number and variety of participants, as well as incessant changes.
Within the economic area, globalization has an impact on trade (exchange of
goods and services), especially on global trade which is realized by way of national
and regional borders, as it demands the harmonizing of national regulations which
leads towards creating international regulations and conditions international
standardization, which further results in producing international standards.
In that way, international standards facilitate economic, scientific and technical
cooperation on a global level and become an effective instrument for regulating the
market, for removing barriers for free trade, that is, liberating from routine tasks
(Krsti? et al., 2012).
Generally speaking, standards provide the necessary help in communication
between economy, technology, science and public services, which contributes to
total economic growth.
172 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
The imperative for sustainable economic growth has produced numerous
economic research of standards impact on a macroeconomic level, for a better
understanding of its factors.
On a macroeconomic level, the role of standards is a multiple one and in a
direct connection with the degree of productivity. Specifically speaking, standards
impact the protection of the community, they facilitate international trade, improve
the interoperability of technology and processes, and ease technological changes
and economic development, by reducing the asymmetry of information.
From the standpoint of international standardization, the most important
benefits from standardization are the following:
? Improvement in universal technical communication and mutual
understanding;
? Facilitating international exchange of goods and services;
? Removing technical obstacles in trade;
? Innovations and transfer of technology.
The significance of technological activity, as a relevant determinant of
economic effect in industrialized economies is mostly acknowledged today. It is
without doubt also, that technical standards are very important for speeding up the
diffusion of innovations, especially new technologies.
An increased economic efficiency, occurring as a consequence of
implementing international standards, creates an economic benefit not just for the
supply industry by increasing profit but also for the users by lowering the price of
goods and services. Also, the application of international standards can reduce the
risk and increase the quality of services. Thus, international standards are able to
improve the economy and contribute to the benefit of society as a whole.
Standards produce externalities – different economic effects (positive and
negative), which can be classified according to several foundations, as shown in
Table 5.
Faculty of Business Economics and Entrepreneurship 173
Table 5: Categorizing standards based on economic effects
Type of standard Positive effects Negative effects
Standard
compatibility
? Network externalities
? Avoiding lagging in old technologies
? Increasing the variety of product
system
? Increasing the probability of
interoperability
? Monopoly
Standards of
minimum quality and
security
? Correction of negative selection of
supply quality
? Reducing transaction costs
? Correction of negative externalities
? Limiting of
competition
Standards of reduced
variety
? Economy of scale
? Building of focus and critical mass
? Reducing choice
? Market concentration
Information ? Facilitating trade
? Reduced transaction costs
? Limiting of
competition
Source: ISO, 2012, p. 8.
The classification is based on compatibility, quality, reducing variability
(unification) and information. Table 5 sums up these four different dimensions of
standardization and stresses the positive and negative effects of each one:
? The compatibility of standards is of a key significance for the development of
network industries such as the sector of Information-Communication
Technologies (sector ICT), as they enable the interoperability between different
users and the compatibility between the hardware and the software systems;
? Standards which specify the minimum of the needed quality and security
limit the risk from production of goods and services of a poor quality, which
in turn increases consumer trust;
? Standards for reducing variability eliminate an undesired variety in processes
or product design;
? Standards which specify information and product description improve
compatibility between products and variability between product types.
Having in mind the advantages of applying standards for the country as a
whole, its quantitative impact for the development of international trade, economic
growth and finally, realizing social aims can be reviewed. In that sense, and in the
aim of analyzing the economic effects of standards on a macro plan, several studies
have been carried out ((Blind, 2004), (Blind, 2011), (SA, 2012), (Miotti, 2009)).
In defining the methodology for determining the economic effects of standards
on a macroeconomic level, the Cobb–Douglas production function is used.
Cobb–Douglas production function is a special form of function which is widely
applied in economics to present the technological correlation between the values of two
or more inputs, a specially engaged physical capital and invested labour as the amount
of output which can be produced from these inputs (wiki, 2014).
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The Cobb–Douglas production function in its standard form in the case of
production of individual goods in whose realization only two factors participate
(labour and capital), has the following form:
(1)
where: Y is the output – the total production (the real value of all goods
produced in the year); L is the input – representing labour (the total number of work
hours of those who worked during a year); K is the output – the representing capital (the
real value of capital expressed through the value of machines, equipment and facilities);
A is the multifactor, that is, the total productivity factor; ? and ? are the coefficients of
capital elasticity and labour, respectively, representing constant values which determine
the available technology. The outputs of elasticity measure the responsiveness of the
output during a change of levels of either labour or capital used together in the production
function. For example, in the case of ? = 0.45, the growth in used capital of 1% would
lead to an increase of the output by approximately 0.45%. If ? + ? = 1, this involves the
presumption of “ideal competition”, and ? and ? can be considered sharers of capital and
labour at the outlet. In this case, the production function has a constant income, which
means that if used capital K is doubled, labour L with also double the output. If ? + ? < 1,
the production function has a decrease of value at the output, even if ? + ? > 1 - the
production function has a value increase at the output.
The further text presents two examples of calculating the economic effects of
the standards at a macro-economic level based on the Cobb–Douglas production
function, but with basically have different models.
Example 1
In this example, and let us mark it as Model 1, for calculating of the economic
effects of standards on a macroeconomic level (Haimowitz, 2007), which will here
be looked at more closely, the Cobb–Douglas production function has the
following form:
Q
t
= A
t
(2)
The output for the realized value of production (Q
t
) is a non-linear function of
production multifactors (A
t
), of basic capital (K
t
), and the amount of labour (L
t
). In
this production function, input capital and labour are combined to produce an
output. The ability of capital and labour to produce an output is increased by the
level of technology and efficiency in the economy, which is represented by the
productivity multifactor (A
t
).
If the left and right sides of the equation (2) are divided by L
t
we get the
following correlation:
(3)
In this model, the correlation from the left side in fact represents labour
productivity, or the realized worker output per hour, and it can be considered as if
it ensues from two outputs, that is, it represents a combination of two contributions,
as shown in the equation (4):
Faculty of Business Economics and Entrepreneurship 175
(4)
Multifactor productivity is composed of two components: knowledge and
efficiency. The factors which impact knowledge or technological capacities are
standards, patents, activities or research and development (R&D), as well as the
import of foreign technology. The factors which impact the level of efficiency in
the economy are standards, improving the infrastructure and structural changes in
the economy, such as the mobility of world labour between industries, and other.
Thus, standards can potentially have an important role in strengthening multifactor
productivity. The mentioned can be interpreted in the example of realization of
railway transportation services. One railway train can realize a certain number of
services (transporting goods, passengers, etc.) with 6 cars. However, 12 cars can
realize a significantly larger number of services in comparison to 6 cars. Let us
presume that at the beginning there were services rendered with one railway
composition, one train engine and 6 cars. An addition of another 6 cars represents a
significant capital increase. Thereby, standardization may indirectly secure that the
mentioned increase of capital is transformed into an increase of output, due to the
fact that if the rails of 6 newly added cars are incompatible with the previously
used cars, the additional capital will not lead to an output increase.
In this study, the multifactor productivity multifactor is modelled as a function
of time and the number of standards, and in that sense it is presumed that it has the
following functional form:
(5)
where exp is the Euler number e; T
t
- is the vector of the time trend, STA
t
-
the number of standards in year t. Additional variables, which in principle can be
important in explaining multifactor productivity, are excluded from the analysis,
due to a short time period for analysis.
If in relation (3) first the multifactor productivity (A
t
), is replaced by the
relation (5), and then on the left and right sides of the equation the natural
logarithm (ln) is applied, then an error is introduced (ut), as well as the ? constant
for defining the initial conditions, and the final functional form is obtained (6).
(6)
The equation (6) is used to estimate the economic effects of standards in the
Canadian economy. The analysis involved the period from 1981 to 2004, during
which the time trend vector (T
t
) included two deterministic periods in the Canadian
economy which divided 1994 (before and after the entry into force of the North
American Free Trade Agreement - NAFTA). The results of calculating the
coefficient by equation (6) are presented in Table 5.
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Table 6: Estimation Results for Existing Number of Standards (in logarithms)
Source: Haimowitz, 2007, pp. vi
During the observed period in Canada, the number of standards grew per an
average rate of 0.69 percent annually, which had as a consequence the increase of
the growth rate of production (the real GDP) by around 9 percent. The implications
of these findings point to an increase of the actual realized GDP in relation to the
GDP which would ordinarily be realized in the case of a lack of standards.
Figure 10: Actual Real GDP and Expected Real GDP Without Standards
Source: Haimowitz, 2007, pp. viii
Faculty of Business Economics and Entrepreneurship 177
Example 2
Let us mark the example as Model 2 for calculating the economic effects of
the standards on a macroeconomic level (Blind, 2004) which will be looked at
closely here. Here too the starting point is the Cobb–Douglas production function,
equation (1). If we add to the mentioned function a time dimension, the equation
becomes:
(7)
where: Y
t
represents the output, K
t
the capital factor, L
t
the labour factor (the
number of workers),
the coefficients of elasticity which represent a partial
participation of the capital and work force factors. A is here the efficiency
parameter, and its change, while other parameters remain constant, leads to a
uniform proportional change of the output for every factor combination. Usually,
technological progress in the Cobb–Douglas production function is budgeted
separately from the function itself and in a neutral form by a time-dependent
equation, where t is the linear time trend, namely:
(8)
When on the left and right side of the equation (7) a natural logarithm is
applied, the production functions become the following:
y
t
= a+ (9)
in which now the lower-case letters (y
t
,k
t
, l
t
) represent logarithm variables,
while a is the constant which is being introduced to determine the initial
conditions.
The weakness of this equation is determining the technological progress via a
time-dependent equation, that is, a member, which can be removed if it is
replaced by suitable members, which more closely represent technological progress
via R&D activities, in the specific case, by way of the number of patents ,
cost of licenses and patents ,, as the number of standards . After the
mentioned transaction and adding the member for an error the following equation
is obtained:
y
t
= a+ (10)
in which the introduced members are calculated based on recursive formula
(11) and (12):
= (11)
= (12)
where: is the average number of patents at the end of the current year t,
number of patents at the end of the previous year, representing
the number of grant patents, the number of revoked patents, representing
the failed patents, the number of standards at the end of the current year t,
representing the number of newly printed standards, representing the
number of withdrawn standards.
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If it is taken that =1+
equation (10) is simplified, after mathematical
organizing, it has the final form:
y
t
= a+ (13)
Based on empirical data from Germany and by using the presented equation
(13) values presented in Table 6 were obtained. The results in the table have
undoubtedly confirmed that the role of standardization is very important. Standards
have a special responsibility for an effective diffusion of innovation, as their
impact, calculated by years, amounts at an average from 0.2 to 1.5 percentage
points from the average degree of annual growth (framed in the table). When
comparing all three factors together (the number of patents, costs of licenses and
patents, as well as numbers of standards), it is clear that standards are equally
important for technical innovations as well as patents. Even though the innovative
potential is not the only decisive factor which contributes to economic growth, it is
a fact that must be widely disseminated via standards and technical rules.
Table 7: Sources of growth in the business sector from 1961 to 1996
Source
Average annual percentage changes
61-90 61-95 66-70 71-75 76-80 81-85 86-90 92-96
1.6 2.6 2.0 1.7 1.3 0.8 1.1 1.1
0.2 0.6 0.1 -0.6 0.5 -0.6 1.1 -0.7
0.1 0.2 0.2 -0.4 0.3 0.2 0.0 -0.3
0.5 0.6 0.5 0.4 0.2 0.1 1.3 0.6
0.9 1.5 1.2 0.9 1.1 0.4 0.2 0.3
Total:
fitted 3.3 5.7 4.1 2.1 3.5 1.0 3.7 1.0
realized 3.3 5.2 4.4 1.7 3.6 1.1 3.8 1.5
Notes: Differences between the sums of the individual components of the growth rates and the
fitted total growth ratesare caused by rouding and by joint effects
Source: Blind, 2004, pp. 317
Viewed as a whole, all the national studies realized on this topic show that
standards have a positive impact on the economic growth as a result of the
improved diffusion of knowledge. The contribution of standards on the growth rate
in each country is different: 0.9% in Germany, 0.8% in France and Australia, 0.3%
in Great Britain and 0.2% in Canada. This also is indicated by the updated German
study whose aim is to recalculate the economic benefit from standardization based
on the current data (Table 8).
Faculty of Business Economics and Entrepreneurship 179
Table 8: National studies on the impact of effects of standards on economic growth
Country Publisher Timeframe Degree of
GDP
growth
Standard
contribution
Germany DIN 2000 1960-1990 3.3% 0.9%
DIN 2011 1992-2006 1.1% 0.8%
France ANFOR 2009 1950-2005 3.4% 0.8%
Great Britain DTI 2005 1948-2002 2.5% 0.3%
Canada Standards Council of Canada
2007
1981-2004 2.7% 0.2
Australia Standards Australia 2006 1962-2003 3.6% 0.8%
Source: Blind, 2013, p. 18.
DI SCUSSI ON OF RESEARCH RESULTS
In this study, we started from the following assumptions:
? Active participation in the standardization process and application of
standards produces specific economic effects, both for those who apply
them, as well as third parties, and these effects can be identified and
quantified, both at the level of businesses (micro level), and also at national,
regional and global level (macro level).
? Active use of standards contributes to the improvement of the operation of
business entities, which consequently results in the enhancement of
competitiveness at the national level.
Hereinafter some of the results of the conducted desk research of the
economic effects of standardization are briefly presented. The results indicate the
following:
1. Generally speaking, it seems that standards and standardization in our
economic context have long been unjustly sidelined to the margins of agenda on
key economic issues. The reason is probably to be found in the known adverse
economic circumstances in which Serbia is in, and the standardization as the
higher-order factor does not come on the agenda. Of course, this is not the case in
the harmonization of general social standards in the process of approaching the EU,
but when it comes to the application of standardization and standards in the
business improvement, it certainly is the case.
2. Study results indicate that the standards produce economic effects at the
macro economic level and that they can be quantified, which was clearly confirmed
by the examples stated in the paper. Thus, in the abovementioned example of the
economic effects of the macro-economic level, from equation (4), appears
important conclusion that the standards were contained in both components of
180 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
multifactor productivity (knowledge and effectiveness). Relevant factors that affect
the knowledge (and, consequently, the technological capacity) include patents,
research and development (R & D), the import of foreign technology, and
standards. Factors that affect the level of efficiency in the economy are
infrastructure improvement and structural changes in the economy, labor mobility,
as well as standards. In this way, standards are potential field for improving the
multifactor productivity. National economy, which seeks to improve the economic
environment, among other things, can achieved that through a proactive approach
to standards. If this is interpreted in our conditions, it is clear that, among other
things, the increasing application of standards can improve the competitiveness of
the Serbian economy.
3. Experience of developed countries shows that national economies that
innovate are more competitive and successful. Successful implementation of
innovation assumes the effective diffusion of innovation. However, the effective
diffusion of innovation requires a proactive standardization and application of
standards, in other words, in the process of innovation diffusion - standards have a
special role. Thus, the innovation potential of the economy is a necessary but not a
sufficient condition, because an evident increase of the level of GDP growth (albeit
unevenly) in most developed countries, is the contribution of standards (as shown
in Table 8 presented in the paper). So, the conclusion is that the innovative
potential has to be widely disseminated through standards. In this way, the
standards represent a specific "catalyst" of the innovation process. In our terms this
means the following: first we have to work on increasing the number of significant
innovations (especially in industry) and along that to work on the intensification of
the activities of standardization.
4. When it comes to determining the economic effects of standardization on
the micro-economic level, the research results obtained confirmed that the
standards produce economic effects and that they can be quantified, which was
clearly confirmed by the examples listed in the paper. Case study analysis
(presented in Table 8 of this paper) mentions a number of such case studies.
However, the number of possible real case studies is nowhere near exhausted. In
this sense it can be suggested that one such study, using the proposed research
methodology, is implemented in Serbia, and by the interested business entity and
the Institute for standardization. This would indicate what the economic effects can
be achieved by applying the standard in our country.
5. The contribution of this research can be reflected in further promotion of
implementation of standards and standardization. From the wider context of
research, it is found that business entities generally do not give proper attention to
the standardization, and it is widely believed that it is a matter for the Institute for
standardization of Serbia. However, we often ignore the fact that participating in
company standardization processes enables, among other things, networking with
partners, users, deliverers, competitors, regulatory organs and bodies for
coordination assessment, as well as a direct approach to the knowledge and
strategy (tactics) of other participants in that process. Along with this, active
participation in this process enables companies not only to directly present their
Faculty of Business Economics and Entrepreneurship 181
interests, but also to have an effective impact on the contents (demands) and form
of standards and similar documents which are a result of this process (Krsti?,
Krsti?, 2010).
6. This paper presents a methodology for determining the economic effects on
macro- and micro-economic level, so selected literature in this paper can serve as a
useful bibliography on this topic.
7. This paper may contribute to raise awareness of decision makers at the
macro economic level as well as management of business entities in the micro-
economic level in the field of further affirmation of standardization and
standardization in our context.
CONCLUSI ON
Applying standards increases the effectiveness and efficiency of the process of
product realization and raises its quality, which meets the demands of the product
users and which in turn contributes to the increasing of the level of their
satisfaction.
The relevant aspects of applying standards are reducing the variety of
products, as well as quality and performances, measuring of standards,
compatibility and interoperability, health and security, environment protection,
codified knowledge and vision.
This paper reviews the issue of economic effects of standards and
standardization on a micro and macroeconomic level. Research has shown that
numerous studies have dealt with this issue and they have unambiguously
confirmed the assumption that the application of standards and carrying out
standardization contributes to externalities – economic effects, as along with the
direct interested parties (such as proposers of standards, policy creators and other
interested users), other factors of the economic systems also benefit indirectly from
their introducing.
The economic effects of standard impact can be positive and negative. Of
course, the focus here is on the positive effects.
In regarding the microeconomic level, that is, the level of the business system,
positive effects can be expressed by way of direct variable factors (economy of
scale, labour division, competencies, barriers for market entry, network effects,
transaction costs, precision, trust and risk), as well as via variables which are of
direct interest for politics (productivity, inputs, competition, innovations, trade, the
object of outsourcing, and market failure). These effects are assessed on the
principle of value chains by way of four steps.
As concerns the macroeconomic level, the positive effects of applying formal
standards are usually expressed in a percentage from the gross domestic product –
GDP, and are variable depending on the industrial branch. Empirical research has
indicated that in developed countries (those which apply intense standardization
182 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
and standards) that percentage is an average 1% of the GDP. The economic effects
of the standards impact in this case is determined by an appropriate modification of
the Cobb–Douglas production function.
Considering that the previous research of the economic effects of standards
excluded the areas of informal standards (standardization activities which are
carried out by industrial consortia), as well as the economic effects of standard
impact in the area of the services sector, this could be the area of future research.
Thus, not only do standards contribute to introducing order in the given
context, they are also a means which help to speed up the diffusion of innovations,
which in turn has a positive reflection on competitiveness. Analysis has shown that
the higher a level of development of a country, especially technological
development, the more it uses standards and standardization, which has a synergic
effect.
The positive macroeconomic effects of applying standards significantly
override the sum of individual benefits of particular business systems and have a
wider significance for the economy, which justifies standardization in its entirety.
REFERENCES
[1] Blind, K., J. A. (2011). The Economic Benefits of Standardization. An update
of the study carried out by DIN in 2000, Issued by DIN German Institute for
Standardization.
[2] Blind K.,J.A. (2013). The Impact of Standardization and Standards on
Innovation.
[3] Blind, K. (2004). The Economics of Standards - Theory, Evidence, Policy.
Cheltenham, UK, Northampton, MA, USA: Edward Elgar Publishing Limited.
[4] Cowan, R. (1991). ) High Technology And The Economics Of Standardization.
Intenational Conference on Social and Institutional Factors Shaping
Technological Development: Technology at the Outset. Wissenschaftszentrum
Berlin für Sozialforschung: May 27-28, 1991.
[5] Gerundino, D., Hilb M. (2010). Economic benefits of standards The ISO
Methodology, WSC Academic Week, 9 July 2010. Geneva.
[6] Haimowitz, J. a. (2007). Economic Value of Standardization. Canada:
Standards Council
[7] ISO. (2013,2). International Organization for Standardization, www.iso.org.
[8] ISO. (2013,3). ISO Methodology toolbox 07 (version 2013-09).
[9] ISO. (2013). Economic Benefits of Standards, ISO Methodolog 2.o.
[10]ISO. (2014). Economic benefits of standards.http://www.iso.org/iso/ebs_case_studies_factsheets.pdf.
[11]ISO. (2012). Economic benefits of standards, International case studies,
Volume 2. International Organization for Standardization, PUB100311.pdf.
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[12]ISO. (2013,1). Economic benefits of standards, The ISO Methodology to
assess the economic benefits of standards, International Organization for
Standardization. www.iso.org, 100288.pdf.
[13]ISO. (2013,4). ISO Methodology toolbox 08 (Version 2013-09). TB_08_-
_Value_Driver_Map.
[14]Krsti?, I., Krsti?, M., Skorup, S. (2012). Metodologija istraživanja
kompetencije menadžera za primenu standardizacije u poslovnom sistemu.
Medunarodna nau?na konferencija MENADŽMENT, 20-21 April, 2012.
Mladenovac.
[15]Krsti?, M., Skorup, A., Krsti?, I. (2012). Komparativna analiza strategija
zasnovanih na standardizaciji, kastomizaciji i modularizaciji proizvoda. (pp.
890-897). Bor, Srbija: Zbornik celih radova 8. Majske konferencije o
strategijskom menadžmentu – MKSM2012, 25 - 27 maj 2012.
[16]Krsti?, M.; Krsti?, I. (2010). Standardizacija i mala i strednja preduze?a. XII
nau?no-stru?ni skup, "Sistem kvaliteta za uspešno poslovanje i konkurentnost",
(pp. 171-177). Vrnja?ka Banja, 25-26.11.2010. godine.
[17]Miotti, H. (2009). The Economic Impact Of Standardization, Technological
Change, Standards Growth In France. AFNOR Group.
[18]Popovi?, P., Živkovi?, V. (2011). Osnovi standardizacije i metrologije, Prvo
izdanje,. Beograd: Univerzitet Singidunum.
[19]SA. (2012). Research Paper: The Economic Benefits of Standardisation.
Australia: Standards.
[20]Samuelson, P.; Nordhaus W. (2000). Ekonomija. Zagreb: XV izdanje, MATE
doo.
[21]Swann, P. (2009). International Standards And Trade: A Review Of The
Empirical Literature. Paris, 5-6 October 2009: 2009 Workshop And Policy
Dialogue On Technical Barriers To Trade: Promoting Good Practices In
Support Of Open Markets.
[22]Swann, P. (2007). Standards, Innovation and Wealth Creation. Berlin Lecture:http://www.consortiuminfo.org/metalibrary/detail.php?EID=1267&PID=10&I
D=39.
[23]Swann, P. (2010). The Economics of Standardization: An Update, Report for
the UK Department of Business, Innovation and Skills (BIS). ? 27 May 2010,
Innovative Economics Limited: Complete Draft, Version 2.2.
[24]wiki. (2014). wikipedia. Retrieved may 2014, fromhttp://en.wikipedia.org/wiki/Cobb–Douglas_production_function
[25]ZOS. (2009). Zakon o standardizaciji. „Službeni glasnik Republike Srbije”, p.
br. 36/2009.
184 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
COMPANIES RESTRUCTURING - MYTHS AND
MISCONCEPTIONS
Slavica Andjelic, PhD
17
Nemanja Damnjanovic, PhD
18
ABSTRACT
In the last 30-40 years numerous companies in the world passed through the
various forms of restructuring. In the EU each month is registered 90-100
restructuring of large companies. In Serbia, the restructuring process is quite
muted. EBRD in 2013. evaluate the situation in this area with modest 2 + and no
progress for several years. The aim of this paper is to show how to implement the
restructuring process, as it usually involves the loss of jobs and large investments.
Some companies made a change in the legal form of joint-stock company and
began the process of corporatization. The most common problems in enterprise
restructuring are huge budget allocations, frequent protests of workers, lack of
interest of potential investors. The restructuring process carries a dilemma
whether restructuring is "makeup" and how to attract investors? In the
restructuring process of public enterprises were achieved modest results. Some of
them carried out a process of organizational restructuring, and some companies
made a change in the legal form of joint stock companies and started a question of
redundancy. The output is increasingly seeking out through in advanced prepared
programs of reorganization that are a wish list or realistic plan of action.
Key words: Restructuring, Enterprise, Investment, Economic Development
J EL Classification: G34
UDK: 005.591.4
17
Slavica Andjelic, Graduate school of proffesional studies “Prof. dr Radomir Bojkovi?”, Krusevac,
Serbia, [email protected]
18
Nemanja Damnjanovi?, Graduate school of proffesional studies “Prof. dr Radomir Bojkovi?”,
Krusevac, Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 185
I NTRODUCTI ON
The restructuring is the company reorganization, which aims to achieve greater
efficiency and to adapt to new market and business conditions. Restructuring of the
company resorts to when there are problems with the debt servicing which
threatened its collapse. It can be said that the restructuring process is an attempt to
achieve a turnaround in the business. Turnaround in business must include more
than the debt restructuring and capital structure. If a company is exposed to such
problems where restructuring is considered as best solution, it is difficult to say that
the management that led the company in this not-so- enviable position, will be able
to take him out of it. The company, which is in the restructuring process, needs
external assistance. Help can be in the form of a new management that has
experience in creating and managing changes or consultants who will transfer
knowledge and focus the existing management on the way of changes or even both
of them in combination. A consultant assists company in creating a unique and
sustainable competitive advantage in the market which is based on a successful
business, inside and outside the company. Consultants establish cooperation with
clients to identify opportunities for development and implementation of new and
more effective strategy, business processes, knowledge and systems that create
value for both the owners and the customers and employees.
The restructuring process involves analyzing and formulating new strategies
for business transformation, enterprise evaluation and consideration of various
financial alternatives that are available. The restructuring implementation involves
tasks that should be fulfilled : an analysis of operational performance and dynamic
turnover of funds ; stabilization operations and the elimination of the financial
crisis ; financial obligations restructuring; strategies formulation including
marketing and related plans ; business units rationalization, distribution channels
and levels in the management structure ; development plan for turning operations
and its execution ; analysis of available alternatives for financing and financial
restructuring. Restructuring brings new opportunities and challenges. Some
companies focus on survival, reduce costs and redundancies, and more successful
look outside the economic framework to reach sustainable ways to improve the
business and enter new markets. The time is right to explore all possibilities.
However, in order to do so, first you must perform a thorough and effective
evaluation of their own weaknesses, strengths and external opportunities
considering several alternatives. You do not need to bypass problems such as low
productivity and inefficient operating systems because they can be causes of
business problems. In the restructuring process a new perspective must be based on
the fast and sustainable change that will be of critical importance. All this means
the diagnostic work on defining the strengths, weaknesses, external opportunities
and threats compared to major competitors. (www.poslovnastrategija.rs)
186 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
RESTRUCTURI NG OF ENTERPRI SES
The restructuring involves the sale of public enterprises to the private sector and is
associated with a privatization program of modern economy. In developed economies,
privatization involves: the development of market structures, deregulation and increased
activity of markets, greater capital market activities, sale of public enterprises to private
capital and increasing the economic efficiency. Many governments are not satisfied with
the economic efficiency of monopolized companies or branches, low motivation of
managers in public enterprises, bureaucratization and politicization of enterprises, poor
quality of products and services, high costs and prices. The economy restructuring should
enable greater control, market discipline, efficient capital management and ensure the
political and economic effects (Komazec, 1996, pp. 22-25).
Restructuring is present in more than 50 countries in the "center "," semi-
periphery" and the "periphery" of the world capitalist system. Many international
institutions such as the International Monetary Fund (IMF) and World Bank
(World Bank), after the International Conference on Privatization (1986) especially
encouraged and financed those stabilization programs that introduce restructuring
elements. For a successful restructuring program is required political consensus,
which will confirm that a political coalition that was able to implement a
restructuring program. To economic restructuring oppose all those who see in the
restructuring endangering their monopolistic position. Some believe that the
restructuring will result in the reduction of production and quality of services,
increase prices, others see the danger of leaving the public control over the
production of certain goods, the third point out possible efficiency reduction, fourth
warn of rising unemployment etc. (Komazec, 1996, pp. 22-25).
The company restructuring achieve opposite results: improving products and
services quality, meeting the needs, increasing employment, price reduction etc.
Services and goods produced by the public sector can more effectively take the private
sector. The last ten years, we observe the process of appreciation of the market
structure and competition, improving management and encouraging privatization. The
aim of the restructuring is to create favorable conditions for privatization.
OWNERSHI P RESTRUCTURI NG COMPANY
One of the key causes of the economic system inefficiency of the Republic of
Serbia is not optimal ownership structure of a market economy. This situation in our
economy produces inefficiency and inertia, and it is necessary to implement ownership
restructuring. Ownership restructuring has more capital objectives: First, raise
additional capital; Second, changes management system - instead of unprofessional
and in many aspects of amateur management, the introduction of professional
management; Third, the establishment of a favorable ownership structure of a market
economy; Fourth, the creation of conditions for the capital mobility; Fifth, establish a
Faculty of Business Economics and Entrepreneurship 187
positive identification of the ownership of companies whose employees are co-owners;
Sixth, the establishment of compatible types of companies with businesses in
developed market countries; Seventh, the establishment of efficient and competitive -
type basic enterprise (Vasiljevi?, 1995., pp. 155-159).
Ownership restructuring ways, are" tiled " with many issues: First, the tempo of
restructuring - fast or gradual. Accelerated restructuring produces a system that
implements the goals of equity restructuring, but it is objectively impossible in terms of
material limitations because it causes a huge drop in the value of social capital in high
supply and low demand ; Second, identifying the subject of social ownership of social
enterprises in which extent are the workers, citizens or the state ; Third, if the process of
ownership restructuring should be spontaneous or wih a specific regulatory role of the
authorized state organization; Fourth, the restructuring of the company at book or the
appraised value; Fifth, whether the company should always be an autonomous entity
decisions on ownership restructuring in the selection of models for restructuring ; Sixth,
the restructuring of loss-making enterprises ; Seventh, the role of the so-called
institutional investors (development funds, mutual funds, pension funds, underdeveloped
social security funds, financial holding companies, banks, insurance companies, funds for
employment) ; Eighth, the actual achievements of the ownership and management
restructuring (Vasiljevi?, 1995., pp. 155-159).
OWNERSHI P RESTRUCTURI NG MODELS
The legislation establishes several models of ownership of restructuring
enterprise, which leads into a corporation (a stock company or a limited liability
company). According to Ownership Transformation Law, ownership restructuring
is done in the company and any other form of organization that has social and state
capital under the conditions and in the manner provided by law. Ownership
restructuring object is a social enterprise and the state capital. A company that has
a social or state capital determining by assessment the total capital value, social and
state capital value and the capital value of other owners and the estimated capital is
expressed in shares. Capital value is expressed in dinars and foreign equivalents.
Ownership restructuring is done by selecting one or more models (Law on
Amendments to the Law on Ownership Transformation, 2001. )
1. Sell the company or the ideal part of the company is the model of
ownership transformation in which the company can fully or partially in the
ideal area fined the owner. This model is recommended for small and medium
enterprises ( in terms of regulations on accounting ) and may be particularly
successful in financial support from banks and development funds using
mortgage loans to real estate companies (fixed assets), to secure payment of
these claims. This sale is done usually by public auction or by collecting
offers, and exceptionally with direct negotiation. In this way the company can
be sold to domestic or foreign legal or individual person. Under certain special
conditions, which is a special variant of this model, the company may be sold
188 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
(in whole or at least the prescribed percentage) to persons who take
management of the company, as well as special customer (a world famous
company that introduces a new technology and open access to attractive
markets). Since the subject of sale is a non-equity type of company, agreement
on the company sale on the seller side concludes legally authorized entity
(Fund for Development, etc.). (Vasiljevi?, 1995., pp. 155-159)
2. Sale of stock to raise capital (discounted) is a model of ownership
transformation whose essence consists in the fact that the funds generated in this
way belong to the company, that on this basis increase their capital and change its
ownership structure.
3. Debt conversion into shares of creditors (with discount ) is a model of
transformation which characteristic is to give the workers of the company a
discount to the nominal value of shares that have the right to purchase in a certain
period and to a certain amount. The company's capital is reduced by the amount of
shares sold without a discount (which bought the company workers and other
citizens outside the quotas which can be purchased with a discount, as well as
other domestic and foreign legal and individual persons) (Vasiljevi?, 1995., pp.
155-159).
The state established the companies that have no purpose. The state would
have to return to the social sphere, but the social sphere is solved in profits. No
social problem can be solved with the help of Forge, which will make huge losses,
but the other way around. It is contrary solving social problems. Ownership and
management are two important resources for success in microeconomic. Why
property? Because it still need to get to the property by funds. The money can be
debited and must be repaid. Money is very important, capital is extremely
important, and the management is even more important because there are many
who have invested a lot of capital (www.politickiforum.org.rs).
THE RESTRUCTURI NG MODEL OF THE COMPANY I N
LI QUI DATI ON
Institute of conventional bankruptcy leading cashing of debtor and establishment of
bankruptcy pending among the masses from which creditors are paid, all the less used in
modern conditions. Institute of programmed bankruptcy, opposed to classical, doesn’t
lead cashing of debtor and the suspension of its business activities. Active cooperation of
creditors, the bankruptcy debtor and the bankruptcy court allows the continuation of the
business and financial consolidation of debtor. Objectives programmed bankruptcy can
be achieved in two ways: First, by creating a new social capital from assets of the debtor,
which warrant the fulfillment of the debtor's to other creditors; Second, the financial
consolidation of existing businesses and identifying the owners of social capital
(ownership transformation). This other way of programmed bankruptcy may be achieved
by: downloads debt, debt relief or delay payments through voluntary or forced settlement
and will bind all creditors, except for includes debt assumption, voluntary settlement, and
Faculty of Business Economics and Entrepreneurship 189
voluntary conversion of receivables and guarantees and warranties claims, which is
implemented by special rules and commits only creditors who enter into such a legal
transaction (Vasiljevi?, 1995., pp. 155-159).
FI NANCI AL RESTRUCTURI NG
Money has the biggest influence in business and is an essential prerequisite for
survival. Companies that are in the process of restructuring will need to monitor the
inflow and outflow of funds, as well as their turnover at least once a week, or
maybe every day. Each payment must be pre- checked and delay as possible.
Credit departments in many companies will have to change their mode of operation
and service regulations. They will need to centralize control over the money that is
available i.e. withdrawal of funds from the operating units. The next step is to
optimize the capital structure. With decreasing sales and profits, many companies
have difficulty in paying interest i.e. servicing current debt; improvement of the
balance sheet would certainly be useful (www.poslovnastrategija.rs).
Consensual Financial Restructuring is implemented at the latest prior to the
bankruptcy proceedings. Financial restructuring is re- edit the debtor- creditor
relationship between the company in financial difficulties as debtors and creditors.
Financial difficulties are insolvency or over-indebtedness. Sleep debt is a
temporary suspension of obligations fulfillment and prohibitions startup
performance by the company in respect of creditors who participate in financial
restructuring. Financial restructuring is introduced to re- edit of debtor- creditor
relations, and claims which the debtor and creditor freely dispose of. This type of
restructuring is carried out voluntarily, based on the written consent of creditors
and debtors, with the participation of institutional intermediate.
Creditors who have agreed to participate in a financial restructuring are required to
cooperate with each other in order to create conditions for the debt right to collect and
provide data and information about their assets, equity, liabilities, operations and
business plans, and to prepare proposals of restructuring measures. Conducting the
negotiations with the debtor is the creditor with the largest total claims against the
debtor on the date of application for the institutional mediation of financial
restructuring. Financial restructuring provide to all creditors equal treatment and equal
position in proportion to the amount of their claims. The debtor must provide creditors
unrestricted access to data and documents relevant to financial restructuring, which is
related to its assets, equity, liabilities, operations and business plans (The law on
consensual financial restructuring of companies, 2011).
Financial restructuring can be implemented if it involves at least two local or
foreign banks as creditors. Other than banks, in financial restructuring can
participate all other creditors. During the financial restructuring is introduced
inaction debts. During sleep debt creditors who have concluded an agreement on
debt standstill may not take action to collect receivables, except than filing lawsuits
to collect receivables in order to prevent obsolescence of its claims (The law on
consensual financial restructuring of companies, 2011).
If the creditors and the debtor company during debt standstill period do not
agree on the re- regulation of debtor- creditor relations, creditors when debt
190 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
standstill period expiry re- emphasize the right to initiate the collection of
receivables from the accounts of the company, or the right to start or continue the
procedure (The law on consensual financial restructuring of companies, 2011).
Serbian Chamber of Commerce, at the request of the debtor or one or more
creditors, assisting in the establishment of cooperation between debtors and
creditors, as well as support debtors and creditors in negotiations for successful
completion. (The law on consensual financial restructuring of companies, 2011)
ENTERPRI SES COVERAGE AND RESTRUCTURI NG
ACTI VI TI ES
The restructuring is governed by the Law on Privatization and the Regulation
on the procedure and manner of restructuring companies and other legal entities,
and it is conducted by the Center for the restructuring at the Privatization Agency.
Privatization Law provides restructuring process that preceded privatization. As
subjects in certain stages of restructuring appear Ministry of economy and
privatization, as strategist, the Privatization Agency as operations officer and
controller, a company that is responsible for the accuracy of the presented
information and union companies that should actively participate in the creation of
a social program, the creditors - giving or approve the restructuring program, and
also significant is cooperation with counselors agencies, government institutions
and international consulting institutions. Companies that are in the restructuring
process are not attractive to potential buyers and that is influenced by numerous
factors ( debt, a large redundancy of workers, low productivity, inadequate micro
and macro organizational company structure, technical, technological and physical
obsolescence of assets). These factors have usually cumulative effect. A
restructuring procedure consists the following phases: (www.kombeg.org.rs)
? Initiative for privatization
? Delivery of the prospectus
? Agency announces prospectus
? Interested parties send letters of interest to the Agency
? The agency makes a decision on the method of restructuring and sends to the
company
? The company shall submit to the Agency a restructuring program
? Verification of the program by the Agency
? The company removes remarks
? Implement Restructuring
? The privatization of parts or the whole enterprise
Identification of the company to restructure is affected by numerous criteria :
First, the lack of interested buyers ; Second, the low companies solvency; Third,
the existence of a product range that can stimulate recovery; Fourth, national and
Faculty of Business Economics and Entrepreneurship 191
regional significance of the company. A company that fails to meet one of these
conditions do not meet the criteria for restructuring, and company probably ahead
of bankruptcy or liquidation (www.kombeg.org.rs).
The privatization process is launched with initiative of the competent authority
that is the entity to be privatized, according to the Privatization Law. Privatization
initiative is an act of privatization entity which expresses its intention to implement
privatization and shall be in writing. Privatization initiative is delivered to the trade
union organizations that act in such entity and the employees shall be notified in
accordance with the general regulation of the entity to be privatized. The initiative
for the prospectus shall be submitted to the Agency within five days of its
adoption. The privatization process can be interrupted by the initiative of the
Ministry in charge for privatization and buyers. The initiative for privatization in
entities with majority state capital Ministry in charge for privatization submitted to
the Government of the Republic of Serbia for approval. When the initiative is
initiated by the Ministry of Economy and Privatization or interested buyer deadline
for submission of the prospectus is 7 days (Law on Privatization, 2012).
The company shall first conduct an analysis of the situation which involves
assessment of the viability and success of restructuring, and company can
independently perform or by hiring a consultant. For the analysis are necessary the
data on the company organization, product range, assets and rights of the company,
claims and liabilities, financial ratios and cost structure, the accuracy of which
corresponds to the company CEO (www.kombeg.org.rs).
Assessment report also contains a proposal of restructuring measures. Among
other proposed: First, organizational restructuring status is currently organized as a
single divisible or indivisible enterprise mixed or holding ; Second, the concept of
business units with positive capital whose only problem is insolvency, and business
units with negative equity ; Third, the determination of redundancy as a basis for
the development of social programs. The report will be presented to the Agency,
the management and the union (www.kombeg.org.rs).
Agency announces the prospectus within 15 days of delivery by the company
in newspapers, on TV, the Internet. The prospectus is a document by which a
company presents business, financial and market situation, review the financial
position and is given on the officially prescribed form. Advertising is done in order
to collect data on the number of potential buyers. Potential buyers of its interest in
buying capital in the company give it in writing form and inform the subjects of
privatization and the Agency within the time limit specified by the Agency in the
public announcement. Agency within five days of the deadline for collecting data
on the number of potential buyers notify the subjects of privatization on the method
of sale or the need for restructuring in accordance with this Act. (Law on
Privatization, 2012) After the period of 5 days for collecting customer data Agency
shall decide on the privatization method. Upon receipt of the decision enterprise
shall submit within 90 days a restructuring program or agency itself conducts
restructuring. The decision on the acceptance of the program Agency brings in 30
192 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
days from the date of the program delivery. The restructuring program should
include: (www.kombeg.org.rs).
a) Information about the company and its operations : address, organization,
association with other legal entities, the state of assets and liabilities, number of
employees, product or service program, the structure of expenditure and revenue,
the value of capital and property evaluation possibilities of a successful
restructuring.
b) The status of organizational changes: a merger, division, change in shape,
increase or decrease in capital, selling part or the whole company, the transfer of
assets to another legal entity, agreement or compulsory settlement with creditors,
rehabilitation through debt assumption, the conversion of debt to equity
abandonment of unprofitable operations, changes in staff. The aim of these changes
is repeal of non-profit business unit and profit centers reorganization.
c) Regulation program of debtor -creditor relationships: about restructuring
process companies notify the Commercial Court and the creditors are publicly
notified to submit their claims to the company within 30 days. Company
indebtedness, inefficiency of bookkeeping and conflicting debtor -creditor relation
require the process of harmonization of receivables with all creditors. If a dispute
arises it is solved in a regular court proceedings, but they should do everything to
avoid litigation because of high costs. The claims are agreed with the companies
record. Possible discrepancies are removed and it is formed a preliminary list of
creditors. After the alignment the classification is done on secured and unsecured,
matured and not matured claims. Depending on the degree of indebtedness it is
necessary to make smaller or larger write-off. Program is approved by the majority
creditor or more of them when claims exceed 50 % of the total debt - then it is
considered that the program was adopted. If no agreement is reached, the Agency
may order the second restructuring process, propose modifications to the program,
initiate bankruptcy or independently implement the restructuring.
d) Social program: agency oversees the development of social programs from
the company, the Institute for the labor market, the Ministry of Economy and
Privatization, and the Ministry of Labor and Employment. The company should
give a realistic assessment of the needs for workers. For workers who lose their
jobs should consider the age and qualification structure for selecting the right
measures for status, define redundancies that will occur in the future as a result of
the production modernization. The Government of Serbia has adopted a social
program for workers that are redundant which accounts for about 35 % of
employees in companies undergoing restructuring. For them is provided :
severance pay in the amount of 6000 RSD per year of service, if they decide for a
stand-alone business they will receive another 30,000 RSD, if they are brought
together and established small businesses they will be encouraged with 300,000
RSD, workers who lose their jobs will receive a cash compensation up to 24
months, the program of the new employment, the program of public Works and
preparation for re-training (3). Since the adoption until verification of restructuring
program may take 170-210 days and for the implementation of the program at least
Faculty of Business Economics and Entrepreneurship 193
90 days. There is a real business need to be made operational business plan for the
next 9-10 months from the date of initiative receipt. In order to facilitate the
monitoring of the company opens a new account through which operates in this
period. This change is recorded in the Commercial Court and the company itself is
obliged to notify the business partner that is in restructuring. After making a
decision on restructuring under Article 9 of Regulation company requires approval
by the Agency for the implementation of certain business transactions such as the
disposal of movable and immovable property, the giving and taking of loans,
provision of guarantees for the other subject, commitment to another entity,
structure changes, status changes, investment, the change in employment. The
provided measures should help costs and business efficiency.
(www.kombeg.org.rs)
BASI C RESTRUCTURI NG TENDENCI ES I N SERBI A
Since the beginning of transition in Serbia, through the Agency for
privatization has been privatized nearly 2,500 companies and collection was
approximately 2.6 billion euro's. Although initially achieved significant results, the
privatization tempo has slowed significantly in recent years. Since 2002. by 2008.
average privatized 320 companies per year, while in 2009. until 2011. average
privatized only 47 companies per year. This deceleration of the privatization
process is the result of two factors: first, the remaining companies are relatively
problematic, and second, there was a decline of investor interest due to the
economic crisis (Arsi?, 2012., pp. 133-137).
"Restructuring" status is used to non-privatized and the most problematic
companies in order to protect them permanent from bankruptcy. These companies
are on indefinite status of "restructuring" in order to avoid the troublesome process
of resolving the fate of these companies, or resolving the fate of workers "
employed" in them (Arsi?, 2012., pp. 133-137).
What is the strategic goal of the restructuring process in the national economy
? Economic growth, sustainable development and exports to less indebted, more
debt repayment, and employment (www.politickiforum.org.rs).
There are about 600 enterprises under the jurisdiction of the Privatization
Agency, a number of those 600 are actually small and often attached to local
governments, but there are about 150 in restructuring. Companies in restructuring
employ about 55,000 workers, produces about 1.5 % of our GDP, added value as
we make annually. Employ 5 % officially employed. Their productivity is
extremely low. Most of these companies were offered for privatization, which
failed and now are thinking about the different possibilities of how to use their
assets, employment and production programs combined, free of obligations and
debts. The point is that restructuring in which you pull out some funds and some
employees actually what is everywhere in the world classical bankruptcy or even
liquidation, but you are trying to save as much as you can of partners resources,
194 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
commercial production relations and of course the employees that the economic
value of these companies activities do not lose completely.
Enterprises under the jurisdiction of the Agency for privatization Serbian
society cost about 2-2.5 %, they are all state-owned enterprises, including the
public. We will concentrate only on the companies in the Agency. The agency
costs about 55 million euros per year, that was 2012. In previous years, there were
about 100 direct subsidies and € 220 million per year of new debt. These are
indirect subsidies, because sooner or later someone has to pay. This figure refers to
all companies under the jurisdiction of the Privatization Agency, about 2 /3 to 4/5
of the company officially in restructuring. Accumulated debts of these companies
stand in the nearly 500 million, only to public companies, not to mention debts to
government, which are usually in the form of contributions for pensions, health,
etc.. There are debts that are difficult to capture, and the rest of the healthy
economy make business difficulties. When you help them and protect them you
create unfair competition to private owners who are trying to produce something
that might be in competition with the products of these companies. They are
restructuring since 2001., when the decree was made. (www.politickiforum.org.rs)
From the 179 companies in the restructuring in late August for 26 were declared
bankrupt because that companies do not have manufacturing program that can meet
the needs of the modern market. Companies which declared bankrupt, paid a social
program, and 643 workers that applied was allocated 436.5 million (EUR 3.8
million ). Companies in restructuring cost the state and citizens $ 750 million. In
most enterprises restructuring is five years. Research shows that for the five years
was spent 3.750 billion dollars (2.7 billion euro's) as it dumped money on
companies that generally do not do anything. Many who are responsible avoiding
the question, why tolerated so long these companies, and public secret was that on
this way state buying social peace. It is actually the companies that were once
pillars of development in cities across Serbia. With the closure of these companies,
the state would have to deal directly with 51,000 employees in 153 companies
which were in this case. The Action Plan should be to resolve the status of former
socially owned enterprises, which reports the loss of his business, and citizens cost
about $ 750 million a year. The other group companies are those companies whose
property will be offered for sale. If these companies do not find a partner, its time
to find the privatization through bankruptcy. List of companies in restructuring
process is as follows.
Faculty of Business Economics and Entrepreneurship 195
Table 1: List of companies in restructuring
No. Economic sector Number of
companies
1. Agriculture, forestry and fishing 18
2. Mining 4
3. Manufacturing 63
4. Electricity, gas and water supply 4
5. Water supply, waste water, waste disposal process
control
1
6. Construction 12
7. Wholesale and retail trade, repair of motor vehicles
and motorcycles
3
8. Transport and Storage 5
9. Accommodation and food services 6
10. Information and Communication 4
11. Financial and insurance activities 12
12. Administration and other services 2
13. Health and social care 21
Source: Ministry of Economy of the Republic of Serbia
The table shows the number of companies from different economic sectors that
are in the process of restructuring and soon will be offered for sale. To this list belong
companies located in Krusevac IMK October 14 Lubricant Factory, Branko Perisic,
Star Garments, Oil Factory, a contemporary home and HI Parish. Listed companies
belong to the manufacturing industry and are used to represent the core of economic
development of Rasinski county. The assets of these companies will be offered in the
future and these companies are likely to find a partner. However, if does not, its time to
find the privatization through bankruptcy. You need to put an end to the 150
companies that are restructuring because they only spend money or property. When
Privatization Law was adopted restructuring was barred, suspended or banned for a
while. The law stated that anyone who buys capital, which had been the social, 2-3
years and sometimes even longer, the agency has contracted, that should not change
the activity must not sell the property and buy another, that limited borrowing. The
poor owner has actually had to be a bit tricky (www.politickiforum.org.rs). There was
an opportunity at that time to repair the metal sector, part of the chemical sector and
some other sectors, because they have suffered the most because of the ban on exports
at a time when our economy was completely excluded from the rest of the world.
Extremely important is to them to add some options to do something more creative.
Today, after so many years, these companies can not do business in that field, because
the business is past time. (www.politickiforum.org.rs) Most of the companies in its
current state would not be able to survive in the market and would require intensive
restructuring or resolution through bankruptcy or liquidation. Resolving the status of
these companies requires political commitment, because it is associated with loss of
jobs, but also the resistance of managers and some politicians.
196 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
RESTRUCTURI NG PROCESS OF PUBLI C ENTERPRI SES
There are still two major sectors in state hands, two types of companies. One is
what economists call the law and public companies, and it is largely, though not
entirely, provide some fundamental functions such as power generation,
telecommunications, public utility companies. These are some fundamental
features that are not actually made from private ownership to twenty years ago and
that they have great social and economic importance, and are regulated by a special
law (www.politickiforum.org.rs). Public or state-owned enterprises are state-
owned enterprises. Reasons for the establishment and operation of public
companies are as follows: the state's interest in certain business areas (transport,
energy, telecommunication, telecommunication systems, etc.) Public agencies have
different objectives than private. The most common objectives are: to meet certain
social needs, the achievement of social wealth, perform social functions that
private equity does not show sufficient interest and others (Komazec, 1996, pp. 22-
25). There was a belief that public companies are effective as private. However, the
efficiency of public enterprises is necessary to ensure certain assumptions.
Competitive market structure: Inefficient management of the state financial and real
resources and a lack of individual responsibility, shows inefficient micro-entrepreneurial
function of the state, and the state usually becomes a "bad entrepreneur." Studies have
shown that public enterprises are not sufficiently efficient and competitive to private,
where the profit motive in these companies can not be more prominent.
Competitive property rights: private and public companies differ in all
important elements of proprietary functions. Managers behavior in the public
enterprise is less responsible than in private because the public sector is showing
less sensitivity to risk than private. Markets and market institutions have an
important role in public versus private companies (money market, capital market,
investment risk, sensitivity to interest rates and losses, etc.). In public companies
there is a tendency toward expansive employment, but also facilitates investment
funds, which reduces productivity and efficiency in capital use. Social and political
objectives in the public sector reduces the motivation for profit. It is accepted
stance that because of the above mentioned reasons public enterprises (
economically speaking ) are less efficient than private enterprises.
The commercialization of the public sector : The ownership rights of public
enterprises are not part of the capital markets resulting in lower entrepreneurial interest
developed in the private sector. In all countries, resulting pressures for the privatization
of the public sector, i.e. the maximum possible commercialization and market
guidance of public sector enterprises. This resulting with the programs of deregulation,
privatization and decentralization. Program of deregulation should remove restrictions
that inhibit free behavior of economic entities and ensure increase economic efficiency
and competitiveness of enterprises, and thereby the efficiency of the national economy
(Komazec, 1996, pp. 22-25). In developed countries, the restructuring of the public
sector includes: deregulation, privatization - enterprises, institutions and insurers,
organizational reform and restructuring ( decentralization, the introduction of operating
Faculty of Business Economics and Entrepreneurship 197
mode that is associated with stimulation ), encouraging greater diversity and
competition, changing role of services - from spending services switched to offering
services, the introduction of discipline of the private sector to the public sector - interest
capital is dominant.We can talk about public enterprises, their privatization and
restructuring. Again it is worked on their depoliticization. In Privatization Law was
given a deadline to complete the restructuring of those companies that are now under
the authority of the Privatization Agency and are actually most often still socially
owned. There are also state and the public, it usually does not think of them when it
comes to public companies. These companies are again divided into those that are in
restructuring and those that are not restructuring, but in preparation for privatization.
(www.politickiforum.org.rs) From an economic point of view, the goal of restructuring
is to improve the efficiency of public enterprises, and that will be achieved with the
following measures : repairing of corporate governance, the government should
complete the corporatization of the remaining large public companies, that the
expected benefits of corporatization been achieved, it is necessary to establish and
implement a transparent and professional framework for the appointment of directors
and members of management and supervisory boards of public companies, for large
public companies it is necessary to strengthen the role of the state as the owner,
including the manner in which it manages public companies and supervises their
activities. One possible approach is a clear delegation of authority and responsibility of
a specialized department within the Ministry of Finance, which could help reduce the
adverse political interference and allow them to strengthen the capacity to be focused
and efficient. An important element in the reform of public enterprises should be the
development of an integrated performance management, which would include the
development of " key performance indicators ". Actual results would be publicly
promulgated. It is necessary to introduce hard budget constraint (ie, to prevent the
accumulation of arrears and unwarranted issuance of guarantees) clearly separate the
role of public enterprises in carrying out the role of public importance and their
commercial operations. One possible model are contracts for providing services in the
public interest. Public companies would commit to a certain level and quality of
services of public interest, which are not commercially viable, and it would be
receiving direct compensation from the state. This compensation should gradually
replace all forms of support (eg subsidies for current operations and guarantees of
indebtedness) in addition to the reform of the subvention and the issue of guarantees, it
is necessary to reform the system of tariff determination, as well as appointing
authority so that they are based on actual operating results of the company, measured
by both financial and " key performance indicators " The current system of state help is
fragmented ; it is necessary to develop a unique and comprehensive database for all
forms of state support, that will included public and large state enterprises. Improving
the management of public enterprises would increase the chances of their privatization.
From the standpoint of economic efficiency, it is justified the privatization of
enterprises operating in competitive conditions, such as Telecom, Galenika, Železara
Smederevo and others (Arsi?, 2012., pp. 133-137).
198 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE RESTRUCTURI NG PROCESS OF REAL SECTOR I N
SERBI A
The process of restructuring of the real sector in Serbia is 17 years old. You do
not need to go far in terms of restructuring in other countries and other continents,
it is enough to look what is happening in the real sector restructuring, draw
experience and on that basis bring political and other decisions related to the
restructuring of the public sector. The restructuring of the real sector started in the
90s of the last century. No matter in what form, legal and other, and no matter who
was in power that restructuring process has produced disastrous consequences to
the industry in general. Then government said that companies that will be included
in the restructuring process are the strategic enterprises primarily, that have a
national or regional significance and which employ large numbers of workers, who
have specific problems related for its debts. It was the 1996th year. Criteria were
then eligible, it was thought that the process will go in a positive direction. What
happened was that the management of these companies realized that they had
become white bears of Serbian economy. They did not have to pay various taxes to
the state and no bank or any creditor was unable to collect its receivables. For those
companies are associated the largest corruption scandals in previous 15-20 years.
At the head of the company in a high percentage were the people that were coming
from the government structure, i.e. from a certain political party as long as the
company was vital and as long as it had nothing to steal and nothing to be
dismembered. Because of this behavior, we came to other conclusion, which was
that a number of these companies, and the list of these companies in fact was a
kind of list for the shooting and killing Serbian industry and economy. Now we
hear the announcement of the Government of the Republic of Serbia that this
restructuring process should be completed in June of 2014. What do we actually do
that welcome 2014. with completely clear situation, that we saved and that we
undertake, here we took such and such activities and something we have succeeded
and something not ? It is obvious that this process is very mystified and we do not
know who is going to survive.
All these activities killing Serbian economy, taking place under the cloak of
re-industrialization, creating a new economic development strategy. Why do we
say under the cloak? Because it is a mysterious process. The unions do not
participate in it, although we were advocates of the process to start. We do not see
that professional public is included. On the ministry website you can see that some
people are consulted and some experts were involved, but nowhere you can see
who is this, if it's an institute, an individual, or something else. From 1996., when
the restructuring of the industry began until today have been lost over 200,000
jobs. Hundreds and hundreds of companies were shut down. These companies have
gone through the process of a second and third privatization. It is a walk through
the agony for the people who are in those companies really honestly and fairly
tried, through this process to find a solution for the enterprise that led, although the
majority of those directors were the criminal structures that eventually no one is
Faculty of Business Economics and Entrepreneurship 199
going to account nor responded why they spent hundreds millions of euro's. All
this was done under the cover to preserve social peace and a big concern for
employees. Companies with whom we live and of which we are living, using their
products; were proud of it, because they were kind of brand of our business and
industry. These are the Prva petroletka, FAP, IMT, IMR, Machine Industry Nis,
Electronic industry, Dragon, Wagon Factory Kraljevo, Jumko, Beko, Kluz, all
companies from Leskovac former Serbian Manchester, Zorka, Župa, Rad, Prahovo,
Ljubisa Miodragovi?, Ivan Milutinovic, etc.. These companies will not exist. Some
have gone and some will soon disappear. No one is taken into account, nor will file
a liability. (www.politickiforum.org.rs)
What we have never tried with us, and that's about to let out or parts of assets
or the entire business of a company. It is a form of restructuring in the market
economy. The restructuring consists of good ideas, choosing the best and the
bigger combining the better restructuring. Bigger issue is neoliberals or
justification state that does not longer participate. The Republic of Serbia is a
country of small economy and for its economic policy is very important to
completely separate look at the micro economy and get into the problems of micro
economics. (www.politickiforum.org.rs)
SOCI AL PRI CE OF CORPORATE GOVERNANCE I N SERBI A
We know that will be laid off 80 % of these 55,000 people. They go to the
street, many of these companies will fail and therefore these people will become
completely unproductive, so far at least something is produced. As a major obstacle
to serious solving of unemployment problem is the lack of any long-term
government strategy to solve the national burning question. Through future
employment strategy should put emphasis on solving problem of poor
segmentation of educational backgrounds (Damnjanovi?, 2013., pp 289-315).
Ten years of privatization on the liberal recipe produced some results where
there were sold successful companies. Here and there is a company that was
already in difficulties with private capital and packaged privatization failed, but
how to deepen the difficulties in which companies are so increases the probability
that the liberal response wouldn’t be good. The other side says we can not just like
that put people on the street. We had ten years and there is no answer, there are no
results. Why are they there ? We think it is not true that public property can not be
managed well. We could see that this country has a successful state and socially-
owned enterprises. A good part of the German economy depends on the banks that
are state-owned. Let us not be blind to the fact that the management of the state or
public property, including the social itself did not have to be a failure
(www.politickiforum.org.rs).
When the social, public, state-owned enterprise or organization, show poor, it
is followed by the transformation process. In Serbia, we have " restructured "
companies that we recognized finished state. We do not know if someone took
200 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
organizational functional unit, the reality is restructured, and we recognized. The
moment when on the serious market stage a company sees that they can not cover
the costs, they sit at the table and think what they have and how much to keep, with
what vision and in what they have to put to change something. It is true that at first
some people lose their jobs, it is true that some countries help these people and
some do not, but the one who is given the task of leading an economic unit is
tasked to find a solution. He is seeking for a solution within the resources that he
have and going away. Sometimes the state and public institutions know to work
that. One of the problems are these companies that we have put in the restructuring
of ten years or more. Why do we put them? The intention was to do with them
what was happened in the developed and established market economies to private.
That is a process that is extramural, that it is actually under bankruptcy legislation
and eventually get something healthy or liquidate.
We knew that we couldn’t do that by legislation that we had. It had to be done
under proper legal bankruptcy. This was a pretext and cover the regulator to do
something that was extremely logical, necessary and best for all. Very soon the
effort to really restructure the company has died. Others said it was actually a form
of subsidies, direct and indirect. We all know that this means that one part going to
the salary, which are social security, but largely go to corruption or the fact that no
one is really responsible and really have some hope of creating something. Why it
happened and what now? We are in 1965. abandoned central planning, and then
forget that kind of capacity in public institutions for economic thinking, analysis,
guidance, coordination must be built.
Than from 1965. until 1990. and especially after 1974. there were mechanisms
in Yugoslavia which primarily relied on a quasi- state institutions, economic
institutes, centers, but the State Administration, especially at the national level,
during time absolutely left every effort and thus the capacity to be able to do an
economic analysis. When it happened 2000th we were actually what is left at the
federal level and finish them off, and on the republic level we begun to make two
types of institution: what we proposed by international financial institutions, such
as the Privatization Agency, which should lead as in the private economy, and what
Europe said to us, and that is what is needed to harmonize our law with theirs. No
one was involved in our ability to perform the most basic way of economic
direction of our development, and so over the next ten years.
Today in Serbia we do not have a single institution in the state that follows
what happens in the real economy or research center. All those former that we had,
Institute of Economics, Institute of Economics science, market research, became
consulting firm. People were not guilty. The company management of social
companies and all employees had to develop their own restructuring programs. In
their interest was to don’t do anything, and if it was in their interest, in the short
term, of course they do not know what to do. That's why capitalism succeeds in
restructuring and socialism never. Because when something does not work comes
second owner. The neo-liberal model is not only and dominant, but when carried
on he is working, because you have the opportunity, a lot of capital and because the
sale comes much earlier. No one there is buying the company in a state in which
Faculty of Business Economics and Entrepreneurship 201
our companies was in 2001., and certainly not now. Whatever discussion we make
today, we have to answer to the means, what, and how, if you do not want illiberal
model. If you do not have an answer with what means and how than neoliberals
model is better. Hundred million, two hundred million a year by infecting the rest
of the economy in that it is free of charge, by promoting unfair competition, by the
distracting State Administration in solving problems in a company that can not
solve their own problems, it costs entire society too much. In the end, the children
of people who will one way or another have a social problem of restructuring will
have a better chance to get a job if you do it before, nor if you do it later. It is not
true that it is not possible to do something, it is true that we never began the task of
training ourselves as a society to do something if we do not want to be a neo-liberal
model (www.politickiforum.org.rs).
THE ROLE OF STATE AND ECONOMI C DEVELOPMENT
American economist Moses Naim made the concept of liberal economic
reforms that being implemented in two phases: the "first generation reforms" and
"second-generation reforms". In the first phase, the priorities are to reduce inflation
and economic growth, in the second phase it is necessary to increase the
international competitiveness and maintain macroeconomic stability. Changes in
business strategy in the first phase relates to macroeconomic policy, reducing the
role of government in economic life and the elimination of protectionism. The
second phase of reform is building institutions of a modern market economy.
"Second-generation reforms" involve the construction of market institutions,
increasing the competitiveness of the private sector, health, education and other
public services. Instruments used to implement "second-generation reforms"
among other measures include restructuring different sectors of the economy and
building institutions for the exports promotion (Moses, 1994., pp. 59-63). "Second-
generation reforms" include the construction of legal, regulatory and political
institutions. Some of these measures in order to advance the realization of the "
first generation reforms" (for example, " careful liberalization of the capital
account " is aimed at macroeconomic stability and financial stability, which is
liberalized in the first phase of reforms. During the discussions that are taking place
in the Serbia about the role of state in a modern market economy, it is necessary to
point out what is the role of the state in the "second generation reforms". "Second-
generation reforms" require strengthening the role of the state in terms of
strengthening the regulatory functions of the state, the role of the judiciary within
the" rule of law" and ensuring social security of the population. Within the "second
generation reforms "it's about defining" small but efficient government" in a
modern market economy (Stojanovi?, 2008., pp. 84-88). The group of economists
gathered at the Washington Institute for International Economics, led by John
Williamson in 2003., thoroughly analyzed the economic development of Latin
America and formulate proposals for a new beginning of development and
202 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
economic growth in Latin America. Recommendations are important not only for
the countries of Latin America, but also due to changes in the development strategy
of the former socialist countries that are building a market economy, including
Serbia. Gradually are changing views on the relationship between government and
economic development (Stojanovi?, 2008., pp. 84-88).
A World Bank report in 1997. among other things, says that "the completed
development under the domination of the state, has been completed and
development without the state. Good government is not a luxury but a vital
necessity. Without successful country sustainable, economically and socially
growth is impossible. "In all the above discussion still lacks a definition of the
economic role of the state. The theoretical basis of the regulatory functions of the
state in the economy, is based on the " theory of market imperfections " and "
theory of asymmetric information " market aggregates, for which Stiglitz won the
Nobel Prize in Economic Sciences. (The World Bank, The State in a Changing
World Development Report, 1997., pp. 95-100)
Serbia needs a change of economic philosophy, respectively a new
development paradigm. We need a new concept, an alternative model of
development, but as it is appropriate to "small open economy". It is required a shift
from the "neo-liberal concept" towards the idea of efficient markets and state
regulation. Sequencing of reforms depends on the objective assessment of the
situation in the national economy. We need the export orientation in order to
reduce the dependence of the Serbian economy from the influx of foreign capital,
mainly foreign loans, but also to achieve higher rates of economic growth. To
make this happen requires proper policies, aimed at increasing exports of goods
and services. The most successful transition from a socialist to a market economy
and the best development successes was achieved by those countries that have their
own programs of economic development, which corresponds to the specific
circumstances of a given country (Stojanovi?, 2008., pp. 84-88).
CONCLUSI ON
In Serbia, the restructuring process is delayed and there is no agreement on how
and when to implement it, because the restructuring rule means a loss of jobs or
requires substantial investments. The focus of the restructuring process is the
ownership, organizational and financial restructuring of public enterprises in the real
sector. In the restructuring field of public enterprises were achieved modest results. In
one part of the company carried out a process of organizational restructuring. Some
companies made a change in the legal form of a joint stock company, started a labor
surplus and implemented some forms of financial restructuring. The public sector is
facing problems of overstaffing, above average wages, poor financial results and party
influence. What to do with too large, inefficient public sector and how to implement
the management professionalization? In 2013. number of " in restructuring " has
reached 179 ( 54 000 employees). The basic form of "restructuring" was financial,
Faculty of Business Economics and Entrepreneurship 203
which basically came down to protect the company from payment of submitted bills.
Direct subsidies to the state of 2013. they have reached 3 billion, and through the
support of about 4.5 billion. Companies "in restructuring " have the following
problems : huge budget allocations (but each company of modest means ); frequent
protests of workers ( " all eyes " are upon state employees, often the highest state
officials, who are required (soft ) solution to numerous problems in the short term ) and
the lack of interest of potential investors for privatization. Exit from the crisis are
increasingly asking for the "pre- planned restructuring programs " - a wish list or a real
plan of action.
REFERENCES
[1] Arsi?, M. (2012), Reforme državnih i društvenih preduze?a. Kvartalni monitor,
Beograd No 28 (1-3): pp. 72-85.
[2] Damnjanovi?, N., Somborac, B., Ostoji?, S. (2013), Problem nezaposlenosti
mladih u Srbiji. Svet rada No 5(10): pp 848-856.
[3] Komazec, S.,. Risti?, Ž M. Jovanovi? (1996) „Ekonomija“, Beograd:
Univerzitet Megatrend.
[4] Moses, N., (1994), The Second Stage of Reform. Journal of Democracy, Latin
America No. 4 (10): pp. 80-83.
[5] Stojanovi?, I.(2008), Kraj „neoliberalne ere“ i nova paradigma za razvojne
strategije privrede, posebno privrede Srbije, Razvojne strategije preduze?a i
privrede. Beograd: Univerzitet Megatrend u Beogradu, pp. 283-288.
[6] The World Bank, The State in a Changing World Development Report; IBRD;
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[7] Vasiljevi?, M., (1995) „Trgovinsko pravo“, Beograd: Savremena administracija.
[8] Zakon o izmenama i dopunama Zakona o svojinskoj transformaciji, „Sl.
glasnik RS“, broj 10/2001. od 14. februara, 2001.god.
[9] Zakon o privatizaciji, „Sl. Glasnik RS“ broj 38/2001, 18/2003, 45/2005,
123/2007, 30/2010, 93/2012, 119/2012.
[10]Zakon o sporazumnom finansijskom restrukturiranju privrednih društava, „Sl.
glasnik RS“, broj 36/11.
[11]http://www.kombeg.org.rs. (30.04.2014.)
[12]http://www.telegraf.rs. (30.04.2014.)
[13] http//poslovnastrategija.rs (30.04.2014.)
[14] http//www.politickiforum.org.rs.(02.05.2014.) Milan Kova?evi?, Država osniva
preduze?a koja ni?emu ne služe, Socijalna cena restrukturiranja javnih preduze?a
[15] http//www.politickiforum.org.rs.(02.05.2014.) Kori Udovi?ki Socijalna cena
restrukturiranja javnih preduze?a
[16]http//www.politickiforum.org.rs.(02.05.2014.) Dragan Mati? Socijalna cena
restrukturiranja javnih preduzeca
[17]http//www.master.fon.bg.ac.rs. (04.05.2014.)
204 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BUSINESS NEGOTIATION
Vlajko Petkovic, PhD
19
Zorana Petkovic
20
ABSTRACT
This paper describes business negotiation, as an essential part of a business
process. It deals with the concept and notion, goals, participants, forms, course
and phases of negotiation process.
Negotiation is defined as a process of discussion between two or more parties,
which often have different interests, in order to achieve a commonly acceptable
solution.
The goal of negotiation is to reach an agreement, acceptable to all
participants. This is achieved through cooperation and compromise between
parties involved in the negotiation. Negotiation is the art of adapting. It is the art
of giving in order to get more in return.
There are different forms of negotiation: internal and external; intuitive and
rational; positional, principle and opportunistic, and depending on the positions
taken by each party in the negotiation process, there are the following forms: win-
win, win-lose, lose-win, lose-lose, win and win-win or no deal.
The entire negotiation process takes place through two main phases. The first
step involves planning and preparation, and the second stage is the negotiation
process. In some cases, there is the third phase. This happens only when one of the
parties deviates from the agreement reached. Then the negotiation enters a new
phase – repetition of negotiation.
Key words: Negotiation Process, Participants, Goals, Forms, Concessions
J EL Classification: M21
UDK: 005.574
19
Vlajko Petkovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
20
Zorana Petkovic, Higher Educational Institution for Applied Studies in Entrepreneurship, Belgrade,
Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 205
THE CONCEPT OF BUSI NESS NEGOTI ATI ONS
Negotiation is a process of discussion between two or more parties, which
usually have different interests, in order to achieve a common, acceptable solution.
It is based on the assumption that it is a controlled communication process with the
aim of resolving the conflict of interest between two or more reasonable
negotiating parties, where each party can block the achievement of the goal of the
other. If one side cannot block the achievement of the objectives of the other side,
then it is not a negotiation. Negotiation is a special form of social interaction, a life
skill, with differences and conflicting interests. Negotiation means to seek
agreement through dialogue. That is the way people solve their differences and
disputes. This is a basic form of human communication which is often used, but
people are not always aware of it.
There is also the notion that negotiation is a form of interaction in which a
group of subjects with conflicting interests are trying to reach a mutually
acceptable agreement on the distribution of limited resources.
In the simplest terms, negotiation is a discussion of two or more parties who
try to find a solution to their problem. It is an interactive process of communication
that may happen whenever we want something from other people or they want
something from us. It must be borne in mind that negotiations are reached by a
voluntary consent of the negotiating parties and that each party has the right to veto
the final result.
It is recommended that all disputes are resolved by reaching an agreement,
regardless of their nature (disputes between political parties, between religious
sects, between companies and trade unions, among researchers in an institute,
between parents and children, between teachers and students, etc.).
Business life is full of such situations, and all managers must negotiate on
daily basis and seek solutions to problems. Negotiation can be even fun if they
know how to do it. The real problems and difficulties arise if, in most cases,
someone comes out with the feeling that he failed in negotiating.
Factors of negotiations are: subject of negotiation, participants in different
roles (buyer-seller; investor-contractor; owner-manager; lender-borrower;
management-strikers, etc.), goal to be achieved, ambient (location) in which the
negotiations are conducted, general atmosphere, as well as many situational factors
that may influence the outcome of the negotiations and the prospect that the
agreement is reached (Pokrajac, 2008, p. 281-291. This interpretation of business
negotiation significantly relies on the cited text).
Ethical considerations require that one should always be well prepared for the
negotiation process. Preparation is the main factor of the success of the negotiation.
One needs to supply the arguments, data, and even the occasional jokes. One
should not be too hard, unyielding at all costs. Stubbornness is a sure path to failure
206 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
of negotiations. Negotiations can be considered successful only when both
negotiating parties are satisfied with the outcome. Otherwise, our seeming success
may, as a boomerang, return to our heads. Therefore, you should skillfully apply a
strategy that clearly separatesgoals to be achieved and those which can be
"sacrified". Every experienced negotiator must know his goals and hispossibilities,
to be able to determine his expectations. Negotiation is not imposing one’s will,
and does not solely serve to fulfill one’s owninterests.
For each of the phases it is possible to identify and extract certain elements
and their application and knowing them lead to a successful final
outcome.Negotiating skills, therefore, are no longer viewed as an innate talent. In
today's complex and changing environment, it is of course still necessary, but it is
no longer sufficient. Successfull negotiating behavior increasingly depends on the
knowledge of proven theories and goodnegotiation practice. Negotiation should be
regarded as one of the key business processes that increases the value of the
business enterprise and its participants.
GOALS OF BUSI NESS NEGOTI ATI ON
The main goal of negotiations should be a mutual agreement. From the moral
point of view only cooperation and compromise can lead to an agreement
acceptable to all participants in the negotiation. Negotiation is the art of adaptation.
It is, in fact, the art of giving away in order to get something more. In order to
achieve this goal it is necessary to leave various prejudices related to gender, race,
ethnicity, physical characteristics, financial status, religious, political, ethnic, or
other affiliation. All this may limit our possibilities of easier and more effective
communication with other participants, and thus the success of negotiations.
Women are not stupid, all men are not goodnegotiators, good-looking might not be
intelligent, poor people are not less capable. We must not think that way. It may
create a prejudice that it will be too easy or too hard to reach the goal of
negotiation. To reach the goal we must use rational approach and flexibility. If we
use flexibility, crucial feature of successful negotiators, we will always find a way
to dispel prejudice that, during negotiations, may jeopardize the ability to adapt.
All people have their own psychological and mental characteristics that make them
more or less suitable for a successful negotiation. However, the existing human
resources are a reality of any organization and it cannot change overnight. Of
course, in the long term, it is to some extent possible, primarily in the context of
building organizational culture.
Faculty of Business Economics and Entrepreneurship 207
PARTI CI PANTS OF NEGOTI ATI ONS
From the point of negotiation, people as negotiators can be divided into seven
psychological types (for further reading see URL: www.poslovniforum.hr):
? Dominant negotiators are those who want to dominate negotiations. They
use rough tactics and tend to command. They suffer from an inferiority
complex, refute the arguments of others, mostly by being loud. In fact, their
negotiation essentially comes to persuasion, including the extortion.
? Extrovert negotiators have a similar approach as dominant ones. They are
superficial, they use rapid and short negotiation to achieve their goals only.
They devote too much attention to appearance and material environment.
? Introvert negotiators do not confide in anybody, they do not have confidence
in anyone. They rarely agree to negotiations and are very difficult to open.
That is why they need more time and patience from others.
? Innocents are pleasant, polite negotiators. They look like they will do
anything just to end negotiations peacefully. But if negotiations continue for
more than 5 minutes, they turn into dangerous negotiators. On the basis of
calmness and confidence of the other side, they create a feeling that they will
agree on everything. In fact, they turn other negotiators to a subjected
position. In negotiation with them, the other side gets the impression that
they achieved what they wanted, but they soon realize that the agreement
was more suited to the others.
? Actors are negotiators who use all kinds of acting, from a recognizable
image, to unusual behavior. It may seem that they more appreciate the form
than the outcome of negotiations. Yet, they prefer the effects of negotiations
to the form.
? Philosophers are negotiators recognizable by their unpredictability. They are for
something, and then, in a second, they change their mind and are against it. They
look like they do not know what they want, but they know it very well.
? Guardians are conservative negotiators, full of common sense. They believe
in traditional values. Their goal is to have a positive result of negotiations, to
keep both sides satisfied. They do not like persuasion. From the ethical point
of view, they are the fairest.
After enumerating the characteristics of individual negotiators, there arises a
logical question about the main characteristics of a good, real negotiator.
Characteristics of real negotiators are:
? Knowledge (intelligence)
? Negotiating skills (experience),
? Honesty (fairness). They take care of their own as well as the interests of the
other negotiating party.
? Pragmatism. They do not ask the impossible, they set realistic and
achievable goals.
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? Flexibility. They use a variety of options, including trade-offs and
compensation from both sides.
? Inventiveness and creativity. They have an idea of the various possible
alternative solutions to problems.
? Visioning. They bear in mind cooperation in the future in order to resolve
the current negotiations quickly, easily and favourably.
TYPES OF NEGOTI ATI ON
There are different forms of negotiations.
1. By the location of negotiation, it is divided into internal and external
negotiation (Jovanovic, 2005, p. 232-233).
Internal negotiation is performed within the company. They include
negotiations with management about current and developing enterprise, about the
distribution of resources between different departments, negotiations between
management and unions over pay and conditions, negotiations of different levels of
managers on how to organize a joint venture, negotiations of managers and their
subordinates about solving of a problem, negotiations and discussions on the
reorganization, etc.
External negotiation is done with stakeholders, with people outside the company.
This is related, for example, to the sale of certain products or services, the purchase of
certain raw materials, negotiations aboutsecuring the financial means,joint work and
realization of certain enterprises, information on integration, etc.
2. Due to the factor on which they base their thinking and reasoning, there are
intuitive and rational negotiation.
Intuitive negotiation is based on emotions, self-confidence, intuition, the
"voice within". In practice, a much larger number of people uses it than it is
commonly believed. When deciding on some minor issues, it can be understood
and justified. But when deciding on some crucial issues, with major consequences,
it can be very risky. Some managers negotiate this way, due to their overload,
overwork or lack of time.
Rational negotiating is based on facts, conscience, understanding, knowledge
and experience. It means calm immersion in fact, reflection and necessary
consultation. It is thorough and much safer.
The main difference between these two modes of negotiation is that intuitive
negotiation is: fast, easy, effortless, automatic, under the influence of emotions
(positive or negative), quite risky. Rational negotiation is: slow, difficult, hard,
logical, conscious, less risky.
3. Given the nature of negotiation,it is divided into: positional, principle and
opportunistic.
Faculty of Business Economics and Entrepreneurship 209
In positional negotiation participants have limited powers. The negotiation
process is usually very long and agreement can be achieved only after hearing all
the controversial details connected to reaching a mutual agreement. These are
usually difficult and lengthy negotiations. Examples of this form of negotiations
are bargaining negotiations between employers and trade unions on wages,
negotiations between buyers and suppliers, territorial disputes, long-term
development programs, and so on.
In principle negotiation, we must first determine the basic objectives and
principles of negotiation and when the participants agree about them, then they try
to reach an agreement. In order to successfully negotiate and obtain an acceptable
agreement, it is necessary to first establish all possible options and to consider each
separately in order to reach an agreement. This is a more favorable form of
negotiation, because both negotiators have a sense of reaching a positive solution
and not a loss, as is usually the case with positional negotiating.
Opportunistic negotiationis a specific form of negotiation that can sometimes
precede positional and principle negotiation, or can be done during breaks or
interruptions, and in the course of negotiations. This form is done indirectly
through secret messages, indirect impact on other negotiators through a third party,
press, media and the like. This type of negotiation can shorten the time of
negotiation, which, especially in positional bargaining, can be very long. It may
also help to avoid interruption or failure of negotiations.
4. Depending on the attitudes that in the negotiation process the two parties apply,
there can be defined different forms of negotiation (Corey, 1994, p. 188-213).
According to Steven Covey, there are the following options:
? Win / win (both sides win)
? Win / Lose (I win, you lose)
? Lose / Win (I lose, you win)
? Lose / Lose (both sides lose)
? Win
? Win / win or no deal (both sides win or no deal).
Win / win. All parties involved are satisfied with the decision and wish to
participate in the activities. There is enough for everyone, and the success of one
side does not mean the failure of others.
Win / Lose (I win, you lose) is the negotiating process in which there can only
be one winner. Most people look at life in this way since birth, which later
becomes their life philosophy. Of course, if we are in a situation that is really based
on a low level of trust and there is a limited amount of resources to divide, there is
a place for this kind of thinking.
Lose / Win (I lose, you win) is according to Covey worse than win / lose,
because in this case there are no requirements, standards, expectations or vision.
People who have this approach to relationships only want to appeal to others. In
negotiating, such an approach is considered surrender. It is used by those whose
only goal is a good relationship with the other party, regardless of the result of
210 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
negotiations. According to Covey, both win / lose and lose / win are weak positions
that are based on the uncertainty and personal insecurity.
Lose / lose (both sides lose) - When both participants have win / lose mindset,
both sides will inevitably lose. Some negotiators so much focus on the opponent, to
become blind to everything but their desire that the other side loses, even if it
means they lose, too. Divorce is a typical example of this paradigm.
Win - People with this mentality do not consider it necessary for someone else
to lose or win, it's irrelevant. The only thing that is important for them is to get
what they want. According to Covey, this is probably the most common way of
thinking in everyday life. There is practically no real negotiation.
Win / win or no deal - "no deal" basically means that if you cannot find a
solution from which we all benefit, it is better to separate as friends and break up
the negotiations. According to Covey, when we have this option, we feel to have
more freedom. We do not have to come up with a solution at all costs, and we can
really try to understand the other side.
All of these solutions can be reduced to two basic forms of negotiation:
competitive (win-lose) and consensual (win-win).
The first form, the so-called competitive negotiation, is based on the principle
"win - lose",which means that one party wins and the other loses. This is a
negotiation that takes the form of competition of two opposing sides, each trying to
impose their interests. Negotiation is hard, conflicting and usually long, often with
an uncertain ending. The most common negotiation endingis when one side
achieves a significant advantage, or when a party deviates from its hard line and
wants to put an end to negotiation. This occurs when one party knows the goals of
the other side and the final point where it wants to go to. It also happens when one
side is pressed for time and wants to finalize the negotiation process.
The second form, the so-called consensualnegotiation, is based on the
principle of "win - win", which means that nobody loses, both parties win. It is a
negotiation that takes into account interests of both sides. To make this form of
negotiation successful, it is necessary that both sides want to reach a mutually
acceptable solution and that they are ready to analyze reasonable and advantageous
solutions for both parties. It is believed that this is the most advantageous form of
negotiations, which leads to the satisfaction of both negotiators.
From the ethical point of view, consensual form of negotiation is the most
acceptable form. In order to be successfully used in practice, the negotiating parties
are advised to follow the following principles.
? Viewing the problem from the point of view of the other side. Trying to
understand the other side and its needs.
? Identifying the main issues involved in the negotiations (not positions).
? Identifying the results that would be perfectly acceptable.
? Identifying possible new options to reach these results.
Faculty of Business Economics and Entrepreneurship 211
From the ethical point of view, negotiation should not be directed solely at
achieving the highest possible economic effects. Sometimes non-economic effects
may be more important. You need to look at long-term goals and interests -creating
trust, advertising, winning the market, understanding the position of a business
partner important to us that can sometimes be unfavorable. This form of
negotiation is from the ethical point of view the most acceptable solution. It arises
in a situation with a high degree of trust among negotiators. It is based on reality,
benevolence and understanding of the situation.
CONCESSI ONS I N NEGOTI ATI NG
Concessions are also an element of negotiation. They have a very important
role in this process. Some even believe that they have a central role. They are the
heart of the negotiation process. If there were no concessions, there would be no
negotiations. If one of the negotiating parties is not ready for any compromise, then
the other must give in, or they will reach a stalemate and there can be no
negotiation.
That is why people who begin negotiations always expect to get some
concessions. They are also prepared for demands from the other side,respectfully.
Concessions are changes of the original offer in the direction of interestsof
other negotiating party, which also reduces its already stateddemands in return.
There are different types of concessions: by size (large, small), by the amount
(much, little), by the time they are given (initial and final stage of negotiation), by
the speed (fast and slow), by the way (all at once and gradual) (Petkovic, (2011), p.
53-55).
Different people (different cultures, religions, customs) have a different
attitude towards concessions. In fact, everyone understands their importance as an
essential element of negotiation. However, they have a different attitude toward the
act of concession. Some believe that we should make concessions but should not
bargain much. Other people enjoy in it. This is especially true of Oriental people.
For example, if one accepts the full offer immediately or acceptsit quickly, easily,
without much bargaining, they are not happy. They think that they did not make a
good job, because they initially set very modest conditions.
In practice, each negotiating party in the beginning of negotiation processstarts
from its own area of interest. This zone has the lowest critical point as the "last
price", "final offer" and so on. This means that they know exactly how far they can
go, and where to stop with concessions. Each side tries to keep a secret about their
interests of negotiation, while trying to find out more about the area of interest of
the other. This once again confirms that the process of negotiation, and the
concession process connected to it, is very complex and requires a lot of patience,
knowledge and skills.
212 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
There is also strategy and tactics. According to our strategy we know that we
must give in, how much, to what extent. Tactically, we estimate when and how to
make concessions.
Negotiation takes place slowly, in stages. In the way of negotiations, there
appear concessions. In the beginning, we give small, less significant concessions,
and later – bigger ones. It is determined when to make the biggest, or the latest
concession. It depends mainly on the behavior of the other negotiating party.
Given the importance and great presence in the business life of the negotiation
process and related concessions, there are manybooks written about it. There are a
number of ideas and suggestions. Some have even attempted to systematize and
make certain models, templates for making concessions. However, just as all
negotiationsand almost all their elements are specific, so is the case with
concessions that accompany them. That is why these specific, diverse and dynamic
processes cannot be shaped into the form of a template. Bargaining and
concessions are among the very few functions in a company, which cannot be fully
standardized. However, this does not mean that some recommendations in this
regard should not be known and used in practice. Such recommendations are
usually the following:
? It is good to plan concessions ahead. Planned concessions are less painful
than those that are unplanned, given under pressure.
? When planning any negotiation, we should leave enough space for
concessions.
? As much as it is possible, we should try to open the other side, to find out its
basic intentions, interests and possibilities.
? For our part, we should give some information so that the opposing party
gets the impression of our willingness to cooperate. However, the
information should not be the most important, but some less important.
? It is good to be the first to give a smaller concession, but last when giving
the biggest concession.
? We should exaggerate every concession given and attach greater importance
to it than it objectively has.
? For each concession given we should try to get something in return - "tit for
tat".
? During the time of negotiation and exchange of concessions, we should
watch the other side’s "body language", non-verbal communication: eyes’
reaction ("eyes are the mirror of the soul"), changing the face colour,
nodding, hand gestures, posture, etc. These thingscan lead us to conclusion
whether the other party is satisfied and whether the end of negotiationsis
near.
Faculty of Business Economics and Entrepreneurship 213
ETHI CS OF NEGOTI ATI ON
Ethics as a science of morality, among other things, determines the moral
norms that prescribe what is moral and what is immoral, what is allowed and what
is forbidden, illegal. There are certain norms that are universal, applicable to all
civilized societies. There are also certain moral norms that are related and are valid
only for a particular culture, religion, nation. There are even narrower moral norms
that are connected only to specific structures, professions-ethics of doctors,
professors, judges, customs officials, military officers, sportsmen, etc.. There are
individuals who, because of their origin or the educational system, have moral
standards that are lower or stricter than the officially accepted moral norms.
Problems in business arise when some individuals accept the principle that
everything that is not forbidden is allowed. There especially arise problemsin
international business, where members of different religions, cultures, nationalities
meet. Such is, for example, the case with corruption, which is in the countries of
Europe or America considered not only immoral but also illegal, compared to most
countries in Asia, Africa and South America, where it is almost legalized.
Such is the case with signing and respecting of contracts. Countries of Europe
and America are for strict observance of all provisions of the contract, while in
most countries of Africa and Asia (China, Japan, Korea) a contract regulates only
general cooperation, and details must be further discussed.
That is also the case with tax paying or tax evasion. In the first group of
countries, tax evasion is considered one of the gravest violations and is strictly
punished. In a significant number of the second group countries, it is considered
normal that companies do the book-keeping in three ways, in order to avoid taxes.
There are differences in terms of basic elements of business ethics and
corporate culture: respect of deadlines, punctuality of arrivals at business meetings,
relation to business gifts and so on.
Because of these differences, there are also differences in the process of
negotiation. The first group of countries has maximum respect for the ethical
principles of negotiation, while others believe that it is not immoral to use unethical
means (fraud, bluffing, lying, etc.). Some countries even think that there is no
negotiation ethics that should be respected, but one should be free to negotiate and
use all means available.
Today, under the influence of globalization process, individual countries and
continents connect and the negative views are seen as relicts from the past and are
increasingly being overcome.
For normal and successful completion of the negotiation process, it is essential
that there is adequate environment. The environment should be characterized by an
atmosphere of trust, safety, relaxation, good faith, optimism, hope of success.
Participants in the negotiations should be on an equal footing, free, without any
pressure, obligations and restrictions. They should freely expose their views and
protect their interests.
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Such a good negotiating environment can sometimes be compromised.
Disturbance is usually seen in the form of disorganization, tension, hostility and too
friendly atmosphere (Petkovic, ibid, p.55-62).
Disorganization manifests when one or both of the negotiating parties come to
negotiations unprepared or under-prepared. It is clear that without a good
preparation there can be no successful negotiations. In this case,one should stop
disorganized meeting and immediately start organized preparation for the meeting.
Having done the necessary preparation, one should define the agenda, start the
meeting and work strictly according to the previously defined agenda.
Tension may occur due to various reasons. Again, the most common is
inadequate preparation. If everybody is aware of it and agreesthat negotiation
process is not performed in a satisfactory manner, tension can be relieved by
having a break, by informal conversations, so that people get to know each other
and relax, and then start over the negotiation.
Hostility also occurs when negotiators are not prepared, when agenda and
goals of the meeting are not clearly defined. Negotiator who initiated the meeting
should take more decisive position, and find and analyze reasons that created
hostile atmosphere. When things are clear, hostile atmosphere will evolve in a
friendly and relaxed, and conditions for normal work will be created.
Too friendly atmosphere is created by inexperienced negotiators. Because of
the importance and responsibilities of the job, as well as lack of knowledge and
experience, and sometimes lack of information, negotiators are afraid, they don’t
have confidence. To cover it up, they try to be overpolite. They forget that
professionalism has its principles. Kindness cannot be a substitute for
professionalism. It can only emphasize it and make it more elegant, more
acceptable. Someone with more experience should direct and animate the
negotiations.
To avoid these things from happening, a proper preparation of the negotiation
process must be done beforehand.
The negotiation process is not simple and routine communication, it involves
certain preparations (cognitive, mental, psychological, ethical, etc.) ofnegotiator,
designing a specific environment and overall atmosphere of the negotiations. This
may significantly affect not only the ease of negotiations, but also their very
outcome.
The results of research show that the success of a meeting is directly related to
its preparation. This relation is obvious, so that for every hour of the meeting "face
to face", you need to spend at least four hours preparing it. Of course, it is not just
about professional and mental preparation, but also a complete environment of
negotiations. It is very important that the space is adequate, clean, ventilated,
sufficiently heated or cooled.
The location of negotiation is very important, too. It may be at one or the other
negotiating party or at a neutral location. Every possible solution has its pros and
cons.
Faculty of Business Economics and Entrepreneurship 215
It is believed that the party who is hosting has a slight advantage. As
negotiations are conducted in its premises, it has the advantage of all the data at
hand. A negotiator can use a break to consult with his/her superiors. But the other
side also has certain advantages. It does not have to make the final agreement, it
may seek to delay the final decision because of the need for consultations. Also, it
is good for it to see the whole potential and infrastructure of the other company,
which will give it a more complete idea for bargaining and the next cooperation. It
is also very important to see the contacts, the credibility of a person who is
participating in the negotiations. This information will be valuable for taking a
position in negotiations.
To make negotiations successful,we should pay attention to the following:
Never be late for negotiations. Negotiations begin at the moment when you
appear (you send the first messages by your looks, your movement, your clothes,
your perfume). You don’t have much time to leave a good first impression.
Negotiations are based on communication (sound, words, voice, movements, body
language - presentation equipment, video beam...).
Be well informed. Before negotiations, a good negotiator should gather all the
necessary information on the subject of negotiations, on the other party, metaphors
and quotations that can be used. The strongest weapon of negotiators are facts that
are used to win the other side. Therefore, you should collect the data and store
them methodically, and you should know where to look for information or data that
may be needed during negotiations. Professional negotiators write down all
interesting things that they notice or read every day, and at the end of the day, they
arrange them. It is good to write down the thoughts that you hear during a
conversation. You should make your files and archive them.
Creating trust. You should believe in yourself and have self-confidence and
thusyou will make others believe that you are the person to be trusted. Present
yourself as a reliable, responsible, organized and efficient person who knows how
to achieve your goals, but also make for others possible to achieve their. It is easy
to fool someone who trusts you, which is immoral. But, usually, it can happen only
once. Lost trust is difficult to regain.
Creating a sense of importance. Someone can call this praising, some flattering
and some obsequiousness. You should praise other people in their presence. Find
something in the other party which you truly admire and praise it to the skies.
Flatter other side and entrust them to a secret to show them they are trustworthy.
Mix the bitter with the sweet, because if you put a little bit of criticism with praise,
it will sound more honest. Compare them with somebody better, for example, tell
them they are a lot smarter than someone who has a better car or more money, etc.
Creating a relaxed atmosphere. The feeling of confidence and personal
significance can lead to relaxation and pleasure. Relaxed and happy man will more
easily accept the terms of the negotiations and allow you to reach your goal. Create
a relaxed atmosphere. Choose a calming color of walls, soft music in the
background. Your voice should be calm, comprehensible and pleasant.
216 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
For clear communication during the negotiation, try to apply some of the
following tips. Let your speech be comprehensible, attractive and reliable. You
should watch the other negotiator, maintain eye contact, but avoid the hypnotic
stare. Avoid interrupting other negotiators, allow them to express themselves fully
and freely. Then ask questions related to facts, to clarify your observation.
Analyze nonverbal signals. Do not let the voice, looks or gestures of other
participants influence the content of the message. In the case of conflict of interest,
keep calm, professional attitude. Always let the other participants know that their
goals are important to you and that you strive to find a solution good for
everybody. Your behaviour must be believable, andalways acceptable.
Do not take gifts to negotiations, or if you feel the other side may be happy for
them, then let it be only symbolic signs of attention. Expensive gifts can be
understood as attempts at bribery, which weakens or completely hinders your
negotiating position.
UNETHI CAL BEHAVI OUR AT NEGOTI ATI ONS
In addition to the normal, ethical, professional behaviour, there is also
unethical behaviour. In some cases, there is a lot of such behaviour, and sometimes
it is rare. In civilized, more established, reputable environment, such behaviour is
almost non-existent, and in primitive communities there is a lot of it. Sometimes
even more than we can imagine and expect.
With the advent of various crises and generally turbulent business conditions,
there appeared such behaviour even in some countries where it wasunusual before.
This also happens when there is a meeting of negotiators from different
civilizations, cultures, religions, value systems.
Unethical behaviour in negotiations are manifested through various forms of
the so-called "dirty" negotiating tactic. These are different forms of manipulation,
bluffing, lying. There are various forms of exploitation and abuse of power,
pressure, ultimatums, blackmail, creating a stalemate or different types of
impediments.
It starts with creating a bad negotiating atmosphere and endswith extortion of
certain demands or fulfilling some interests. This is most often achieved through
one of the following forms (Petkovic, ibid, p. 63-65):
Creating an atmosphere of mystery and expectation. Do not let the other
negotiator put you in a state of anticipation, creating an atmosphere of secrecy and
mystery. Ask for an explanation of what you do not understand, even ten times if
necessary. You have the right to get accurate and clear picture of what you
negotiate about.
Using pressure. Pressure may be seemingly decent, and it can be rough. The
most common form of pressure is force. Threatening a business partner, standing
too close to his face, and other forms of force are a thing of the past. Psychological
Faculty of Business Economics and Entrepreneurship 217
pressure may force someone to agree to some conditions, but dominant negotiators
will always look for something more. In this case, you must learn to say no, stand
up to the pressure and say no, I do not accept it.
Creating discomfort. Discomfort is the kind of pressure which some
negotiators use to force the others to promptly stop the unpleasant situation, often
accepting unfavorable solutions.
Creating anxiety. Dissatisfaction with the opinion of others about ourselves,
over-reliance on the opinion of others, fear and uncertainty can make you withdraw
into yourself or start a conflict with the environment. Anxiety, as such, is fertile
ground for taking control over you, in which case you lose negotiations.
Creating the feeling of dependence. Dependence on other people's opinion and
expectations of their acceptance creates fear of the person whom we depend on,
leading to uncertainty. Therefore, make a list of the people whose opinions you
care about, and do not allow others to influence your mood.
Creating fear. Fear affects behaviour, blocking the nervous system and makes
us more sensitive to other people's goals. The most common fears of negotiators
are fear of oneself (of being ignorant, of not be able to understand the other sideand
fear of physical reactions) and fear of the other side. Fear of being ignorant starts
from ignorance of the issues you negotiate. Being unprepared and lack of
knowledge can lead to the fear of unknown and from the start, put a negotiator into
a subordinate position.
The notion that you are in a subordinate role will block you with fear that takes
control of your nervous system, and can lead to serious physical consequences, as
panic attacks. Negotiation requires knowledge and constant readiness to creative
improvisation in expressing ideas and thoughts. Negotiations should be planned,
using notes or plan of presentation canprevent fear. A good negotiator relies on
facts, good presentation, confident demeanor and proper use of voice. All this leads
to self-confidence that is a prerequisite for the successful presentation of thoughts.
Creating and encouraging aggression. Aggressiveness in negotiations usually
occurs as a result of fear and insecurity. Negotiators who have high expectations
and low opportunity of exercising them, will resort to aggression to achieve their
goals. It is possible that they will try to induce aggression in others in order to
make them subordinate to their goals. Aggressive man may lose control and react
without thinking about the consequences. And that is what your opponents want,
they want you to make a decision without thinking about the consequences. If your
opponents affect your behavior,they will also affect your decisions.
Creating stress. Stress is often a consequence of shorttime and set deadlines,
regardless of whether you specify them or someone else imposes them on you.
People who have fast pace of life become victims of pressure and they do not have
enough time for all that must be done in a day. Stress also appears when the other
side tries to make you think or act faster than you are capable of (insisting on quick
decisions, quickchange of proposals or opinions). Under such pressure, you may
make wrong decisions, which is the goal of your opponent.
218 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
You should avoid stress with good self-control and using some of the
relaxation techniques. You should never try to negotiate when you are tired and
discouraged. Do not accept the imposed pace of negotiations if you cannot follow,
but choose the pace that suits you.
THE PROCESS OF NEGOTI ATI ON
Although a lot of different elements are present in negotiation, the key element
is still speech, language, word, meaning, as means to communicate our intentions
and hinder intentions of others.
If, during negotiations,you notice that respondents do not understand or do not
think too much about the topic of conversation, you may use louder speech,
movement and gestures to make them more observant. In case the other side is
intelligent and interested in the topic, you should apply a more subtle approach,
filled with, for example, humor, communication that you will convey with the
appropriate tone, words and movements. If your voice is flat, without expressive
and powerful tones, you will give away the impression of fear and insecurity, or
even indifference. The lack of coordination between thoughts and voice makes an
indecisive voice, which occurs mostly with the negotiators that are not sure what
they are talking about. The cure for such things are notes, which should help the
speakers establish a connection between the brain and voice.
Style of speech is a matter of personal choice of each negotiator. It involves a
good knowledge of grammar, knowledge of word meaning and skill in formation
of sentences. Your respondents expect of you expertise, knowledge of grammar,
which is visible from the correct stacking of words in a sentence, proper separation
of words and proper use of pause. Rhetorical pauses retain the attention of
participants, dramatic pauses stress the importance of that part of speech, and
pauses for air intake must not interfere with fluid discussion. Fast talking
negotiators, who are in the habit of talking before they could think, are difficult to
understand and people may get the impression that they just want to quickly wrap
up the negotiations. Do not accumulate unnecessary words in the debate in order to
impress others as a learned person. Some will see it as your attempt to get more
time because you do not know what to say at that moment. Your speech should
contain no unnecessary words, it should be clear, simple and easy to understand,
but never dull.
The meaning of words. In preparing for negotiations you must be sure that you
know the meaning of words you may use. Do not use Latin words to impress the
other side if you did not check their meaning in a dictionary. The first time such a
mistake may be taken as a cute mistake, but frequent errors could lead to negative
reactions of the other side. Do not use words that, in the local vernacular, may have
a different meaning (often vulgar and offensive).
Faculty of Business Economics and Entrepreneurship 219
Caring for the listeners. Tactics is important for a positive acceptance of your
thoughts and arguments. Do not use the speeches and presentations that cannot be
doubted, you could create aversion. The message will be the same, but the level of
non-acceptance will be lower. Make easy for your listeners to understand your
words by repeating important facts. Avoid mumbling and repeating various
catchphrases like hmmm, well, you know. Use warm and gentle humor and good
spirits. Speaking without listening is a one-way street. Hearing someone does not
mean listening. Physicalact of listening does not mean that words are understood.
Sometimes the pace of listening is faster than pace of speaking, soa listener has
time for his own thoughts, and sometimes the listener estimates that there is no use
of listening and rather amuses him with his own thoughts.
When does not-listening occur? When your listenerkeeps silent and listens to
you, but shows no signs of interest, does not comment on your words or ask
questions.
People often listen to only what is interesting to them, and sometimes they
listen to what they do not want to hear. During the debate, while listening to others,
some people use that time just to clear their minds and start talking as soon as they
have the chance, and sometimes they listen lurking for the wrong words of their
opponents. Remember that those who do not know how to listen, cannot make
others listening.
What to do when your listeners indicate that they hear you, but they are not
listening to you? If they are not interested in what you are saying, change the
subject. If you speak monotonously,try to sound more emotional and speak faster,
and if you start repeating yourself or you speak too much about yourself, again
change the subject. Turn not-listening to listening so that your listener understands
your message and beginsspeaking and you start listening.
Show to the other speaker that you are listeningby repeating and describing
what he said, ask questions, try to guess his thoughts and emotions, ask for
explanations of what you do not understand, and finally repeat his key thoughts and
messages.
The effectiveness of listening will significantly increase if we decide in
advance that we will listen, if we do not talk too much during negotiations, if we do
not use silence to think, we keep eye contact, ask and repeat the main ideas, we do
not interrupt speakers and avoid movements that interfere with negotiations. We
should not forget that good negotiators listen carefully, and the best negotiators do
not miss anything. During negotiations, we must not allow others to interrupt us
with comments, but listen what we want to listen, think in advance and model our
expectations to it and not let emotions put us out of balance. If necessary, check
things two or more times, ask appropriate questions, so that the other speaker sees
that we are interested in the solution. Only if we receive the full message,we will
be able to handle it effectively. People have two ears and one mouth, so let it be the
proportion in which they should be used. So, it is more important to listen than to
talk.
220 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Sense of time is an extremely important characteristic of a good negotiator.
We need to know how long our speech will be before we begin to speak. Some
negotiators deliberately ignore the sense of time in order to create pressure on the
other side. When negotiating, you should plan no more than one quarter of the time
for introduction, two quarters for the main part of negotiations, and the last quarter
for conclusion. Even in negotiations that are not limited by time, you should not
leave more than 10 minutes for conclusion. Always leave several safety minutes
for unpredictable situations during discussion. Do not show before the other party
that you are a slave to time, so as not to leave the impression that negotiations are
done worrying more about the time than the other negotiator and the actual
situation.
Other processes such as phonics, panting, trembling of voice, facial spasms,
etc.are complex processes in which there is a series of voluntary and involuntary
movements, which are not desirable. The movements that we do unconsciously
(frowning, licking of lips, loud swallowing, brows lifting, twitching of lips) - reveal
some of our internal states. Theother negotiator will understand this as our
weakness and a sign of crisis, and try to use it against us. In this regard, the
extremely negative phenomena are tics - unpleasant, little, repetitive, involuntary
movements.
Dressing and personal hygiene. We make our judgment about our surrounding
on the basis of what we see. Although it is said that clothes do not make the man, it
still says a lot about him or her.
The fact is that your satisfaction with someone's appearance will affect your
opinion. And the other way round, if you make a good first impression, you are on
a good way towards the successful completion of negotiations. There is no second
chance to leave a good first impression. So, you should not wear brown shoes with
a black or dark blue suit, checked tie with a striped shirt, white socks, cowboy hat
and so on. But also, do not wear your best evening suit if you negotiate with people
who can barely make ends meet, with union strikers, and so on. Although it goes
without saying, it is good to be reminded on the importance of personal hygiene
(clean and tidy nails, washed hair, no bad breath, neat beard and mustache, etc.),
which can only contribute to your self-confidence, and with that – easier and more
successful negotiation.
PHASES OF NEGOTI ATI ON
Every day there is a growing number of participants in business processes,
especially the key ones: owners, managers, entrepreneurs, advisors, etc., which
puts them in a variety of negotiation situations with different participants. It is
expected that they have a considerable degree of communication skills and all the
other prerequisites for successful negotiation. This is the reason that modern books
on this topic pay more and more attention to knowledge and skills of negotiation as
Faculty of Business Economics and Entrepreneurship 221
a subtle "tool for fine-tuning" of the business enterprise towards its successful
realization.
So, negotiation cannotbe obligation or privilege of only a few selected and
certified, high-quality, experienced professionals, as it used to be. Today, the
strategic emphasis is placed on managing relations with suppliers, customers,
contractors, financiers, government bodies, etc. Therefore, negotiation has become
a very important process that has a direct impact on the achievement of the overall
business success of companies.
The important novelty in the approach to negotiation is systematics, which,
among other things, means that the negotiation process is broken down into several
phases: the preparation phase, the course of a negotiation and the phase of revision
of a negotiation. In this way, using different techniques and resources,we try to
achieve maximum possible additional value to each of negotiation activities.
The first, and, in the opinion of many scholars and practitioners, the most
important phase of every negotiation process, is the preparation and planning of the
negotiations. Generally, this stage is attributed to the 70 to 90% of the success of
the negotiation (Tomaševi?-Lišanin, 2004), Negotiation - business process that
gives value, "Proceedings of the Faculty of Economics in Zagreb," year 2, No. 1).
At this stage, it is necessary to identify and study the available sources of
information, and based on that, determine our needs, demands and possibilities,
and based on them better evaluate business partners with whom we negotiate. In
this phase, we should take into account not only organizational demands, but also
individual characteristics and demands of people who participate in negotiations.
We should not forget that although negotiators present their organization and try to
achieve specific organizational goals and needs, each of them enters negotiations
asa person and an individual with their own individual needs. Both of these should
be taken into account. A good analysis of needs of both sides means the ability to
find a "win-win" solution that will satisfy both sides,no matterthey enter
negotiations because of the existence of disputes or conflicts of interest.
Prior to the commencement of negotiations, we need to determine how far we
can go in giving away, i.e. what we want or can give to the other party. In addition
to the established baseline, maximum, minimum and target positions,we should
predict expected objectionable points that could be crucial or problematic in the
way of coming to an agreement. Also, it is necessary to consider and anticipate
different scenarios and alternatives, acceptable, positive outcomes. The
collaborative, or "win-win" approach to negotiations, preparations should include a
lot of seemingly minor issues such as the determination of location for
negotiations, setting equal number of members of the negotiating team, the ambient
and seating arrangements of negotiators, refreshments and short breaks, with the
aim of making stimulating and pleasant atmosphere for all parties involved. In the
“win-lose"approach,in preparation they usually think about various traps, the ways
of expressing power, as well as the number of available manipulative techniques
that will help with the attempt to put pressure and be dominant over the other side.
222 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
The second phase of negotiations is a negotiating session or meeting where
two sides are trying to reach an agreement. At the beginning of the meeting it is
necessary to do everything to reduce tensions and to express intent and desire for a
successful outcome of the negotiations for all parties involved. A negotiating
session essentially consists of the following elements: coordination and
confirmation of the agenda, expressingof views on the situation, presenting
concrete proposals, debate about the differences in viewpoints, arguments,
discussing possible solutions, compromises and attitudes that are the subject of
possible exchange, and finally negotiating the terms of exchange. When making
concessions, we should always try to get the same value in return not agree on what
we do not like. Otherwise, we may come out of negotiations with badresults. At the
beginning of a negotiation process, we should clearly express what we want to
achieve with negotiations and ask the other side to do the same. It depends on pre-
approved tactics what will be presented as our wishes. It is usual not to expose
immediately the desired final goal, but to start with bigger demands and thus leave
some space for later concessions and negotiations.
When both sides express what they want,it is time to start with the
determination of similarities and differences. To make the process of negotiating
effective, it is necessary to start with solving the problems and discussing the
differences. It usually starts with smaller problems and differences.
The discussion should lead to reducing the differences and preparation for
making compromises. From minor differences and easily solved problems, we
should go to bigger differences and larger problems and solve them patiently and
slowly, one by one. It is very important that the atmosphere in the negotiations is
good and that both sides are willing to make compromise and agreement.
Compromise is a key part of the negotiation process, and without it there can be no
agreement.
The aim of the whole process of negotiation is to reach an agreement. The
agreement is finally reached when all differences are removed and all important
issues are resolved. To end the process of negotiation effectively,the agreement
needs to be formulated accurately and clearly and written downin a form of a
contract, agreement, etc. This is especially important and necessary in larger
purchases and sales, realization of major enterprises, etc. In this case, drafting of a
contract requires special procedures and time for completion.
The third phase occurs only if there is a unilateral deviation from agreement of
one of the negotiating parties or there appear new or changed circumstances which
require new, redefined negotiations.
When concluding this review of the business negotiation as an important
element of the business process, i.e.the factor of the success of a business
enterprise, we should say that each business subject should see negotiation as a
powerful tool, which can help to win a lot, but also lose a lot. It is always important
to set clear goals, to aim high, to target the best possible result. Therefore, in
addition to being clear, business objectives must also be attainable and time
Faculty of Business Economics and Entrepreneurship 223
determined. Also, the more we know about the other negotiator,the more we can
accomplish during negotiations.
Finally, it should be noted that there is an opinion,which is empirically
confirmed, that knowledge contributes 15% to the success of a negotiation, and the
ability to communicate 85%. In addition, verbal communication contributes only
45%, and non-verbal communication 55%.
CONCLUSI ON
The entire process of the analysis shows that business negotiation is a heart of
every business process. Without negotiation, any human activity would be
impossible. That is why negotiation is sine qua non of every human activity and
survival of society in general.
With the development of human society in economic and civilizational terms,
the negotiation process becomes more complex, complicated and sophisticated.
Therefore, we must constantly study, develop and improve negotiation process.
Studying and developing of the process of business negotiation must be
conducted from different aspects, and above all, from technological,
organizational, economic, socio-psychological and ethical aspects.
In the future, human society will primarily develop as an information society.
In advanced information society, negotiation in general, and, especially, business
negotiation will be faster, better, more complex, and also more humane and
dignified.
224 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Corey, R.S. (1994), Seven Habits of Highly Successful People, Belgrade:
Grme?.
[2] Jovanovic, P. (2005), Management, Belgrade: Faculty of Organizational
Sciences.
[3] Pejanovic, R. et al. (2012), Economics and Ethics, Business and Moral,
Belgrade: Proceedings from the First International Conference Employment,
Education and Entrepreneurship, Volume 2, Employment, p.165, Faculty of
Business Economics and Entrepreneurship.
[4] Petkovic, V. (2011), Business Ethics, Belgrade: Faculty of Business Economics
and Entrepreneurship.
[5] Petkovic, V. (2009), Entrepreneurship, Belgrade: Faculty of Business
Economics and Entrepreneurship.
[6] Petkovic, V. (2006), Management of Human Resources, Belgrade: Faculty of
Business Economics and Entrepreneurship.
[7] Pokrajac, S. (2008), Entrepreneurship, Novi Sad: Alpha Press.
[8] Tomaševi?-Lišanin, M. (2004), Negotiation - business process that gives value,
Proceedings of the Faculty of Economics in Zagreb. Zagreb: Faculty of
Economics, year 2, No. 1.
[9] Vukosavljevic, D. (2012), More Flexible Approach to SMEs Financing and Job
Creation, Belgrade: Proceedings from the First International Conference
Employment, Education and Entrepreneurship, Volume 2, Employment, p.233,
Faculty of Business Economics and Entrepreneurship.
[10]http://www.poslovniforum.hr, 25/4/2014
Faculty of Business Economics and Entrepreneurship 225
AMICABLE FINANCIAL RESTRUCTURING OF
COMPANIES IN REPUBLIC OF SERBIA
Vladimir Kozar, PhD
21
Ana Opacic, PhD
22
ABSTRACT
Legal consequences of an amicable financial restructuring of business
companies are important both for the corporate debtor and for its creditors.
According to the order of creation, they can be divided into those that act
independently of the outcome of the restructuring process and prior to its
completion such as debts stand-by (moratorium), and those that are arising from
the conclusion of the contract on financial restructuring, following the successful
completion of the procedure. An effective protection measure of creditors’ claims
during the moratorium is limitation of powers of statutory representatives in the
form of mandatory countersignature. The consequences arising from the
conclusion of the contract are reflected, primarily, in redefining of debtor –
creditor relations, foreseeing of repayment in instalments, modifying terms of
maturity, interest rates and other terms of the loan or collaterals. An important
result is the retention of the order of priority of mortgage.
Tax incentives for the banks and other creditors, the participants in the
financial restructuring, are provided. Absolute right transfer tax was abrogated on
the transfer of shares in legal entity and securities, which refers to the measures of
converting receivables into capital of the business company – corporative debtor.
Contract on financial restructuring constitutes legal grounds for the
reclassification of banks’ claims, thereby reducing the mandatory reserves for the
potential losses and has a positive effect on capital adequacy of the banks.
Key words: Financial Restructuring, Sebts Stand-by, Mortgage, Tax
Incentives, Reclassification of Claims
J EL Classification: K12, K34, K41
UDK: 658.16 347.728.1
21
Vladimir Kozar, Special adviser to the NLB bank a.d. Belgrade and Assistant professor of the
Faculty of Law for economy and justice of Commercial Academy University in Novi Sad, Serbia,
[email protected]
22
Ana Opacic, Faculty of Business Economy and Entrepreneurship, Belgrade, Serbia,
ana.galjak@gmail,com
226 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Amicable (out-of-court, non-insolvency) financial restructuring of a company
represent first in a series of measures which are possible to conduct in relation to a
company which has financial difficulties. Order of measures in such situation in
our legal system is the following: amicable (out-of-court, non-insolvency)
restructuring; plan of reorganization prepared in advance; bankruptcy
reorganization; bankruptcy (Kozar, 2011, pp.8). These institutes, except
bankruptcy, represent ways and forms of recovery of companies, which can be lead
under institution of recovery which is developed for years, and now is not existent
in our legal system (Mi?ovi?, 2011, pp.54).
Law on Amicable Financial Restructuring of Companies (Official Gazette of
Republic of Serbia, 2011, a.18) regulates conditions and manner of amicable
financial restructuring of companies in Republic of Serbia, which is conducted
prior to initiating of bankruptcy proceeding at latest.
Purpose of amicable financial restructuring of companies is timely recognizing
and resolving of financial difficulties and creating conditions for normal
continuance of business activities of a company (corporative debtor). Amicable
restructuring of activity of a company occurs in case that relevant creditors assess
that survival and recovery of a company which has financial problems is
economically justified and manageable, that it should be able to recover and
continue sustainable long term business, and that relevant creditors, primarily
banks, will be able to acquire favourable settlement of their claims. This way, a
company which faces financial difficulties is granted survival and continuance of
business, and at the same time the bankruptcy proceeding is avoided regardless of
the fact that there is long term inability for payment as reason for bankruptcy from
articles 11 and 12 of the Law on Bankruptcy Proceedings (?uki?-Mijatovi?, 2010).
Legal consequences of amicable financial restructuring of companies reflect in
inactivity of debts, which is a result of a proceeding, and if a proceeding is
completed successfully, an agreement on financial restructuring is being
concluded, which defines relations between debtor and creditor.
MEASURES FOR PROTECTI ON OF CLAI MS OF CREDI TORS
DURI NG MORATORI UM
One of base presumptions for successful managing of amicable financial
restructuring of companies is temporary suspension of obligations fulfilment, and
prohibition of initiating of execution proceeding, i.e. postponement of fulfilment of
obligations of corporative debtor towards creditors, primarily banks (delay of
payments, moratorium) (Kozar, 2012, pp. 226). “Delay of payment” is temporary
suspension of fulfilment of obligations, including suspension of execution during
Faculty of Business Economics and Entrepreneurship 227
enforced collection from the account of a company, and prohibition of initiating of
execution proceeding, i.e. postponement of execution towards company concerning
claims of creditors who participate in financial restructuring.
During financial restructuring, delay of payments (moratorium) is being
established, including all executive court decisions, other executive decisions and
legal authorizations, as well as tax, customs and bill of exchange debts from Article
47 of the Law on Payment Operations (Official Gazette of SRJ no. 3/2002, 5/2003,
Official Gazette of RS no. 43/2004, 62/2006, 111/2009, 31/2011), which has legal
effect as from the date of conclusion of an agreement on delay of payments (delay
of payments is regulated by Article 12 of the Law on Amicable Financial
Restructuring of Companies). Therefore, the law does not prescribe moratorium as
legal consequence of process of amicable out-of-court restructuring, which would
incur by operation of law, it is necessary that creditors conclude with a debtor
relevant agreement.
Beside general prohibition of conducting acts which could prevent or
aggravate collection of claims of creditors who concluded agreements on delay of
payments, which is integral part of legal principle of acting in a good faith (Kozar,
2012), it is possible to prescribe special measures of protection of creditors’ claims
in the agreement on delay of payment.
Although it is non-mandatory element of an agreement, prescribed by law –
Rule on Contents of the Agreement on Delay of Payments, allowing stipulation of
special measures of protection of creditors’ claims represents very significant
instrument which contributes to reduction of business and legal risks of creditors
who engage in a project of amicable financial restructuring, whose outcome cannot
be predicted with certainty, with a moratorium as its mandatory phase (Kozar,
2012, pp. 619).
Measures of protection of creditors’ claims include in particular: limitations
and follow-up of payments, settlements of liabilities, debts and other transfers and
transactions of debtors, such as prior or subsequent consent (approval or
permission) or appointing a person authorized for countersigning of documents by
which debtor makes monetary transactions during delay of payments, including
arrangement of matter of responsibilities of this person (Article 3 paragraph 1 point
2 of the Rule on Contents of the Agreement on Delay of Payments). This way, the
autonomous use of various institutes is allowed, by which creditors can control and
follow business of a corporative debtor, e.g. new debts by raising loans, giving
guarantees, establishing mortgages, and concluding other agreements and
businesses which would, by the means of accepting new main or accessory
obligations, burden assets or worsen position of creditors who participate in a
process of amicable financial restructuring.
Prior or subsequent consent (approval or permission) as a measure of
protection of creditors’ claims from an agreement on delay of payments, has
certain similarities with an institute of consent for conclusion of an agreement from
Article 55 paragraph 1 of the Law on Obligations, which prescribes when a general
act of the legal entity specifies and in the registry stated that his representative may
228 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
conclude certain contract only with an approval of an authority, the approval may
be given previously, concurrently or subsequently, unless otherwise stated in the
registry. The difference is that in the first case there is no limitation prescribed by
the general act of the corporate debtor, nor to be registered at the Company
Registry. Also, when it comes to restructuring the limitation refers to the corporate
debtor as the legal entity, and the limitation from the Law on Obligations refers to
its statutory representative. In the first case consent (approval or permission) is
given by the creditors, and not debtor’s authority. Therefore there is a question of
scope of this limitation towards a third, conscientious person with whom the
corporate debtor would conclude a contract or any other legal business on new
debt, without the consent of the creditors provided by the agreement on delay of
payments. In any case, such limitation should be registered so it could have the
legal effect on third parties.
The appointment of the person authorized to countersign documents with
which the debtor performs financial transactions during the delay of payments, as a
measure of protection of creditors’ claims, has greater legal and practical
significance, considering that such person is obliged to deposit its signature at the
bank that maintains the account of the company, and limitation of the countersign
of the documents is registered at the company registry (Article 3 paragraph 2 and 3
of the Rules on Contents of the Agreement on Delay of Payments).
The Rules on Contents of the Agreement on Delay of Payments uses the term
“countersignature” and this limitation ties to signing of “the documents with which
the debtor performs financial transactions during the delay of payments”. There is a
question to which legal transactions the limitation of “countersignature” refers to.
The term “financial transaction” is similar to “payment transaction” which is being
used in the Law on Payment Operations, thus we come to conclusion that by
agreement on delay of payments one can appoint person authorized for
countersigning of payment orders, which the corporate debtor issues to its bank
with instruction for transfer of funds from its account to the creditor, or to the
account of the creditor ( In Article 4 paragraph 1 of the Law on Payment
Operations provides that the payment transaction can be approval transfer or debit
transfer, while in paragraph 3 of the same article defines that the approval
transaction of the payment transactions initiated by the debtor, which payment
order is issued to its bank and given instruction for transfer of funds from its
account to the creditor, or to the account of the creditor.) However, since the terms
“financial transactions” and “payment transactions” do not match “countersigning
of the documents” as the measure for protection of creditors’ claims who
participate in the procedure of amicable financial restructuring, they may be
applied to other legal transactions which govern or provide cash flows, and above
all to conclusion of the new loan agreements, granting guarantees, the
establishment of mortgage, which would worsen the positions of the creditors, the
participants of the restructuring. In this way the creditors are enabled to perform
direct control and influence the business of the corporate debtor, above all through
substitutionary function, and indirectly to the management function.
Faculty of Business Economics and Entrepreneurship 229
There is a question of scope of this limitation towards a third, conscientious
person with whom the corporate debtor would conclude a contract or any other
legal business which performs the financial transaction, without the countersign of
the person appointed by the agreement on delay of payments, when the limitation
of the countersign of documents is registered at the company registry.
The Company Law (Official Gazette of RS“, no. 36/2011, 99/2011) in article
33 stipulates that the representative is obliged to act in accordance with limitations
of its powers determined by the company acts or decisions of the competent
company authorities (paragraph 1). Considering that the signing of the agreement
on delay of payments precedes the decision of the competent company authorities,
it is clear that the representative is obliged to act in accordance with limitations of
its powers which are determined by the agreement on delay of payments, and with
limitation of countersigning of the documents. However, the Company Law does
set the rule that towards the third parties registered limitations of the powers of the
representative (and thus those unregistered) have no legal effect (Vasiljevi?, 2011,
pp.78), stipulating that the limitations to the authority of a representative cannot
stand out to third parties (paragraph 2).
Exceptionally this law prescribes that the limitations of the authorisations of
the representative in terms of the mandatory countersigning can be pointed out
towards third parties, if they are registered in terms with the law on registration
(paragraph 3), so in accordance with the Law on Procedure of Registration at the
Business Registers Agency (Official Gazette of RS, no. 99/2011). This is a
limitation that consists of joint closing a deal by multiple representatives and
procurators (countersignature) (Vasiljevi?. 2011, pp. 78).
Cited provisions of the Company Law on the effects of the registered
limitation of the countersignature towards the third persons, may be applied to the
effect of limitation of “countersigning of documents with which the debtor
performs financial transactions during the delay of payments” as the measure of
protection of creditors’ claims in the procedure of amicable financial restructuring.
This indicates that the “countersignature”, i.e. mandatory co-signature, is the only
effective limitation of the debtor, i.e. authorisations of its representative, of course
provided that it is registered at the Company Registry.
The Rules on contents of the agreements on delay of payments allow
contracting other measures of protection of the creditors which are not explicitly
stated in them, in accordance with the principle of freedom of contracting, which
must be within the limits of the mandatory provisions, public order and good
practice (The principle of the autonomy of choice from the Article 10 of the Law
on Obligations).
In addition to the measures of protection of the creditors’ claims, the stated
rules enable contracting additional security instruments, i.e. guarantees and
warranties.
230 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE CONTENTS OF THE AGREEMENT AND MEASURES OF
FI NANCI AL RESTRUCTURI NG
The financial restructuring ends with the agreement on financial restructuring
(Article 14 of the Law on Amicable Financial Restructuring of the Companies).
The debtor is obliged to deliver the agreement on financial restructuring within the
two days from the day of conclusion to the company registry for registration of the
note on existence of such agreement, pursuant to the principle of legal security.
The agreement on financial restructuring is being notarised at the Serbian Chamber
of Commerce and recorded in a special book (according to Article 12 paragraph 2
of the Rules on terms and manner of institutional mediation in amicable financial
restructuring of the companies).
The agreement on financial restructuring may contain the following measures:
prediction of repayment in instalments, amendment of maturities, interest rates or
other terms of the loans, credits or other claims or security instruments;
encashment of the assets or transfer of such assets for the purpose of settling the
claims; discharge of the debt; execution, amendment or waiver of the lien; giving
additional security instruments by the debtor or third parties, including granting
warranties and guaranties; converting claims into capital; conclusion of the loan
agreement; issuance of the securities; other measures significant for realisation of
the financial restructuring.
Therefore, the law does not prescribe mandatory contents of the agreement on
financial restructuring, but lists the most often measures as an example, and allows
the possibility to contract other measures significant for realisation of the financial
restructuring.
The listed measures of the amicable financial restructuring are similar to the
measures within the homonymous institute of the privatisation process (Kozar,
2008, pp. 64-70), as to the measures for realisation of the plan on reorganisation
from Article 157 of the Law on Bankruptcy.
Faculty of Business Economics and Entrepreneurship 231
LEGAL NATURE OF THE AGREEMENT ON FI NANCI AL
RESTRUCTURI NG AND EFFECT OF THE I NNOVATI ON TO
THE TERMI NATI ON OF THE PLEDGE
By its legal nature, and depending on the measures envisaged for the
realisation of the financial restructuring, the agreement has legal nature of a
settlement from the Article 1089 of the Law on Obligations (e.g. if it provides
repayment in instalments) or innovation from the Article 348 paragraph 1 of the
Law on Obligations, if the existing obligations are replaced by new ones (e.g. if
there is a conversion – conversion of claims into capital) (Kozar, 2011, pp. 56).
In addition, it is possible to combine settlement and innovation, because by
settlement one can perform innovation of the obligation, and in such case the
guarantor is freed from liability for its fulfilment, and the pledge given by a third
party ceases (Article 1095 paragraph 1 of the Law on Obligations). If by a
settlement where was no innovation of the obligation (such as e.g. partial discharge
of the debt or repayment in instalments), the guarantor and third party who gave its
thing to a pledge remain still bound, and their liability can be reduced by
settlement, but not increased, except if they have agreed with the settlement
(Article 1095 paragraph 2 of the Law on Obligations).
However, when it comes to the effect of the innovation to the termination of
the pledge in general, even the pledge given by a third party, and not the debtor of
the secured claim, the Law on Amicable Financial Restructuring of the Companies
in article 15 makes a significant exception in relation to the cited general rule of the
obligation law by establishing the rule of continuity of the lien, and as it is in the
case of the mortgage, so when the claim is secured by a pledge on movables and
rights (Kozar, 2012, pp. 236-250).
SUBSTITUTE OF THE “SECURED CLAI M WHI CH I S BEI NG
RESTRUCTURED” “BY A RESTRUCTURED SECURED CLAI M”
The Law on Amicable Financial Restructuring of the Companies distinguishes
two types of the claims: “secured claim which is being restructured” and
“restructured secured claim”. Even though the used terminology may lead us to
think that it is a play on words, it is important to distinguish the difference between
these terms and two types of claims which are marked by them. For “secured claim
which is being restructured” is replaced by “restructured secured claim”. In this
way the legislator gave the restructuring unambiguously legal nature of the
innovation, because one claim which existed between the creditor and the debtor is
now replaced by new claim (Kozar, 2011, pp. 59), which corresponds to the
definition of the innovation from the Article 348 paragraph 1 of the Law on
Obligations which regulates substitution (innovation) by prescribing that the
232 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
obligation ceases if the creditor and the debtor agree to replace the existing
obligation with a new one and if new obligation has different subject or different
legal grounds. Article 350 of the same law, within the regulation of the effects of
the substitution, in paragraph 1 it is prescribed that by an agreement on substitution
the earlier obligation ceases and a new one comes into being, and in paragraph 2
that with previous obligation the pledge and warranty also cease, unless the
guarantor or pledger agreed otherwise, and in paragraph 3 the same goes for all
other secondary rights that were related to the previous obligation.
In order to avoid the stated unfavourable effect of the substitution (innovation)
in the financial restructuring to the security instruments, which would come to
occur according to the cited general provisions of the Law on Obligations, unless
otherwise was agreed with the pledger that with previous obligation do not cease
pledge or warranty, the Law on Amicable Financial Restructuring of the
Companies establishes continuity of the lien. The claim which is being restructured
and which is secured by a mortgage, i.e. lien on movables and rights (hereinafter
referred to as: a secured claim which is being restructured), is replaced by a
restructured secured claim, to that the mortgage, i.e. lien on movables and rights, as
secondary right related to the secured claim which is being restructured, continues
to exist as the security instrument of a restructured claim, in accordance with the
agreement on financial restructuring (Kozar, 2012, pp. 236-250). Real estate
cadastre, or other registry of lien, performs the amendment of the data of registered
mortgage, i.e. lien on movables and rights, according to the amount of the
restructured secured claim, and other terms of the restructured secured claim. The
mortgage, i.e. lien on movables and rights, represents a security instrument of
restructured secured claim to the amount of secured claim which is being
restructured, and in case that the amount of restructured secured claim is reduced in
relation to the amount of the secured claim which is being restructured, the real
estate cadastre, or other registry of lien performs the amendment of the data of a
registered mortgage, i.e. lien on movables and rights.
KEEPI NG THE ORDER OF PRI ORI TY – CONTI NUI TY OF LI EN
Considering that in the amicable financial restructuring of the companies
several creditors, above all banks, simultaneously conclude with a company as
debtor agreement on debt restructuring, which implies redefinition of the debtor-
creditor relations between the corporate debtor and creditors, this agreement
replaces the existing obligation with a new one, which, accordingly, has a new, i.e.
different legal ground. In terms of the mortgage, and in accordance with provisions
of the Law on Obligations, the Law on Mortgage and Law on State Survey and
Cadastre, as well as accompanying by-law regulations, due to this substitution of
the obligation, the creditor whose claim is secured by a mortgage, in lack of stated
special provisions on continuity of lien from the Law on Amicable Financial
Restructuring of the Companies, would be forced to re-register the mortgage in the
Faculty of Business Economics and Entrepreneurship 233
public records, which would make him lose the order of priority of already
registered mortgage. Having in mind a greater number and difference (often and
conflict) of interest of creditors, in practice it is rarely contracted the ability to keep
the existing mortgage in case of substitutions (innovations), in terms of the article
350 paragraph 2 of the Law on Obligations. The same problem would exist in
relation to the liens on movables and rights. Because of all this, the creditors, and
especially banks, would be discouraged to participate in amicable corporate
restructuring of debts, which would lead to bankruptcy of many companies and
other forms of businesses, which could financially recover and continue business,
and which could end in bankruptcy and discontinuance of business.
In addition, the costs of establishment of new mortgage are additional
demotivating factor for creditors, especially having in mind provisions of tariff
number 8 item 15 of the Tariff of fees for service provision, which is an
accompanying part of Rules of the amount of fees for service provision of the
Republic geodetic authority, in which it is prescribed that for registration of the
mortgage the fee is paid, which depending from the amount of secured claim,
amounts from 20,000 up to 150,000 dinars. However, in tariff number 21 it is
prescribed that for the change of data in registered mortgage (creditor, debtor,
repayment period, interest rate, grace period, currency) fee in the amount of 2,600
dinars is paid. In this way significantly lower fee is prescribed for service of
change of data of registered mortgage, and established the “change of data in
registered mortgage” as a procedure, i.e. process operation.
TAX I NCENTI VES
The Law on Amicable Financial Restructuring of the Companies does not
contain specific provisions on incentives in the process of financial restructuring,
but points to other legislation, which proposing and passing is in the jurisdiction of
the National Bank of Serbia, the Ministry of Finance and the Ministry of Economy
and Regional Development (Kozar, 2012, pp. 85-90). The tax incentives for
financial restructuring, in terms of tax exemption of debt discharge with the
creditors, and possibilities of reprogramming of debt based on taxes and other
public revenues, are determined by law which regulates tax on corporate profit, i.e.
law which regulates tax procedure and tax administration, while the National Bank
of Serbia in regulations from its jurisdiction regulates incentives for financial
restructuring (Article 16 of the Law on Amicable Financial Restructuring of the
Companies).
Amendments to the Law on Property Tax from 2009 (Article 8 of the Law on
amendments and supplements of the Law on Property Tax, Official Gazette of RS,
no. 5/2009) deleted item 3 in article 23 paragraph 1 of the basic legal text, which
provided that the tax on transfer of absolute rights is payable during the transfer
with compensation of the share in the legal entity and securities. Thusly measures
of conversion (replacement) of claims in the company’s capital (the corporative
234 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
debtor) were exempt from this type of tax, which represents significant incentive
for amicable financial restructuring of the companies, and for bankruptcy
reorganisation (Kozar et al., 2013, pp. 267). Such solution was maintained even
after the latest legislative amendments from May 29
th
2013.
Also, amendments and supplements of the Law on Corporate Income Tax,
which is now called Law on Profit of Legal Persons amended Article 22a
paragraph 1 so that at the expense of expenditures in the tax balance of a bank an
increase of adjustment of claims of balance sheet assets and reserve for losses on
off-balance sheet items are recognised, which are in accordance with internal acts
of a bank stated in the balance sheet at the expense of expenditures in the tax
period, up to the amount determined in accordance with regulations of the National
Bank of Serbia, which provides tax incentives for banks as creditors of a corporate
company with financial difficulties.
Regarding the process tax law, amendments and supplements of the Law on
Tax Procedure and Tax Administration provide incentives for amicable financial
restructuring, so that by added Article 74b it is prescribed that the competent
authority may, upon written and reasoned request of the taxpayer who had
concluded an agreement on financial restructuring, in accordance with the law that
regulates amicable financial restructuring of the companies, approve delay of
payments of tax debt in equal instalments up to 60 months, with possibility of
using delay of payments for the first 12 months. Approval of the delay of payments
of tax debt terminates the statute of limitations for collection of the tax debt whose
deadline was postponed, and time for which the delay of payment was approved
does not count into the statute of limitations, which means that in that period there
is a delay of statute of limitations. Minister or person authorised by him decides on
delay of payment of tax debt – based on written proposal of the head of the
organisation of the Tax Administration based on the principal place of business, i.e.
place of residence of the taxpayer – except for the source public revenues of the
local government units, when the decision is brought by the mayor or the municipal
president or person authorised by him, the local government units to which the
public revenues belong to whose collection is being delayed (Article 73 paragraph
3).
In this way, through delay and enabling the payment of the tax debt in
instalments, with grace period of 12 months, the same tax incentive was introduced
for amicable financial restructuring, which in the previous legal amendment was
provided in the procedure of the bankruptcy reorganisation. Additional benefit for
taxpayers who conclude the agreement on financial restructuring is that it does not
require provision of the security instruments when the amount of debt whose
payment is delayed up to 500,000 dinars (Article 74b paragraph 2 regarding the
article 74 paragraph 6 of the Law on Tax Procedure and Tax Administration).
Faculty of Business Economics and Entrepreneurship 235
RECLASSI FI CATI ON OF THE RESTRUCTURED BANKS’
CLAI MS
New Decision on Classification of the Bank Balance Sheets Assets and Off-
Balance Sheet Items (Official Gazette of RS, no. 94/2011, 57/2012, 123/2012,
43/2013, 113/2013), and especially its amendments from December 2012
envisaged incentives for reclassification of banks’ claims based on concluded
agreement on financial restructuring.
The said decision determines which balance sheet assets and off-balance sheet
items are classified, criteria for classification of the banks’ claims, and the manner
of calculation of reserves for estimated losses which may arise based on the bank’s
claims, and for adequate and efficient management of the credit risk to which the
bank is exposed in its business (item 1). The bank’s claims are classified into
categories A, B, V, G and D, according to the criteria for classification described in
item 20. Into the most favourable category A stand classified claims from debtors
with whom, based on the estimate of the financial status or creditworthiness, no
problems are expected, then claims secured by first-class security instruments (cash
deposit, pledge on gold along with fulfilment of some other conditions) and claims
according to which the debtor settles its obligations timely or is overdue no longer
than 30 days. In the most unfavourable category D stand classified claims from
debtors in liquidation or bankruptcy, then claims from debtors who do not act
according to the adopted plan of reorganisation, and claims according to which the
debtor is overdue longer than 180 days and similar.
Reserve for estimated losses is calculated on the gross carrying amount of the
claim, depending on the classification of the claim (item 34), and from 0% of the
claims classified into category A, 2% of the claims classified into category B, 15%
of the claims classified into category V, -30% of the claims classified into category
G and 100% of the claims classified into category D. Therefore, mandatory reserve
for estimated losses ranges from 0% up to 100% of the claims, depending on the
classification. The more favourable classification of the claim, the lower mandatory
reserve for estimated losses is, which represents deductible item from the banks’
capital (The amount of the required for estimated losses per balance sheet assets
and off-balance sheet items is deductible from the basic capital – item 12 paragraph
1 under 6 in relation to the paragraph 3 under 4 of the Decision on the Adequacy of
the Capital of Banks,Official Gazette of RS, no. 46/2011, 6/2013 and 51/2014) and
affects adversely the adequacy of the bank’s capital. The bank is obliged to
maintain a prescribed amount of capital for the sake of stable and safe business, or
fulfilment of the obligations towards the creditors, in the amount not lower than the
dinar equivalent of 10,000,000 euros. Capital adequacy indicator represents ration
between capital and risk-weighted assets. The National Bank of Serbia prescribes
the manner of calculation of capital and adequacy of the bank capital (Article 21
paragraphs 1 and 3, Article 22 paragraph 1 and Article 23 paragraph 2 of the Law
on Banks, Official Gazette of RS, no. 107/2005, 91/2010).
236 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Therefore, concluded agreement on financial restructuring is a basis for more
favourable reclassification of the banks’ claims, because delay is calculated to
subsequently agreed maturity date, and thusly accomplish more favourable
classification of the claim which is being restructured, or restructured claim. Item
23 paragraph 4 of the Decision on Classification of Bank Balance Sheet Assets and
Off-Balance Sheet Items it is provided that the provisions of paragraph 1 and 2 of
this item, which regulate calculation of the delay in payments according to the
original maturity date, are not applied to the restructured claims or to the
restructured claims which are restructured for the second time, only if the second
restructuring is made in accordance with the law which regulates amicable
financial restructuring of the companies, under the condition that the debtor, for at
least three months, i.e. three consecutive months made the payments according to
the agreed plan of repayment of its debt with delay no longer than 30 days. In order
to literally apply the cited provision, it would be desirable to provide in the
agreement on financial restructuring that the debtor in the first three months pays a
smaller part of the debt at once or in three instalments.
If the said conditions are met, the delay in collection of restructured claims is
calculated according to the subsequently agreed maturity date, which means that
according to the amended maturity dates from the concluded agreement on
financial restructuring.
This way the claim based on which the debtor was in delay longer than 180
days, and which was classified into the most unfavourable category D, based on the
agreement on financial restructuring is reclassified into one of more favourable
categories with far lower rate of calculation of the reserve for estimated losses.
Mortgage on real estate is considered an adequate security instrument, in terms
of the item 29 of the Decision on Classification of Bank Balance Sheet Assets and
Off-Balance Items only under the condition that the debtor settles the claims
secured by this mortgage with delay no longer than 720 days, or that the debtor is
not in bankruptcy, i.e. acts in accordance with the adopted plan of reorganisation in
terms of the law which regulates bankruptcy. The bank’s claims secured by
adequate security instruments can be classified into one category more favourable
than one in which it would be classified. That means that in case of delay in
payment of the claim secured by mortgage, which is longer than 720 days, the
claim is classified into the most unfavourable category D, with obligation of
calculation of the reserve for estimated losses from 100% of claims. The same
situation occurs when the debtor is in bankruptcy or if the debtor does not act in
accordance with the adopted plan or reorganisation. The obligation of reservation is
increased for 70% of claim secured by mortgage, in relation to the category G, for
which the prescribed rate is 30%.
The conclusion of the agreement on financial restructuring with repayment in
instalments, amended maturity dates, interest rates or other loan terms, at the same
time eliminates permanent inability to pay as the reason for bankruptcy from
Articles 11-12 of the Law on Bankruptcy, and thusly the opening of bankruptcy
proceeding over the debtor, which represents a criteria for classification of bank’s
Faculty of Business Economics and Entrepreneurship 237
claims into the most unfavourable category D with obligation of calculation of the
reserve for estimated losses to 100% of the claim.
This way the company in financial difficulties is enabled to survive and
continue business, bankruptcy is avoided, and banks as key creditors are given
incentives in terms of the more favourable classification of the claim and lower
obligation of the calculation of the reserve.
In item 2 paragraph 2 the definition of “restructured claim” is given so that it is
prescribed that by restructured claim, in terms of this decision, it is considered a
claim regulated by the agreement which redefines debtor-creditor relations of the
bank and debtor due to his financial difficulties. In addition, this agreement must
fulfil three cumulative conditions, namely: 1. that it replaces all balance sheet
claims from the debtor, or their greater part, 2. that it substantially changes terms
under which this claim is approved (under which it is especially considered
prolongation of the term for repayment of the principal or interest, reduction of the
interest rate or amount of the claim, substitution of the fulfilment, as well as other
changes of conditions which facilitate debtor’s position) and 3. that adequate
program of financial consolidation of the debtor is adopted simultaneously. In case
of debtor who is a natural person – that the bank, based on creditworthiness of the
debtor, estimated that the debtor is able to settle its obligations towards the bank
regularly in the following period, reduced the amount of the claims for the amount
of deposit placed in the name of securing claims in case that this deposit is placed
and contracted that the debtor after performed restructuring shall not be further
indebted.
Therefore, the stated three conditions must be cumulatively fulfilled in order
for the agreement on financial restructuring from Article 14 of the Law on
Amicable Financial Restructuring of the Companies represent valid legal basis for
reclassification of claims which is regulated by it, by redefining debtor-creditor
relations between bank and debtor, and thusly considered restructured claim in
terms of the Decision on Classification of the Bank Balance Sheet Assets and Off-
Balance Items (Kozar, 2011,pp. 66).
If the restructuring satisfies only the conditions from the Decision on
Classification of the Bank Balance Sheet Assets and Off-Balance Items, and at the
same time does not represent the financial restructuring in terms of the Law on
Amicable Financial Restructuring of the Companies, e.g. if at least two domestic or
foreign banks as creditors participate in it, then for securement of restructured
claim it is necessary to register new mortgage, considering that restructured claim
is defined as new claim (which replaces all balance sheet claims from the debtor, or
their greater part), and by that new mortgage ensure redefined bank’s claim
(Standpoint of the Legal Affairs Committee of the Association of Serbian Banks
from June 20
th
, 2011).
238 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON
Purpose of amicable financial restructuring is to timely recognize and resolve
financial difficulties and to create conditions for normal continuance of company’s
business (corporative debtor) if relevant creditors assess that existence and
recovery of a company which has financial difficulties economically justified and
doable.
One of basic assumptions of successful implementation of amicable financial
restructuring of companies is delay of payments (moratorium). Allowing to
contract special measures of protection of creditors’ claims is very important
instrument which contributes to decrease of business and legal risks of creditors
who engage into amicable financial restructuring, result of which cannot be
foreseen with certainty, and moratorium is its mandatory phase. Appointing a
person authorized for countersigning of acts by which a debtor performs monetary
transactions during moratorium, as measure for protection of creditors’ claims, is
of a greater legal and practical significance, since this person is obliged to deposit
his signature in a bank where a company’s account is, and limitation of
countersigning of act is being registered in business companies register.
Financial restructuring is completed by an agreement on financial
restructuring. Law does not prescribe mandatory content of an agreement on
financial restructuring, but indicates most common measures, the most significant
of which are: payment in installments, amendment of due dates and interest rates,
release of debt, conversion of claim into capital, and also allows possibility to
contract other measures which are significant for realization of financial
restructuring.
This agreement’s legal nature is settlement (e.g. if prescribes payment in
installments) or novation in case that current obligations are replaced by new ones
(e.g. if conversion is made – transforming claims into capital). Besides this,
combination of settlement and novation is also possible. Secured claim which is
being restructured is replaced by restructured secured claim. Legislator has
indisputably given to the restructuring a legal nature of novation, because one
claim, which is existent between creditor and debtor, is now replaced with new
claim, which corresponds to definition of novation. Continuance of a lien is
established, so that a mortgage, i.e. lien on movables and rights, as secondary right
in connection with secured claim which is being restructured, continues to exist as
mean of security of restructured claim, in line with the agreement on financial
restructuring.
Tax incentives for financial restructuring, in the sense of tax exemption of debt
release with creditors, as well as possibility of debt reprogramming on the basis of
tax and other public revenues, are prescribed by the Law on income tax of
companies, i.e. Law on tax procedure and tax administration. Also, in new
Decision on classification of balance assets and non-balance bank items, and
especially their novels from December, incentives for reclassification of claims of
Faculty of Business Economics and Entrepreneurship 239
banks based on concluded agreement on financial restructuring have been
prescribed. Based on analysis of said regulations it can be concluded that in
Republic of Serbia, a solid legal frame for amicable restructuring of companies has
been created, which is used in practice unjustifiably rare because of inaction of
companies, primarily banks as major creditors.
REFERENCES
[1] Decision on Classification of the Bank Balance Sheets Assets and Off-Balance
Sheet Items, Official Gazette of RS, no. 94/2011, 57/2012, 123/2012, 43/2013,
113/2013
[2] Decision on the Adequacy of the Capital of Banks, Official Gazette of RS, no.
46/2011, 6/2013 and 51/2014
[3] Duki?-Mijatovi?, M. (2010), Overview of law procedures in proceeding of
determining claims of bankruptcy laws in the region, Theme Collection of
Works Laws of Countries in the Region, Belgrade: Institut za uporedno pravo.
[4] Kozar, V. Po?u?a, M., Stankovi?, I. (2013), General bankruptcy procedure
(Comment to the Law on Bankruptcy with court practice and by-laws) 1st
edition Belgrade: Poslovni biro.
[5] Kozar, V. (2012), Legal consequences of the amicable financial restructuring
of the companies, Pravo i privreda. 4(6): 236-250.
[6] Kozar, V. (2012), Moratorium and protection of creditors in financial
restructuring, Pravna rije?. 32: 619-636.
[7] Kozar, V.(2012), Incentives for financial restructuring, Radno-pravni savetnik.
9: 85-90.
[8] Kozar, V. (2012), Prohibition of causing damages and other principles of
amicable financial restructuring, Insurance, damages and new Law on
Litigations. Belgrade: Intermex pp. 322-332.
[9] Kozar, V. (2012), Delay of payments (moratorium) in the process of financial
restructuring, Theme Collection from International Science Conference. Novi
Sad: Faculty of Law for Economy and Justice of University Commercial
Academy in Novi Sad, pp. 224-237.
[10]Kozar, V. (2011), Comment to the Law on Amicable Financial Restructuring
of the Companies, Belgrade: Poslovni biro.
[11]Kozar. V. (2008), Influence of restructuring and mandatory debt dismissal in
the privatisation procedure to the enforcement procedure, Radno-pravni
savetnik. 1:64-70.
[12]Law on Amicable Financial Restructuring of Companies, Official Gazette of
Republic of Serbia, no. 36/2011 from May 27
th
, 2011, effective as of June 4
th
,
applies as of June 24
th
, 2011.
[13]Law on Payment Operations, Official Gazette of SRJ no. 3/2002, 5/2003,
Official Gazette of RS no. 43/2004, 62/2006, 111/2009, 31/2011.
240 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
[14]Law on Procedure of Registration at the Business Registers Agency (Official
Gazette of RS, no. 99/2011)
[15]Law on Property Tax, Official Gazette of RS, no. 5/2009
[16]Law on Tax Procedure and Tax Administration, Official Gazette of RS, no.
80/2002, 84/2002, 23/2003, 70/2003, 55/2004, 61/2005, 85/2005, 62/2006,
61/2007, 20/2009, 72/2009, 53/2010, 101/2011, 2/2012, 93/2012, 47/2013,
108/2013
[17]Law on Banks, Official Gazette of RS, no. 107/2005, 91/2010
[18]Mi?ovi?, M. (2011), Amicable Financial Restructuring or Recovery of
Companies, Pravni život. 11:54.
[19]The Company Law (Official Gazette of RS“, no. 36/2011, 99/2011)
[20]Vasiljevi?, M. (2011), A Guide to implementation of the Company Law,
Belgrade: Intermex.
Faculty of Business Economics and Entrepreneurship 241
THE ADOPTION OF OPEN INNOVATION PRACTICES
IN SERBIAN ICT INDUSTRY
Jelena Lukic, MA
23
ABSTRACT
The main aim of this paper is to present the adoption of open innovation
concept in information and communication technology industry (ICT), and to
analyze key practices, strategic motives and concerns with its implementation
based on case study of Serbian ICT industry. The main reason for conducting
research in ICT industry is that Serbian ICT companies have understood best that
competition is no longer based on traditional resources, combining raw materials,
labor and capital, but that the competitive advantage is based on knowledge and
innovation. Also, many authors argue that knowledge-intensive industries are
incubators for innovation, and that open innovation practices are the most
advanced in high-technology industries. Our starting research questions were: 1)
What are the key practices of open innovation in Serbian ICT companies?, 2) What
are the strategic motives for engaging in open innovation practices?, 3) Which
partners are shown to be of the most importance in open innovation activities?,
and 4) What are the key concerns of companies when engaging in open innovation
practices. At first, we used desk-based research to analyze the open innovation
literature including academic publications, goverment reports and news articles,
and after that we designed a questionnaire in order to gather qualitative empirical
data about open innovation practices in Serbian ICT companies.
Key words: Open Innovation Concept, Open Innovation Practices,
Information and Communication Technology Industry
J EL Classification: O31, O32, M15
UDK: 005.591.6:[004:007 005.591.6:654
23
Jelana Lukic, PhD candidate at Faculty of Economics University of Belgrade, Belgrade, Serbia,
[email protected]
242 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
The environment of organizations has significantly changed comparing to their
surroundings few decades ago, challenging managers to achieve flexibility,
innovation and collaboration with others as factors that will guide towards a long-
term competitive advantage. Managers are aware that organizations cannot deal
with business using old routines, nor efficiently manage everything under their own
roof. In past, collaboration among partners is used as transitive step to enter to new
markets, reduce risks, share the costs of research and development (R&D)
activities (Porter, 1986), while today collaboration and partnership represent the
key components of corporate strategy (Koput,Powell, 2004). To achieve and
sustain competitive advantage in global economy, the need for collaboration with
various organizations, regardless of factors such as time, space and culture is of
tremendous importance (Mankin et al., 2004). Many organizations have shifted
their activities toward external sources of knowledge, developing more extensive
relationships with universities, public research organizations, customers, external
consultants, suppliers, manufacturers, and even competitors. In 2003, Henry
Chesbrough introduced open innovation concept and defined it as “the use of
purposive inflows and outflows of knowledge to accelerate internal innovation, and
expand the markets for external use of innovation, respectively” (Chesbrough,
2003, p. 1). Many organizations have recognized superiority of tearing traditional
boundaries (which lead to extensive separation of people and business processes)
down and collaborating with others striving for constant innovation, improvement,
quality, learning, new technology, new markets.
The aim of this paper is to examine the practices of open innovation in Serbian
information and communication technology industry. At first, we used desk-based
research to analyze the open innovation literature including academic publications,
goverment reports and news articles, and after that we designed a questionnaire in
order to gather qualitative empirical data about: general information about
companies - age, number of employees, key characteristics in conducting their
businesses; the key practices of open innovation in Serbian ICT companies;
strategic motives for engaging in open innovation activities; the satisfaction with
individual partners in open innovation practices; and the key concerns of engaging
in open innovation activities.
Faculty of Business Economics and Entrepreneurship 243
THE EVOLUTI ON OF OPEN I NNOVATI ON CONCEPT
Innovating in today’s environment characterized with hyper-competition,
increased technological advances, greater mobility of human capital requires from
companies to tear down their traditional boundaries and collaborate with other
organizations and individuals. Companies realized that creating organizational unit
for research and development (R&D) and forming cross-functional teams cannot be
stimulus for radical innovations and competitive advantage in the 21
st
century, and
that the locus of innovation is placed beyond their own roof. The concept of open
innovation points out that the purposive inflows and outflows of knowledge can be
used to accelerate internal innovation, and expand markets for external use of
innovation (Chesbrough et al., 2006) reducing the cost of innovation, sharing the
risks and rewards of innovation, and accelerating the time required to deliver
innovations to the market (Chesbrough, 2007). Regarding to traditional, closed
innovation concept, there are clear differences which are summarized in table 1.
Table 1: Closed versus open innovation concept
Closed Innovation Open Innovation
A company should hire the best and
smartest people
A company does not need to employ all the
smart people, but rather work with them inside
and outside the firm
Profiting from innovative efforts
requires a company to discover,
develop and market everything itself
Internal innovation activities are needed to
claim some of the significant value which can
be created by external innovation efforts
Being first to market requires that
research discoveries originate within
the own company
In order to win the competition, it is more
important to have the better business model
than getting to market first
Being first to market also ensures that
the firm will win the competition
Winning the competition does not require
coming up with the best and most ideas, but to
make the best use of internal and external ideas
Leading the industry in R&D
investments results in coming up with
the best and most ideas and eventually
in winning the competition
Proactive intellectual property (IP) management
allows other companies to use the companies'
IP. It also considers to buy other companies' IP
whenever it advances the own business model
Source: Adapted from Chesbrough, 2003
Many of the terms like collective, distributed, cumulative, democratized
innovation are focused only on users and thus make just the part of a broader
phenomenon – open innovation. Open innovation, beside customers and consumers
involves the collaboration with manufacturers, suppliers, universities, public
research agencies, and even competitors.
244 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Innovations will need to be aware of and solve many societal challenges in
domains such as climate change, sustainability, healthcare, youth unemployment,
financial stability, and to ensure benefits for whole society with improved quality
of life, and new jobs and services. Thus, the concept of open innovation 2.0 was
promoted as new innovation paradigm based on principles of integrated
collaboration, co-created shared value, cultivated innovation ecosystems, unleashed
exponential technologies, and extraordinarily rapid adoption (Curley, Salmelin,
2013, p. 2). The aim of open innovation 2.0 is to, by tearing down all barriers
among public/government, academic, business sector and citizens, create shared
value, sustainable prosperity and improvements in human well-being (Curley,
Salmelin, 2013). In open innovation 2.0 the citizens are recognized as very
important for innovation, so the Triple Helix model has become Quadruple Helix
model of innovation which encompasses public/government, academic, businees
sector, and citizens (Helms, Heilesen, 2011).
The key idea of open innovation 2.0 lies in the concept of shared value which
can be defined as set of “policies and operating practices that enhance the
competitiveness of a company while simultaneously advancing the economic and
social conditions in the communities in which it operates” (Porter,Kramer, 2011, p.
6). In practice, there are three key ways in which companies can create shared
value opportunities: by reanalyzing products and markets, redefining productivity
in the value chain, and enabling local cluster development (Porter, Kramer, 2011).
OPEN I NNOVATI ON PRACTI CES AND TRENDS
Companies can employ a variety of practices to make use of external and
internal knowledge innovation. Generally, there are two directions (Chesbrough,
Brunswicker, 2014): one, where external knowledge flows into the company
(inbound practices), and other, where knowledge flows out of the company
(outbound practices).
Faculty of Business Economics and Entrepreneurship 245
Table 2: Open innovation practices
Inbound Practices Outbound Practices
? Consumer and customer co-
creation
? Information networking
? University research grants
? Publicly funded R&D consortia
? Contracting with external R&D
service providers
? Idea and start-up competitions
? Intellectual property in-licensing
? Supplier innovation awards
? Crowdsourcing
? Specialized services from open
innovation intermediaries
? Joint venture activities with
external partners
? Selling of market-ready products
? Participation in public
standardization
? Corporate business incubation
and venturing
? Intellectual property out-
licensing and patent selling
? Donations to commons or
nonprofits
? Spinoffs
Source: Adapted from Chesbrough and Brunswicker, 2014
Open innovation is going to be of great importance for innovation
management in corporate practice. Regarding previous research and practice of
open innovation, some trends can be identified (Gassmann et al., 2010):
? Industry penetration: from pioneers to mainstream. The principle of open
innovation has penetrated pioneering industries such as software, electronics,
telecom, pharmacy and biotech.
? R&D intensity: from high to low tech. It can be identified new trend for the
low-tech sector to exploit the potentials of opening up their innovation
processes. Open innovation's principles have spread to different sectors
(machinery, medical tools, fast moving consumer goods, food, logistics), not
only in high tech.
? Size: from large firms to small and medium firms. Smaller and medium-
sized firms are also opening up their innovation processes.
? Processes: (1) from stage gate to probe-and-learn (highly structured stage-
gate process is becoming more interactive probe-and-learn process); 2) from
amateurs to professionals (industry is starting to professionalize the internal
processes to manage open innovation more effectively and efficiently).
? Structure: from standalone to alliances. It can be identified trend from strong
R&D partnership and alliances toward inter-organizational relationships.
? Universities: from ivory towers to knowledge brokers.
? Content: from products to services. The service sector is still underdeveloped
in terms of the innovation process.
? Intellectual property: from protection to a tradable good. Companies buy
intellectual property - mostly from universities and high-tech ventures and
leverage its value through professional management.
246 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Companies must be aware that too much openness can negatively impact their
long-term innovation success because they lose control, but on the other hand,
without open innovation approach they cannot achieve shorter innovation cycles
and reduced time and risk to market. Without cooperation and exchange of
knowledge, companies are losing their knowledge base on a long-term basis. It is
important for companies to create successful products and services using open
innovation philosophy faster than their competitor and at the same time to foster
the building of core competencies and protect their intellectual property (Enkel et
al., 2009).
EXAMPLES OF OPEN I NNOVATI ON PRACTI CES I N I CT
I NDUSTRY
Regarding key characteristics of information and communication technologies:
enabling better connection between different organizations and partners,
establishing and maintaining business-to-business relationships, communication
and coordination (Petkovi? et al., 2014), they are one of the key factors that enable
pursuing of open innovation activities (Dodgson et al., 2006).
Information and communication technologies provide large amount of real-
time data which are simply and faster available (Luki?, 2014a), they facilitate the
exchange of ideas and information moving them from one place to another
(Zuboff, 1988), and the flow of information through space is enabled, accelerating
life beyond the conceivable boundaries (Luki?, 2014b). Advances in ICT “brought
the firm to the world, but they also brought the world to the firm” (Walsh et al.,
2006, p. 665). Many innovation technologies are specially developed for creating
innovation including a wide range of design, simulation, modeling, and
visualization technologies, which are increasingly used in innovation processes
(Dodgson et al., 2006).
It is clear that in the 21
st
century, ICT represents the key enabling factor for
conducting open innovation activities. Many authors argue that open innovation
practices are the most advanced in high-technology industries (Chiaroni et al.,
2011) and that they are fertile ground for innovation (Fjeldstad et al., 2012).
Practices and maturity of open innovation concept varies by industry. Clear
example is status of open innovation in ICT, pharmaceuticals and fast-moving
consumer good (FMCG) industry, where open innovation practices are necessary
for survival (Golightly, 2012, p. 36).
Faculty of Business Economics and Entrepreneurship 247
Table 3: Different sectors and open innovation concept
Industry
Status of open
innovation
Drivers of open
innovation
Sector characteristics
ICT
Open innovation
maturity is high.
Innovation in products
and processes is
usually very high, and
moves quickly.
Rapid growth of start-
ups, disruption of
business and
technology, mobile
computing.
Very high customer
demand, technology
innovation by small and
medium companies and
start-ups.
Pharmacy
Shift from the
“chemical paradigm” to
the search for
innovative therapies
requiring mixed
disciplines and
integration of
technologies.
Regulatory pressure,
time pressure to bring
drug to market, and
cost reduction are
drivers for innovation.
Driven by incremental
and radical innovation
where the product and
process innovation takes
more time than other
market sectors.
FMCG
Open innovation
maturity is high due to
continuous incremental
innovation.
Competition is high
and the market is very
demanding. Short life
of products, rapidly
moving market and
customer needs.
Consumer demand is
high. Markets move very
quickly, hence product
innovation is very high.
Source: Adapted from Golightly J. et al., 2012, p. 35
ICT industry is at the top according to adoption of open innovation practices.
In continuation of this paper, we are going to present some of the key examples of
open innovations in ICT industry.
The Internet has facilitated mass collaboration as one of the form of open
innovation where anyone can participate electronically to solve some problem or
challenge, or to give some contribution. Among the best known examples of mass
collaboration as one of the practices of open innovation is well-known Wikipedia.
Wikipedia represents an online encyclopedia created in 2001 with aim to give a
free knowledge to everyone in the world in their native language. As of August
2014, Wikipedia includes over 32.7 million freely usable articles in 287 languages
that have been written by over 47 million registered users and numerous
contributors worldwide. On average, Wikipedia receives a total of 10 billion global
page views from around 495 million unique visitors every month, including 85
million global page views every day
(http://en.wikipedia.org/wiki/History_of_Wikipedia).
Among many examples, it is interesting to mention CAS, market-leader in the
customer relations management (CRM) software for small and medium companies
in Germany, which was founded in 1986 with the aim to achieve a high degree of
innovation. Annually, the company spends about 30% of its revenues in research
and development. Nowadays, CAS defines itself as a networked enterprise and as
an open innovator (Brunswicker, Ehrenmann, 2013). CAS has designed business
248 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
model based on principles of modularity – an integrated software system
embedding different applications and services in collaboration with over 200
partners in more than 24 countries. The results of CAS commitment to its
customers, suppliers, competitors, intermediaries are reflected in fact that more
than 200.000 people in more than 7.500 companies and organizations are using
CAS software solutions (Brunswicker, Ehrenmann, 2013).
Over the last 20 years collaboration between firms, suppliers and customers
has produced open source products such as Linux operating system, Firefox web
browser, Apache web server, etc. (West,Gallagher, 2006).
Open source software includes source code which can be modified by
geographically dispersed programmers which collaborate using virtual
collaboration tools, while at the same time acknowledge the original author’s
contribution (Raymond, 2004). The first question that we think of is what
motivates individuals to contribute to open source projects? The answer can be
found in two different types of motivation (Ryan,Deci, 2000):
? Intrinsic rewards include the enjoyment of creating something new, the
stimulation of an intellectual challenge;
? Extrinsic rewards include enhansed reputation, the signalling of technical
challenges to potential employeers and venture capitalists.
Table 4: Open source approaches, types and results of open innovation
Approach to open
innovation
Types Results
Structural approaches
Pooled R&D
? Linux
? Mozilla
Spinouts
? Jikes
? Eclipse
? Beehive
Product centric
approaches
Selling
Complements
? Apache
? KDE
? Darwin
Donated
Complements
? Avalanche
? PC Game „Mods“
Source: Adapted from West and Gallagher, 2006
Faculty of Business Economics and Entrepreneurship 249
KEY CHARACTERI STI CS OF SERBI AN I CT I NDUSTRY
Serbian ICT industry is an important exporter with rising tendency of software
export: in 2011, the software export amounted to 166 million euros, while in 2012
it exceeded 200 million euros (www.pks.rs), and in daily jargon it can be heard that
Serbia is "the country of farmers and IT specialists" (www.rtv.rs). Programming
and computer services dominate in the structure of export of computer and
information services, followed by embedded systems and system integration
(www.pks.rs).
Serbian ICT industry has understood best that competition is no longer based
on traditional resources, combining raw materials, labor and capital, but that the
competitive advantage is based on knowledge. It contributes to affirmation of a
cluster. Vojvodina ICT Cluster (VOICT), Nis Cluster of Advanced Technologies
(NiCat), ICT Network Serbia Cluster (ICT Net), integrate companies in this
industry, scientific-research institutes and supporting institutions. Financial data for
2010 show that one of the highest turnover is made by the member of two ICT
clusters (from ICT NET with around 87 million euros, and from Vojvodina ICT
with 44 million euros) (Mija?i?, 2011, p. 32).
ICT industry contributes to balanced regional development. Comtrade’
software development center has opened in Kragujevac, where is employed 200 IT
engineers, with promise that there will be more employees with government
support (www.comtrade.com). Also, the newest cluster in Kragujevac, in the
Business Innovation Centre (BIC), that brought together companies dealing with
information and communication technologies from Sumadija and Pomoravlje,
should get the full support from the Government and become the business model
for connecting young talents in the ICT industry (Kartalovi?, 2013).
Serbian Government adopted certain support policies for the ICT industry,
including The Strategy for development and support of the information technology
industry, that should encourage and support the industry in four segments: startup,
outsourcing, development and export of original software products, development
centers of large multinational companies (Službeni glasnik RS 72/12). In 2012, the
Directorate for Digital Agenda, as an organ of the Ministry of Foreign and Internal
Trade and Telecommunications, was established, and it is, among other things,
responsible for the use of information and communication technology, providing of
information services, research and development in the field of information society
and electronic communications, the implementation of standards in information
and communication technology (www.digitalnaagenda.gov.rs). The reduction of
customs duty on computers to 1% in 2004, the public call of Serbia Investment and
Export Promotion Agency for allocation of grants in the field of IT for
technological entrepreneurship start-ups and for organizing trainings and
networking in the field of IT entrepreneurship (www.siepa.gov.rs) represent
legislation and support measures, which indicate that the Serbian government has
recognized the importance and role of the ICT industry. Also, nearly all state
institutions have their Web sites. In this way, Serbian government sent a clear
250 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
message to potential investors that Serbia works on improving its information
space, which should make Serbian national economy more competitive globally.
Generally, ICT industry requires small capital investments, and offers
significant revenue opportunities, so some countries took advantage of it,
especially Ireland that was one of the least developed European countries and
became a real economic miracle by developing and exporting ICT products and
services (www.ictireland.ie). India where information technology almost did not
even exist, is becoming one of the world leaders in manufacturing and software
export, as well as Israel, China and Brazil that have achieved impressive results in
the production and sales of ICT products and services (Arora,Gambardella, 2005,
p. 4). Those countries should be used as a model for Serbia where in recent years
the awareness of importance of informatization of economy and society is
awakened.
RESEARCH DESI GN
The aim and the object of research. In practice, there is a lack of clear
understanding of open innovation practices. Companies face risks and many
challenges when they conduct open innovations. Our starting research questions
were: 1) What are the key practices of open innovation in Serbian ICT companies?,
2) What are the strategic motives for engaging in open innovation practices?, 3)
Which partners are shown to be of the most importance in open innovation
activities?, and 4) What are the key concerns for companies when engaging in open
innovation practices? The object of research are Serbian companies in information
and communication technology industry (ICT). The main reasons for conducting
research in ICT industry are that knowledge-intensive industries have been the
fertile ground for innovation, they first realized that the locus of innovation extends
beyond the individual company (Fjeldstad et al., 2012), and innovation practices
are the most advanced in high-technology industries (Chiaroni, Chiesa, and
Frattini, 2011). Also, the fact that large number of Serbian ICT companies are
micro and small companies (www.sito.rs) which do not have large financial
resources, technological and managerial skills, suggests that it would be of
tremendous importance for these companies to use open innovation practices as a
source of competitive advantage.
Design of research. Research was conducted by using the questionnaire
technique for data collection: the questionnaire was sent via e-mail to 300 ICT
companies which are members of ICT clusters and which launched new products
and services in past three years. It consists of 14 questions created by using one of
free Google services (Google Drive) which, among other things, provides creating
anonymous surveys and simple overview of responses.
Faculty of Business Economics and Entrepreneurship 251
The questionnaire encompassed four sections asking about:
? General information about companies: age, number of employees, key
characteristics in conducting their businesses
? The key practices of open innovation
? Strategic motives for engaging in open innovation activities
? The satisfaction with individual partners in open innovation practices
? The key concerns of engaging in open innovation practices
The questionnaire was answered by 25 companies, while 2 companies sent e-
mail in which they clearly stated that they do not use open innovation practices.
Collected data from the questionnaire were analyzed and interpreted by the
description method.
DI SCUSSI ON OF RESEARCH FI NDI NGS
Measured with the number of permanent employees, more than half of
surveyed ICT companies belong to group of small companies, while 36% are micro
companies.
Graph 1: Number of employees in surveyed ICT companies
Source: Author
More than one third of surveyed companies work more than 15 years, while
20% represent very young companies which operate less than 5 years.
252 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Graph 2: Age of the surveyed ICT companies
Source: Author
Key characteristics of surveyed companies can be summarized in the
following statement: Serbian ICT companies need to solve complex problems in a
short time with experts from various fields, not just ICT, and knowledge,
innovation and customer relations are of tremendous importance for them.
Graph 3: Characteristics of surveyed ICT companies
Source: Author
Bearing in mind all benefits of open innovation practices, it is important to
understand how ICT companies in Serbia engage in open innovation activities. We
asked them to evaluate inbound and outbound practices that had been identified as
most critical in literature and discussions with open innovation practitioners,
according to Chesbrough and Brunswicker survey (Chesbrough, Brunswicker,
2014).
Faculty of Business Economics and Entrepreneurship 253
Table 5: Open innovation practices in surveyed ICT companies
OPEN INNOVATION PRACTICES %
Inbound practices of open innovation
Networking with other organizations without a formal contractual relationship (at
conferences, workshops, events)
14%
Involvement of consumers and customers in generation, evaluation, and testing of
new ideas for products, services, processes
12%
Licensing of external intellectual property rights (e.g., trademarks, patents, etc.) via
formal licensing agreements
11%
Contracting with external service providers for specialized R&D services.
Including technology scouting, virtual prototyping
7%
Outsourcing innovation problem solving (including scientific problems) via an
open call to external organizations and individuals to submit ideas
5%
Participating in R&D consortia with other public or private organizations in which
R&D activities are fully or partly funded by governmental organizations
5%
Funding of external research projects by researchers and scientists in universities
to access external knowledge
4%
Invitation of existing suppliers to participate in innovation and submit innovative
ideas
3%
Outbound practices of open innovation
Licensing of internal intellectual property to external organizations via licensing
agreements or selling via single payment
9%
Participation in standardization activities via formal standardization agencies (e.g.,
ISO) or informal standardization consortia
8%
Sale of a market-ready novel product idea to a third party for sale to its customers 6%
Strategic and financial investment in independent joint ventures jointly with
external partners
4%
Corporate incubators or accelerators developing potentially profitable ideas and
offering supportive environments for entrepreneurs inside the organization to
identify novel paths to market
4%
Donations to commons or nonprofits (e.g., open-source communities) to support
external R&D
4%
Source: Author
Out results show that companies engage far more frequently in inbound open
innovation practices where external knowledge flows into the firm. Among most
used practices are networking with other organizations without a formal contractual
relationships, involvement of consumers and customers in generation, evaluation,
and testing of new ideas for products, services, processes, and licensing of external
intellectual property rights via formal licensing agreements.
254 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Reasons for engaging in open innovation practices are different. We created a
list of some of the most frequently named reasons for engaging in open innovation
practices according to JISC study Facilitating Open Innovation (JISC, 2009).
Answers of surveyed companies are summarized in following table.
Table 6: Reasons for engaging in open innovation practices in surveyed ICT
companies
Reasons for engaging in open innovation practices %
We did not have the required expertise under our own roof 20%
We did not have the capacity to carry out the work alone 20%
We wanted to bring “fresh blood” into the project to benefit from their
different approach and ideas
14%
Cost saving 14%
We believed that outsourcing of expertise would save money 9%
To enable exploitation of any intellectual property produced into other non-
competing markets
5%
Believed a multidisciplinary approach would produce more successful output 5%
Reputation of partners 5%
We wanted to become a member of a consortium to obtain eligible status for
funding
4%
We wanted to create revenue by acting as an intermediary to encourage and
facilitate open innovation
2%
We required someone else’s intellectual property 2%
We felt it was our only chance of commercializing our ideas 0%
Source: Author
Required expertise beyond the company, shortage of internal capacity, need
for fresh approach and need for cost saving are main strategic motives for engaging
in open innovation practices in surveyed ICT companies.
We also wanted to identify the importance of individual partners in open
innovation practices. Answers about satisfaction of individual partners show that
companies are most satisfied with their customers.
Concerning fact is that many companies are dissatisfied with universities and
public research organizations which indicates that there is a lot of space for
improvement of their activities and engagement.
Faculty of Business Economics and Entrepreneurship 255
Table 7: The satisfaction with individual partners in surveyed ICT companies
Partners
Hugely
satisfied
Largely
satisfied
Satisfied
Largely
dissatisfied
Hugely
dissatisfied
Customers
22% 57% 9% 12% 0%
Universities
5% 33% 24% 38% 0%
Suppliers
0% 41% 36% 9% 14%
Public research
organizations
5% 14% 32% 36% 14%
Entrepreneurs and
start-ups
5% 14% 50% 23% 8%
Competitors
23% 36% 27% 14% 0%
Source: Author
When engaging in open innovation practices, surveyed ICT companies are
most concerned about the ability to find the right people to be involved, costs,
intellectual property issues, and time constraints. Potential cultural differences and
trust among partners are of some, little or no concern at all.
Table 8: The key concerns and challenges in pursuing open innovation practices in
surveyed ICT companies
Answers
Huge
concern
Large
concern
Some
concern
Little
concern
No
concern
Intellectual property issues
16% 5% 37% 21% 21%
Costs
5% 32% 42% 21% 0%
Ability to find the right
people to be involved
26% 42% 21% 0% 11%
Potential cultural
differences
5% 0% 26% 37% 32%
Time constraints
5% 32% 21% 37% 5%
Project management
0% 26% 42% 16% 16%
How to build trust
0% 5% 42% 37% 16%
Source: Author
Regarding to the durability of open innovation practices in Serbian ICT
companies, we asked how long companies had been practicing open innovation.
56% of surveyed companies are engaged in open innovation activities less than
three years, while other 44% of the companies engaged in open innovation
activities from three to six years. 55% of surveyed companies answered that they
would engage in open innovation projects in future, only 5% stated clearly no,
while 40% answered that they are not sure about engaging in open innovation
practices.
256 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Beside 25 companies that answered to the questionnaire, there are 2 companies
that sent e-mail in which they clearly stated that they do not use open innovation
practices. Received e-mails indicate that top management manifest resistance to
change, it is not informed about all benefits that open innovation brings and that
there is a lack of understanding that links with external partners tend to
complement rather than replace internal R&D department and activities
(Chesbrough, 2006). Some of the surveyed ICT companies have illusion that their
internal R&D department is just enough for innovations, which is consistent with
some other results on open innovation where employees in R&D departments
believe that their technology is the best and requires no further development
(Rangus, Drnovšek, 2013).
CONCLUSI ON
The aim of this paper was to analyze open innovation practices based on case
study of Serbian ICT companies. Results show that Serbian ICT companies engage
far more frequently in inbound open innovation practices where external
knowledge flows into the firm. Among most used practices are networking with
other organizations without a formal contractual relationships, involvement of
consumers and customers in generation, evaluation, and testing of new ideas for
products, services, processes, and licensing of external intellectual property rights
via formal licensing agreements. The key strategic motives for engaging in open
innovation practices are: required expertise from partners, shortage of internal
capacity, need for cost saving, and need for fresh approach, which is not surprising
bearing in mind that large number of Serbian ICT companies are micro and small
companies. Answers about satisfaction of individual partners show that companies
are most satisfied with their customers which is very positive result according to
fact that involvement of customers and consumers in open innovation practices is
of tremendous importance for companies. Networking with other organizations
without a formal contractual relationships via conferences, workshops, seminars is
at the top of open innovation practices in surveyed ICT companies. Bearing that in
mind, result that many companies are dissatisfied with universities and public
research organizations is very concerning and indicates that there is a lot of space
for improvement of their activities and engagement. Results that more than one
half of surveyed companies are interested to engage in open innovation activities in
future, while 40% are not sure, highlight the importance of all challenges and
concerns that surveyed ICT companies are faced with. Surveyed ICT companies
are the most concerned with the ability to find the right people to be involved,
costs, intellectual property issues, and time constraints.
Taking into account that small number of companies respond on questionnaire
(27 companies out of 300 companies included in survey) making response rate of
9%, we can make just limited conclusions regarding ICT companies and their
general attitude toward open innovation practices. Some general proposals for
Faculty of Business Economics and Entrepreneurship 257
facilitating the practices of open innovation in Serbia are: to raise awareness about
key benefits and advantages of open innovation practices through education,
workshops and training of open innovation, to change the mentality of management
and employees and their understanding of open innovation activities, to establish
good regulatory environment, and to provide direct and indirect financial
incentives and initiatives for open innovation practices.
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Faculty of Business Economics and Entrepreneurship 259
II PART.
SOCIOLOGICAL AND SOCIAL PSYCHOLOGICAL
ASPECTS OF ENTREPRENEURSHIP
Faculty of Business Economics and Entrepreneurship 261
ROLE STRESSORS AND ORGANIZATIONAL
COMMITMENT: EMPIRICAL RESEARCH
Plama Hristova, PhD
24
Albena Krumova, PhD
25
Julika Novkova
26
ABSTRACT
Professional stress is a current research issue in modern psychology due to its
direct impact on health and subjective well-being of people all over the world.
Professional stress also leads to financial losses for the organizations. On the
other hand, organizations can benefit from employees who are committed to them.
Such employees contribute to the better quality of work and positive image of their
organizations. This paper studies the interrelations between the role stressors in
the workplace and organizational commitment of the employees in Bulgaria. The
research provides valuable conclusions or the employers and it will be helpful for
effective management of organizations.
Key words: Research, Organizational Commitment, Role Stressors,
Employees, Organization
J EL Classification: I15, J24, J28
UDK: 331.101.3 331.445:159.944.4
24
Plama Hristova, Sofia University “St. Kliment Ohridski”, Bulgaria, [email protected]
25
Albena Krumova, Sofia University “St. Kliment Ohridski”, Bulgaria, [email protected]
26
Julika Novkova, Sofia University “St. Kliment Ohridski”, Bulgaria, julika @abv.bg
262 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Professional stress is a widely discussed organizational phenomenon in modern
psychology due to its direct impact on health and subjective well-being of people at
work. However, regardless of the achieved scientific progress this problem continues
existing in professional lives of many employees and gains intensity over the last years
that are characterized by frequent changes in organizations – merges and bankruptcies,
layoffs, losses of jobs, various anti-crisis measures, decreased costs on healthcare, etc.
On the other hand, the high levels of unemployment stimulate minimum tolerance to
mistakes employees can make in the workplace and increase the requirements on
behalf of the management. The value of human labor becomes lower when the
employers believe there are many other candidates willing to replace the employees
who do not perform well. Thus we are witnessing a new organizational reality which
leads to professional stress and high health risks.
The negative side of stress, distress, is accompanied by a multitude of health
problems and risks. Both people and organizations are paying a high price for
poorly managed professional stress. For the individuals, the price of stress can be
physical, mental, behavioral or emotional. Organizations whose employees and
leaders experience high levels of professional stress which they cannot manage
suffer enormous financial losses due to absenteeism, turnover, work accidents and
decreased productivity.
On the other hand, organizations can benefit from employees who are committed
and loyal to them. Such employees accept the goals and values of their organizations,
are ready to put more efforts at work and are willing to remain in the organizations. It
has been found out that the higher the organizational commitment of employees, the
lower the chance of leaving the organization (?????, 2006). Committed workforce is
also less susceptible to stress as it will be discussed in this paper.
PROFESSI ONAL STRESS
Professional stress occurs when the perceived pressure exceeds the perceived
abilities of coping with it (Palmer et al., 2004). Everybody can suffer from professional
stress and there has been found no demographic characteristic which puts some group
of people in a more favorable position than the others. Stress is ubiquitous.
According to Palmer, Cooper and Thomas (2004), the role in the organization
is one of the major risks for professional stress. This role concerns clarity of the
functions people perform in the organization and whether the organization
guarantees that employees do not enter into conflict with these functions. The
authors state that the organizations can manage this risk factor by purposeful
avoidance of role conflicts and preparation of clear job descriptions.
Faculty of Business Economics and Entrepreneurship 263
Ambiguity at work or role ambiguity is characterized by the lack of clearly
defined work duties. When there is uncertainty about the obligations and
responsibilities employees experience professional stress (?????, 2006). The role
conflict also contributes to stress in employees. The simultaneous performance of
several roles in the workplace poses the evaluation of employees and their work
performance on a difficult test. The role ambiguity and role conflict are considered
as some of the factors for development of depression and anxiety related to work
(Lowman, 1993). The role ambiguity is most detrimental to work performance
(Gilboa et al., 2008). For the organizations, the negative consequences of
professional stress are mainly economic. Organizations suffer enormous financial
losses due to absences from work of their employees, turnover, work accidents and
reduced productivity. All these are consequences of professional stress (TUC,
2004, in Palmer et al.,2004).
Unfortunately, the detrimental effect of professional stress is not observed only
in the organizational life. In the modern world, professional stress takes even
bigger, epidemic sizes. (Cooper, 2010). From a psychological perspective, the
negative consequences of stress at work are worrisome. It affects both physical and
mental health of people. The physical conditions caused by acute and chronic stress
include: increased morbidity from cardiovascular diseases (Tennant, 1999),
hypertension (Ogden, 2007), suppressed immune response (Lazarus, 1993),
diseases of the respiratory (Lehrer et al. 2002) and muscular systems (Gevirtz et
al., 1996), metabolic syndrome and some types of cancer (Ogden, 2007). In
addition, the physiological changes caused by stress lead to poor memory
(Sapolsky, 2003) and difficulties in spatial orientation (Ogden, 2007).
Both chronic and acute stress lead not only to changes in physiology but also
to changes in behavior. In their attempts to improve their moods people suffering
from chronic stress show self-destructive behaviors: tobacco smoking,
consumption of alcohol, drug abuse (Sinha et al., 2000), excessive intake of
carbohydrates (Greeno, Wing, 1994) and non-observance of a healthy sleep and
wakefulness cycle (Ogden, 2007).
Badly managed stress causes physiological changes in the organism by means
of which it has a serious impact on the mental health as well. It has been found out
that stress is connected to anxiety, and the chronic stress in particular demonstrates
a specific relation with the onset of anxiety and depression (Esch et al., 2002).
This is why it is essential that employers pay more attention to creating less
stressful work conditions for their employees.
264 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ORGANI ZATI ONAL COMMI TMENT
In the scientific literature, there are different definitions of the term
‘organizational commitment’ but it is accepted that the original conception is based
on the work of Mowday et al., (1979) who identify commitment-related attitudes
and commitment-related behaviors. Today, a widely used model of organizational
commitment is the three component conception of organizational commitment,
which was developed by Meyer et al., (1993).
Organizational commitment can be considered as psychological identification
of the employee with the organization where he/she works. It consists of the
positive evaluation of the employee of the organization, the intension for
contribution to its success, as well as desire and striving for keeping their position
in the organization. Often, when the employee is alienated from the activities and
life of the organization, we can speak about lack of commitment. Some authors
define commitment as loyalty or even patriotism (??????, 1997; 1998; ??????,
????????? 2001) and they assume that organizational commitment expresses
involvement in the work process and emotional affection to the organization.
The employees’ commitment to the organization is a psychological state
determining the expectations and attitudes of the employees. Their behavior to the
organization is defined by how they perceive it: if they belong to the organization
or are outside it. From a managerial perspective, it is enormous success if the
managers build commitment to the organization in their personnel. It includes
internalization of the organizational goals and values, the ability to work to the
benefit of the whole organization and to overcome the individual needs (even in
cases when it is not profitable for the employee).
In the specialized literature authors very often connect the term ‘organizational
commitment’ with ‘identification’, ‘involvement’ and ‘loyalty’. Identification is
acceptance of the organizational goals as the employee’s own goals; involvement is
the desire to put personal efforts to the organization’s success, and loyalty is the
emotional commitment to the organization, the desire of the employee to be its
member (??????, ?????????, 2007).
Commitment to an organization inevitably includes the above stated factors
and assumes their inclusion in the self-image of each employee. By its nature
organizational commitment is equal to neither identification nor loyalty. A meta-
analysis conducted by Riketta (2005) reveals that although there is some similarity
between identification and affective organizational commitment, organizational
identification is weaker than commitment, correlates with job satisfaction and
intention to continue working in the same organization, and is strongly dependent
on involvement in work (Riketta, 2005).
The interrelation between organizational commitment and identification gave
grounds to Meyer et al. to develop an integrative model of the processes of
commitment and identification (Meyer et al., 2006). According to this model, the
various types of commitment are a consequence of the various types of
Faculty of Business Economics and Entrepreneurship 265
identification. The model was derived from the idea of Rousseau (1998) according
to which there are two levels of identification – situated and deep structural
identification.
Research conducted by Lovakov and Lipatov (???????, ???????, 2011) did
not find a relation between the current commitment and identification of the
employees and the results confirmed the hypothesis that the two constructs are
independent and different from each other.
One of the most popular models considering the essence of organizational
commitment is the one of Allen and Meyer (1990) called the three-component
model (TCM) (Allen, Meyer, 1990). This model consists of three types of
commitment: affective, continuance, and normative, which outline the relation
between the employee and the organization. The authors state that, “Employees
with strong affective commitment remain because they want to, those with strong
continuance commitment because they need to, and those with strong normative
commitment because they feel they ought to do so“ (Allen,Meyer, 1990; p. 3).
In their research, Allen and Meyer (Allen, Meyer, 1990; Meyer, Allen, 1991)
consider the first component, affective commitment, as consisting of three
elements: emotional ties, identification, and involvement in the organization. The
second component of commitment, the behavioral one, concerns the losses
perceived by the employee in case of a possible leaving of the job. The normative
component of commitment relates to the perceived obligations upon staying in the
organization.
Organizational commitment is formed in these employees who feel the
organization provides them with opportunities for growth and development and the
opportunity to do activities which they like. The strong affective commitment leads
to the desire of the employees to keep their job positions and to remain employees
in the organization. The employees having a strong behavioral aspect of
commitment remain at work because they need it. The employees who have a
leading normative component of commitment stay in the organization because they
believe they must stay. Allen and Meyer (1996) maintain that there is enough
evidence for validity of the three-component model of organizational commitment.
Alienation and opposition are an alternative to commitment (?????????,
2011). The organization is not perceived as ‘one’s own’ but as ‘alien’. There is a
high power distance between the employees and the management. The
organizational goals serve the managers’ and directors’ own agenda. The needs of
the person are put above the organizational ones.
266 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ORGANI ZATI ONAL COMMI TMENT AND PROFESSI ONAL
STRESS
Organizational commitment cannot be directly observed. An expression of
commitment to the workplace is the desire of the worker to put more efforts so that
the organization functions better, focusing on organizational goals and readiness
for self-sacrifice. Stress in the workplace is the harmful physical and emotional
responses to adverse and noxious aspects of work content, work organization and
work environment. Occupational stress is a very subjective concept, affecting every
individual differently and has been linked to absenteeism, decreased productivity,
increased health care costs and illness (Yahaya et al., 2012).
The factors of organizational environment play a major part in creating stress
in the workplace (Ivancevich et al., 1982; Jamal, 2010) and the employees with
various degrees of organizational commitment would perceive this stress in
different ways. The employees with a lower degree of organizational commitment
are likely to demonstrate higher levels of trust to the organization (Meyer et al.,
2002; Ouchi, 1981). Adversities, as, for example, high levels of stress, might not be
perceived by them as sufficient grounds for non-fulfillment of their obligations. In
contrast, the employees displaying low levels of organizational commitment
demonstrate a limited sense of loyalty to the organization (Jamal, 2011). Research
conducted by Jamal (2011) found out that organizational commitment acts as a
buffer against the aversive effects of job stress on individuals’ job performance.
Practically, it means that individuals who had high organizational commitment
appeared to be better off against the adverse consequences of job stress than
individuals who had low organizational commitment (Ibid).
Similar results were obtained by another research indicating a significant and
negative relationship between job stress and organizational commitment (Khatibi et al.,
2009). As the employees' job stress increases, their commitment to organization
decreases and vice versa. According to the authors, identification and minimizing of
the stress factors can decline the adverse effects of job stress and promote the
organizational commitment of employees. In addition, the research showed there was a
negative and significant relationship between job stress and affective commitment
(Khatibi et al., 2009). The results of the research of Khatibi et al. (2009) is to a large
extent consistent with the research results of Lee (2007), Lambert, Paoline (2008),
Omolara (2008), Boyas, Wind (2009), but inconsistent with the research results of
Wells et al. (2009) and Yaghoubi et al. (2008).
Organizational commitment should exist within every employee, from
managerial staff to non-managerial staff in order to determine the success of an
organization. Employee commitment is gained when the organization shows the
same amount of commitment as well (Bytyqi et al., 2010). Cooperation and
appreciation between each and every members of the organization is needed to
achieve the organization’s goal. This can be achieved only if strong commitment
exists within the members of the organization (Ratmawatti, 2007).
Faculty of Business Economics and Entrepreneurship 267
Job satisfaction and employee commitment are not a onetime process but
change constantly especially when the organization deals with high level of
employee work stress (Bytyqi et al.,2010). Work stress should not be taken for
granted but pragmatic measures should be employed to deal with it and void
eventual negative effect on organizational commitment.
ROLE STRESSORS AND ORGANI ZATI ONAL COMMI TMENT:
EMPI RI CAL RESEARCH
This research is a pilot project aiming to find out the interrelations between job
stress and organizational commitment of employees. For the purposes of the pilot
project the authors used a heterogeneous sample consisting of 43 subjects. The
tasks the researchers set to themselves are to study the interrelations between role
stressors and organizational commitment.
The methodology used in this research consists of two questionnaires for
assessment of role stressors in organizations and for assessment of organizational
commitment standardized by Radoslavova and Velichkov (???????????,
????????, 2005). The questionnaires are of self-assessment type and were
administered to the participants online on a random principle.
For assessment of the role stressors in the workplace a questionnaire of 41
items was employed. The questionnaire comprises two scales: role ambiguity and
role conflict. Each scale consists of three subscales measuring the job duties,
performance and results. The role perceptions of the subjects are evaluated by
frequency of occurrence in their everyday work life. The answers are on a five-
point Likert-type scale where 1 being almost never and 5 being almost always.
(???????????, ????????, 2005).
The role ambiguity scale covers statements describing ambiguity of the
employees about their job duties, planning of goals, tasks, the ways of evaluating
their results, the authorities. The role conflict scale includes statements which show
the necessity of the employees to perform unexpected and unusual tasks, to respect
different opinions and recommendations of other people concerning performance
of employees’ duties, as well as to assess the achieved results etc. (Ibid). The
internal consistency of the questionnaire measured by Cronbach’s Alpha is.94 for
the present sample.
The second questionnaire measures organizational commitment and consists of
24 items. The response scale is five-point, Likert-type and the answers vary from 1
being never to 5 being every day. This questionnaire includes 5 subscales: personal
importance, emotional involvement, identification, positive exchange and
dedication. The internal consistency of the questionnaire measured by Cronbach’s
Alpha is.83 for the present sample.
Bearing in mind the small sample used, the research hypotheses raised were
exploratory. The main research hypothesis is that there are interrelations between
268 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
role stressors and organizational commitment. The second hypothesis is that with
increase of stress organizational commitment decreases.
The additional tasks of the research is to study the relationships between the
above mentioned factors and the demographic characteristics of subjects like
gender, age, education, length or service etc. The expectations are that the
demographic characteristics will influence commitment to the organization and the
subjective evaluation of the role stressors in the workplace.
The demographic profile of the sample shows a relatively young sample. The
mean age of participants is 33 years. About 56% of the subjects are women. In
terms of education, the sample is dominated by holders of master’s degree
diplomas (77%), followed by bachelors (11%), persons with PhD degree of other
(7%) and only 5% have primary or secondary education. Length of service reveals
that most of the respondents have a total length of service between 6 and 10 years
(35%), followed by those whose length of service is between 16 and 20 years
(21%). 18% have served between 11 and 15 years, 14 percent between 3 and 5
years. The lowest percentages belong to the shortest (between 1 and 2 years) and
longest (more than 21 years) periods of service – 5% and 7% respectively. The
years spent with the present employer, divide the sample as follows: 67% of the
subjects have worked with the same employer between 1 and 5 years; 26%
between 6 and 10 years and only 7% above 16 years. In terms of family status, the
predominant part of the sample is taken by people who are married (53%) or living
with a partner (14%), followed by single people (26%) and widowed or divorced
(7%).
KEY FI NDI NGS
In order to test the two research hypotheses, correlation analysis was
conducted using the statistical software SPSS. The main research hypothesis is that
there are interrelations between role stressors and organizational commitment. The
second hypothesis is that with increase of stress organizational commitment
decreases.
Faculty of Business Economics and Entrepreneurship 269
Table 1: Correlations of Pearson (r)between role stressors and organizational
commitment
Organizational
commitment –
personal
importance
Organizational
commitment –
emotional
involvement
Organizational
commitment –
identification
Organizational
commitment –
positive
exchange
Organizational
commitment –
dedication
Role
ambiguity –
job duties
-,407** -,326*
Role
ambiguity –
performance
-,346* -,352* -,363*
Role
ambiguity –
results
-,335* -,340* -,347*
Role
conflict -
job duties
-,417* -,514** -,431** -,428** -,432**
Role
conflict –
performance
-,458** -,326* -,458** -,463**
Role
conflict -
results
-,393** -,430**
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
The results obtained by means of the correlation analysis demonstrate there is only
partial interrelation between the role stressors and organizational commitment. The
figures in the table represent only the statistically significant correlations. Most of the
correlations are of medium strength while only one correlation has large strength and this
is the correlation between role conflict concerning job duties and organizational
commitment concerning emotional involvement. The correlation is negative which
means that the higher the role conflict caused by inconsistent job duties, the lower the
emotional involvement in the organization the person is working in. There are three other
correlations which deserve more attention as they are close to being of approximately
large strength. These are the interrelations between role conflict concerning employees’
performance and organizational commitment concerning emotional involvement,
positive exchange and dedication. All of these correlations are negative showing the
detrimental effects of role conflict caused by unclear evaluation of employees efforts
invested in work. It is worth commenting that all statistically significant and insignificant
correlations the analysis yielded were negative. Thus, the two raised research hypotheses
were confirmed partially, i.e. there is a negative interrelation between role stressors and
organizational commitment but only in some aspects.
It was considered as necessary to study also the following demographic
characteristics – gender, education, total length of service, length of service in the
present organization and family status of the respondents. The main assumption
270 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
about these factors was that they will influence organizational commitment and the
subjective evaluation of the role stressors in the workplace.
For studying the influence of the demographic characteristics (gender
excluded) on the subscales one-way analysis of variance ANOVA was used.
The only statistically significant influence of a demographic characteristic was
found out in the subscale role ambiguity concerning results. It shows the length of
service in the present organization influences the role ambiguity in terms of results
of the employees. Table 2 demonstrates the specific differences for each group.
Table 2: Influence of the length of service in the present organization on role
ambiguity concerning results - one-way analysis of variance ANOVA
(I) Length of service in
the present organization:
(J) Length of service in the
present organization:
Mean Difference
(I-J)
Std. Error Sig.
1 to 5 years
6 to 10 years -1.05643 1.02916 .565
Over 16 years 4.03448 1.76264 .069
6 to 10 years
1 to 5 years 1.05643 1.02916 .565
Over 16 years 5.09091
*
1.89302 .027
Over 16 years
1 to 5 years -4.03448 1.76264 .069
6 to 10 years -5.09091
*
1.89302 .027
The test Tukey HSD demonstrates that in terms of role ambiguity concerning
results at the level p < 0.05, employees with length of service in the present
organization from 6 to 10 years (M = 9.09; SD = 4.27) are more strongly
influenced by the factor ‘length of service in the present organization’ than in the
case of the employees who have served in it for more than 16 years (M = 4.00;
SD= 0.00). Most probably this is due to the fact that with the long years of service
in the same organization employees from this sample have learned more about the
ways these organizations function and understand better the ambiguous messages
concerning evaluation of their work. It is an interesting finding which inspires
future research efforts in this direction.
For testing the influence of gender on role stressors and organizational
commitment independent-samples T-test was conducted. The results showed no
statistically significant differences in the responses of men and women and hence
the gender does not influence the role stressors and organizational commitment in
this pilot study.
The analyses of the demographic factors show that for this sample, with the
exception of length of service in the present organization, the characteristics of the
respondents do not influence their responses as only a single statistically significant
difference was found out.
Faculty of Business Economics and Entrepreneurship 271
DI SCUSSI ON
The pilot study the authors conducted on role stressors and organizational
commitment has two limitations: the sample is modest by its size and it is not
homogeneous. Nonetheless, the analyses conducted yielded interesting results which
can be very useful to the employers who want committed and healthy workforce.
The correlation analysis demonstrated statistically significant negative correlations
between most subscales of the questionnaires on role stressors and organizational
commitment. The strongest correlation discovered was the one between role conflict
concerning job duties and organizational commitment concerning emotional
involvement. This finding clearly demonstrates that employees in the present sample
respond strongly by decreasing their emotional involvement in the organizational
matters when they have inconsistent job duties. There are three other correlations
which have a practical value to employers although coming from a small sample.
These are the correlations between role conflict concerning employees’ performance
and organizational commitment in terms of emotional involvement, positive exchange
and dedication. All of these correlations prove the negative reaction of withdrawal
when the employees perceive their work efforts have not been evaluated properly.
The one-way between-groups ANOVA analysis of the influence of respondents’
demographic characteristics on role stressors and organizational commitment showed no
statistically significant influence, with the exception of one demographic characteristic –
length of service in the present organization. It proved to influence role ambiguity
concerning results of the work done in the direction that employees who have worked
between 6 and 10 years in the same organization experience stronger role ambiguity
concerning the evaluation of the results of their work as compared to the respondents
who have spent more than 16 years in the same organization. Most probably, this result
can be explained with the experience accumulated in an organization. However, the
modest number of subjects does not allow making definitive interpretations.
CONCLUSI ON
Professional stress will remain a challenge for the modern organizations as it
cannot be completely eliminated from organizational life. This is one of the most
difficult tasks of organizational leaders – to create organizations where stress is
well managed. At the same time, they have to stimulate and maintain
organizational commitment in their employees in order to keep them loyal and
devoted to the organization, on the one hand, and healthy and hard-working, to
ensure good financial results, on the other hand.
The results of the empirical research provoke future scientific explorations on
the topic. They can also serve the employers by providing them with better
understanding how to maintain the levels of professional stress in their
organizations low and the employees committed.
272 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
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Faculty of Business Economics and Entrepreneurship 275
DEVELOPING BUSINESS CULTURE THROUGH
MOTIVATION AND CONFLICT MANAGEMENT
Zarko Pavic, PhD
27
Marija Cukanovic Karavidic, PhD
28
ABSTRACT
Business culture, organizational culture and corporate culture are all terms
that different authors describe as values and norms held in common within a
particular business, whereas the “culture development” is a process of shaping
business culture over time. Cultural clashes in any international project or
organization have in this day and age greatly enhanced the emphasis on the
preparedness for potential conflicts residing in cross-cultural collaboration.
Corporate culture, at the same time, plays a significant role in providing a
framework in which different motivational issues can act. These issues require an
assessment of the influence business culture exerts on motivational practices, and
an assessment of probably existing differences in motivation management
practices. Our study investigates different influences using the sample comprising
247 education centers’ employees in terms of positive and negative motivation
factors and two specific conflict categories, namely: 1) real professional
differences, and 2) power struggles and personality issues. Consequently, the
objective of this research is to establish the relationship between organizational
culture and conflict management styles together with motivation approaches in the
workplace. Our main conclusions suggest that approaching conflicts with a
positive attitude is the best way to make the most of it and emerge at the end of the
tunnel with a more creative solution, and that business culture does influence
motivational practices that are further determined by whether the culture is task-
orientated or person-orientated.
Key words: Business Culture Development, Motivation Factors, Conflict
Management, Cross-Cultural Collaboration.
J EL Classification: J53
UDK: 005.32:331.101.3 005.958
27
Zarko Pavic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
28
Marija Cukanovic Karavidic, Faculty of Hotel Management and Tourism,Vrnjacka Banja,
University of ?ragujevac, [email protected]
276 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Society development and contemporary socio-economic relations create an
increasing need for an advanced business culture in solving a diversity of problems in
almost all areas of human activity. Globalization trends, democratization and political
decentralization, consolidation of capital and business networking in a common
business system, great turbulence in the global financial market, decreasing weight of
centralized decision-making, as well as the advancement of science and technology
with a highly pronounced practical application of acquired knowledge led to
unstoppable changes in the organizational structure and resurfaced the tendency to
provide explicit business culture support in order to ensure necessary prerequisites
significant for realizing objectives set by any organization.
The stated pursuit toward business culture was at first present only in the developed
world, however it has transferred to and engulfed the entire global market of knowledge
and goods, making decision-making increasingly mobile from higher to lower parts of
the system, namely, from one to several persons, members of the group. For that very
reason, collaboration, coordination of activities and teamwork represent prerequisites for
developing and successfully running any modern company, organization or
organizational system incorporated into one joint business network. The aim of
collaboration is to improve relations within an organization, to develop team work and
group decision-making climate, to timely and adequately resolve conflicts, and to thereby
enable a more efficient and effective work process in order to achieve the set plan of the
organization (Martin, 2010, Armstrong, Mitchel, 2007).
Aligning individual and common needs and interests is fundamental in
corporate culture in order to express and project tendencies and issues surrounding
motivation and conflict as disagreements between two or more members or teams
due to different statuses, goals, or perceptions. Fundamentals in any motivational
process and any motivational structure are needs, and resulting interests, values and
personality traits.
The aim of this study is to examine how motives and conflicts influence
business results and business culture projections within an organization with
particular respect for individual and general social needs and interests. For that
purpose original research surveys were prepared and implemented in accordance
with set goals and tasks. Set research goal produced research tasks using questions
on motivation and conflicts concerning the following:
? Defining motivation and conflicts;
? Identifying and interpreting motivation structure, main motivation elements
and conflict structure;
? Establishing relationships between motivation, conflict and other aspects of
a personality;
? Identifying other psychophysical, demographic and professional
characteristics of a personality and social socio-economic conditions for life
and work of employees.
Faculty of Business Economics and Entrepreneurship 277
Active interpersonal cooperation, developed good interpersonal relationships,
and an advanced level of corporate culture have proven essential for the
development and prosperity of an organization in the new political and economic
value system dominating the world today. The very concept of organization has
two aspects:
INSTITUTIONAL ASPECT
(Organization as an institution or functional group)
PROCEDURAL ASPECT
(Method for designing and presenting the system to the members of the organization)
Organizational process involves a detailed description of assigned tasks,
division of tasks and activities, coordination of activities and constant monitoring
and control of the increasing effectiveness. This requires implementing both
internal and external mission (Mi?ovi?, 2000).
Implementation of the external mission requires:
? Defining the position and the role of the organization/institution in the
society and the belonging environment;
? Defining the position and the role of the organization/institution in relation
to set objectives and tasks;
? Aligning the plan of activities with the external mission;
? Structuring the organization based on external demands;
? Appropriately integrating constituent parts for implementing the external
mission;
? Motivating its members in furthering the external mission;
? Timely monitoring and controlling achieved tasks;
? Employing necessary resources and caring for their rational use for the
purpose of implementing the external mission.
Implementation of the internal mission requires:
? A developed work plan on the most rational use of existing resources of an
organization/institution in order to achieve its objectives;
? More efficient execution of planned activities;
? Appropriate control of the assigned tasks and activities completion;
? Organizational structure optimization to facilitate reaching long-term
objectives;
? Delegating organizational units’ authorities and responsibilities to ensure
necessary conditions for performing their activities;
? Creating a positive working environment and motivation for successful
operation;
? Ensuring required financial resources for reaching set objectives;
? Rational use of available resources.
278 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Even though developing a system and an organization often involves structural
and technological changes, the main goal in the process is to bring about change in
people, i.e., in the nature and quality of their working relationships. Successful
development of an organization is therefore directed not only toward the
organization as an entity, but primarily toward individuals and/or groups
significant for the progress and achievement of stated goals of the organization.
In upholding the quality of business activities and depending on the situation
on a global, regional or local level as well as within the organization itself, it is
quite often essential to make and manage changes. Useful therefore is to be on
familiar terms with methods for adjusting to changes regardless of whether the
change is induced by external or internal environmental factors. The most
important methods that can be employed in the process of change (Mi?ovi? et al.,
1983) include:
? Problem solving;
? Organization renewal;
? Collaborative management;
? Cultural environment;
? Action research.
The authors additionally propose three approaches in the process of change
( Leavitt, H.J., 1964), namely:
I. Changes in the organizational structure;
II. Changes in technology;
III. Changes in people.
Human resources managers require good understanding of activities and
techniques that stimulate organizational development. They may be applied in
various situations, such as identifying certain problems and situation in which the
intention is to induce changes significant for organizational development. Three
main techniques are nowadays cited for stimulating development and prosperity of
an organization (DeCenzo, Robbins, 2010), namely:
I. Technique according to the target group;
II. Technique of feedback survey, group and network management;
III. Technique of improving collaboration.
Certain activities implemented with the aim to raise the quality of work in an
organization, ranging from individual training to improved general environment
and climate in the organization, may be based on the following target groups:
? Individuals - training individuals in small groups in order to improve their
skills, especially in the field of interpersonal relations, effective cooperation
and increased threshold for tolerance.
? Small groups - two to three persons training through the so-called
“transaction analysis” in which they practice communication styles and
communication content exchange in order to reduce destructive and
accentuate clean and creative messages.
Faculty of Business Economics and Entrepreneurship 279
? Teams or groups - training teams or group members to better understand
their working relationships. This is done by developing problem solving
skills within a team/group.
? Intergroup relations - training for confronting different opinions based on
which the situation in the organization is assessed. The ultimate goal is to
enable teams and/or groups to prepare action plans and improve job
activities and own efficiency. These meetings are organized following either
significant organizational changes or introduction of new technologies in the
work process.
? The entire organization - either a technique of reverse situation research in the
organization or a network technique for identifying different combinations for
caring for people and production within the organizational process matrix.
Communication studies and social and cultural studies unmistakably reveal a
direct correlation between positive climate in an organization and the achieved
level of communication and tolerance between individuals, groups and teams
within that organization. Technique for improving collaboration is therefore
extremely important and generally accepted in the modern world of management.
Main parameters for attaining a high level of cooperation and collaboration in an
organization include implementation of joint values and strengths, trust between
individuals, groups, teams and top managers, risk taking by responsible individuals
and departments, and finally, a clear representation of all stakeholders in the
organization in terms of higher goals of importance for organizational development
( ,
BUSI NESS CULTURE AND LEADERSHI P
Answering to many questions this day and age impose may help us to become
leaders with a high level of business culture. Introducing culture intelligence in
any business is a major challenge. Leaders ought to employ awareness and
adaptability skills to assess given business opportunities and align their
management with the amount of available power, the nature and values of their
followers and tasks to be achieved.
Leadership is generally defined as the ability to influence others to voluntarily
aim to realize a common goal. Crucial for every leader is building a leadership
style rich in cultural intelligence with a clearly defined and visible performance for
the organization. Achieving aforesaid requires utmost care for attaining
organization’s business and work objectives and care for relationships within the
organization, in other words, requires both organizational and business culture.
The above stated indicates a clear correlation between leadership style and
organizational performance. A great number of other factors also play a part, them
being the structure of tasks resulting from organization’s objectives, leader’s power
and behavior of subordinates, who naturally try to exert influence over their leader
280 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
just as often as he/she tries to exert influence over them. There is no defined ‘best
leadership way’ that can be applied in all organizations and business cultures
throughout the world. However, leadership examples in the world allow us to
understand the great complexity and finesse of business culture influencing forces
:
EXAMPLE 1)
Inherent to Japanese, as opposed to American culture, is a higher level of
power distance, in other words, they expect and accept that leader typically
conducts power. Japanese show more respect for their leaders simply based on
their position, whereas in the USA leaders must earn that respect with their deeds.
For that reason the success of leaders in Japan is largely based on their ability to
understand and attract followers.
EXAMPLE 2)
Leadership in the Arab society is directly ingrained in the historical and
cultural heritage, considerably shaping business tradition, management practices
and expectations from the leader. The management style emerging from such
circumstances is referred to as the “Sheikocracy”. This management style is
distinguished by strong elements of personal autocracy. Leaders shall instead of
respecting procedures appoint based on family relations and friendships.
EXAMPLE 3)
Leader’s legitimacy in Chinese culture is loyalty based, and in a modern
Chinese organization a word of the founder or chief executive is interpreted as law,
resulting in a specific relationship between the leader and followers.
EXAMPLE 4)
Management in France is influenced by a strong emphasis on social
development based on established hierarchy. A large group of middle managers
dealing with an abundance of rules and regulations acts as a mediator between top
management and employees (workers). Even though the system seems confusingly
inefficient, French organizations function rather reliably.
EXAMPLE 5)
The image of Russian leaders as powerful self-rulers is based on the long history
of the country run by centralized authority and responsibility. Centralization of power
created strong bureaucracy at the top. While Russian organizations are trying to find
their place in the new free market setting, Russian leaders are attempting to bring the
responsibility down to the lower hierarchical levels.
Given examples from the United States, Japan, China, Arab Countries, France
and Russia show the complexity of forces that influence leadership styles. The
significance of historical factors and tradition is not to be underestimated.
Individuals with a high degree of cultural intelligence consciously pay attention to
said facts and work hard to improve own knowledge. An aspect of leadership that
ought to be considered focuses on followers rather than leaders, meaning that in a
certain way everyone is responsible and everyone has potential to become a leader.
Faculty of Business Economics and Entrepreneurship 281
The leader needs to consider not only how to persuade, but how the interaction
between his/her exerted influence and influences exerted by others may lead to a
positive outcome. A skilled leader may set goals for his/her followers just the way
they expect him/her to do, and still use formal and informal processes ingrained in
their culture. Managing an organization or a group with a culturally diverse
workforce generally requires strong cultural intelligence.
Respecting diversity and recognizing the principle “Think globally, act
locally!” is a positive objective of any organization. Additionally, leaders must
possess appropriate knowledge and respect earned based on that knowledge. The
advantage of a leader is in the ability to ‘read’ other leaders or colleagues from
other organizations by taking into account their national culture and related
peculiarities. Thoughts on leadership in most recent decades have shifted towards
the idea of a modern leader who ought to transform and improve the management
process primarily through encouraging employees to overcome their immediate
personal interests and goals, and to not only accomplish the desired outcome, but
exceed projected expectations. A leader who truly wants to succeed in this quest
must not merely reward a certain performance of his/her employees and thus
motivate their further work and advancement, but rather, he/she must present a
compelling vision of the future and lead by own example, modeling the desired
employees’ behavior and showing personal interest in each one of them.
However, even with the common comprehensive definition of the
transformation management, employees from different countries have different
expectations regarding their leaders’ behavior. In any case, it is possible that the
implementation of the transformation management requires a specific set of
personal traits not present in every leader. In short, leader must primarily be
familiar with organizational rules. If he/she desires to be recognized as a leader
distinguished by cultural intelligence, he/she must use knowledge and awareness to
develop behaviors that can be adapted to any particular situation or context.
We can conclude that a leader who distinguishes himself/herself by cultural
intelligence can select a management style that will create a balance between
his/her usual leadership style, expectations of followers and demands of the
situation. A good illustrating example authors use is found in the fact that “when
riding the waves, skiing or cycling, in the beginning it is very difficult to find a
balance, but over time it gets easier and easier and more natural” (Tomas, Ikson,
2011, 141-142).
282 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
MOTI VATI ON AND MANAGI NG MOTI VATI ON
Working with people by employing effective communication and adequate
staff motivation, and managing by authority, responsibility, power and influence
today represents a great challenge and task for all managers. Motivation, and in the
narrow sense “work motivation” has proven to be one of the most important
assumptions for effective performance and achieving set tasks for both individuals
and entire organizations. Motivation in an organization is directly proportional to
the quality of results achieved and the level of organizational development. For this
specific reason, every manager wants to have a large number of motivated
individuals and groups in an organization, which is why planned and systematic
work on improving employees’ morale and motivation, an aspect falling within the
scope of work of experts in human resources management, is of utmost importance.
Academically speaking, motivation is an inner impulse that can urge a person to
appropriately react to a series of internal events happening on different
psychological levels (Mi?ovi?, 1983), such as:
? Ensuring basic needs
? Ensuring social needs
? Ensuring personal satisfaction.
From the organizational behavior perspective, motivation is the way in which
drives, aspirations or needs manage, control or explain behavior of an organization.
If motivation is understood as “an effective network of ideas and thoughts”, then
every person has the motivation, although it is either qualitatively and
quantitatively similar or different, and very rarely identical with that of other
organization and/or team member. If motivation is viewed solely through the lens
of a work process and realization of set goals of the organization, then it is either a
“process of stimulating people to act to achieve desired goals”, or it is more a
“management process that affects people’s behavior with regard to manager’s
knowledge on human behavior in a given situation” ( ). The
attitude towards defining motivation in an organization has been changing due to
changes in the very nature of managerial work, in direct correlation with
civilization factors, including: new scientific and technological disciplines, new
approaches in applied psychology, introduction of meditation, relaxation and
physical exercise skills, changes in the substance of expert-employer relationship,
mobility of employment, new jobs, new managerial approaches, computerization of
the society in its entirety, high degree of alienation, alteration of ethical awareness
and morality, etc. The most influential factors in terms of attitude towards
motivation in the workplace include:
? Psychological characteristics of people and their dedication;
? Complexity of work and new technological circumstances;
? Effectiveness of management approaches;
? Social aspects in relation to the organization and its environment.
Faculty of Business Economics and Entrepreneurship 283
Previous research on the importance of motivation for improving work
processes clearly indicates a direct link between the degree of motivation and the
effectiveness of results, even though there are numerous other important
parameters that either directly and/or indirectly affect the level of achieved goals of
the organization.
These include: personal skills, talent utilization, material resources, level of
improved professionalism within the organization, hierarchy of values and
positions, morals, ethics, culture, socialization level, personal and collective
responsibility, commitment to the idea and assurance in strategic guidelines, and
management method of the top management in the organization.
Motivation factors represent different values, situations, standards and norms
that either positively or negatively affect the level of motivation. Major positive
motivation factors or so-called “motivators” are achievement, recognition, personal
work, responsibility, advancement and personal development. Negative motivation
factors or so-called “demotivators” include inefficient administration, incompetent
supervision, poor interpersonal relations and inadequate personal qualities of a
manager, insufficient reward, and poor working conditions.
Common for all demotivators is “deviation from the expected” both in terms
of efficiency and accountability of administration, lack of professional qualification
of superiors, unfair and unequal managerial treatment in respecting those who
really work hard and those with poorer results who, nevertheless are protected from
superiors due to managers/team leaders’ inadequate knowledge, integrity and job
understanding, unequal or insufficient reward as well as unsuitable work conditions
in terms of employees’ needs for good performance of assigned responsibilities and
duties.
In a practical sense, approaching different motivation theories must
differentiate between three paradigms that are based on:
I. Needs
II. Processes
III. Behaviors.
Even though motivation, based on the definition, is a personal phenomenon, in
an organization it represents a systemic problem that must be addressed and
modified based on the structure of the organization, its objectives and real
achievements. Certain authors suggest first analyzing the entire system in which
members of the organization work, and then looking at the impact motivation and
behavior of individuals produce on work efficiency (
. They believe the system itself comprises three following
groups of variable parameters that affect motivation in an organization:
1. Individual characteristics (interests, positions and needs a person brings to
the organization. Given that prior to arriving into an organization people
differ based on their individual characteristic, they clearly harbor different
or possibly similar motives. That is why same motivation does not
produce the same effect with everyone!)
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2. Job characteristics (tasks and job qualities employees consider satisfactory,
further resulting in greater responsibility and work motivation),
3. Work situation qualities (factors in the work environment that stimulate
productivity. A particularly important aspect is the system for evaluation
and reward managers implement, along with the reached level of interest
the organization shows for its employees).
A particular aspect in the systemic approach to motivation is modification of
employees’ behavior that includes a set of various techniques managers can use to
generate individual behavior that would be adequate for assumed work tasks or set
objectives. The most common methods or techniques managers can use to timely
and positively change the behavior of their subordinates include:
? Positive reinforcement or support,
? Learning by avoiding negative consequences,
? Absence of reinforcement or support,
? Punishment.
Managing work motivation is one of the most important aspects of work of
every manager, especially manager who cares about human resources in an
organization. A global economy and proliferation of new technologies,
informatization with a precise control of the entire work process and various forms
of inter-organizational business networks in consolidating capital and prestige in
the market have imposed the importance of motivation at the level of the
organization and its members ( ). Hence, managing work
motivation may be conducted on a macro (focused on the organization) or micro
level (focused on the individual).
A. Measures and activities that may be undertaken to manage motivation on
the macro level include:
? Researching relationships in the organization
? System development
? Analysis of regulatory procedures and rules
? Motivation factors incentives
? Support for factors concerning “business hygiene”
? Improving communication
? Improving participation in decision-making
B. Measures and activities that may be undertaken to manage motivation on
the micro level include:
? Legalizing personal needs
? Creating opportunities for development
? Influencing individual efficiency
? Positive reinforcement in the workplace
? Reward
? Continuity of success
Faculty of Business Economics and Entrepreneurship 285
? Type of reward
? Advancement
? Improvement
? Culture within an organization
? Cooperation and communication
? Expected task performance
? Feedback
? Leadership
? Realistic estimate
? Self-confidence and faith
? Sense of personality
CONFLI CT AND MANAGI NG CONFLI CT
Conflict in an organization represents a disagreement between two or more
members, groups or teams because they have to share insufficient resources or work
activities, or have different statuses, objectives, positions or perceptions. Modern
approach to conflict suggests that conflict is inevitable, and in many aspect even useful
for successfully and efficiently resolving certain situations and issues. Even though
literature differently interprets the mere essence of a conflict given the approach and
the method of its resolution (conflict of interest or values, disagreement with general
objectives, low level of interpersonal relations, influence of demotivation factors,
dysfunctional tendencies in outward or inward organizational development, etc.), it is
evidently one and the same process. It can have both positive and negative qualities
that must be diagnosed in time and the negative impact on the entire organization or
work of individual teams or individuals in the organization prevented.
It is very important to distinguish early on between conflict and competition, since
the two phenomena are often jointly presented (Stoner,Wankel, 1986). Competition is
created when group’s or team’s objectives are not equal and harmonized, and when
groups or teams cannot interfere or influence each other. If a window for interfering
with or influencing work between groups and/or teams arises, the conflict ensues. As
opposed to competition, cooperation and conflict do coexist, as the opposite of
cooperation is not conflict but absence of cooperation. Based on the definition,
cooperation is a process in which two or more groups/teams work together to jointly
achieve common objectives. Based on the aforesaid, a common denominator in a
modern understanding of conflict is that conflict is far more functional and positive in
an organization than it is directly destructive, and therefore human resource managers
and managers in general must timely recognize conflict and manage it by minimizing
its detrimental effects and accentuating useful aspects the conflict may produce
(Rahim, 1985). Experienced and skilled manager must be able to not only identify
conflict but also the conflict phase.
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Conflict process has 6 following phases:
? Potential conflict
? Emerging conflict
? Identified conflict
? Personal conflict
? Conflict episode
? Conflict consequences
Even though the spectrum of conflicts is very diverse in terms of the adopted
resolution approach, emergence aspects, relations within an organization, team
structure and personal traits, one of the educationally most explanatory conflict
classifications is the following (Mi?ovi? et al., 1983):
? Conflicts based on the source and cause (include subjectively induced
conflicts due to poor interpersonal relations, negative personality structures,
opposing attitudes, opinions and interests, and those objectively determined
due to various organizational, technological or economic problems),
? Conflicts based on actors and levels (there are three types of conflicts based
on actors: within oneself, between individuals, and between groups/teams,
whereas based on levels we can differentiate between five possible types of
conflicts: within oneself, between individuals, between individuals and
groups/teams, between groups/teams within an organization, and between
organizations),
? Conflicts based on onset phases (include potential, emerging and identified
conflicts),
? Conflicts based on work and management levels (include vertical, between
various work and management levels within an organization, and horizontal
emerging between individuals or groups working within the same
organizational level),
? Conflicts based on its character (include destructive, due to emotional intolerance or
disagreement with work objectives and work methods, and constructive emerging
due to aspirations to increase individual creative capacities).
Before we proceed with explaining the conflict management procedure, it is
important to learn about potential conflict prevention activities within an
organization. Human resource manager must permanently monitor and insist on the
importance of human potentials, value objectives and needs of members of an
organization, work on risk minimization, create a climate of understanding and
respect, support informal groups in their strive to resolve problems, support the
culture of self regulation in relation to the culture regulated by authority, influence
the division of responsibilities according to levels, encourage innovations and
practicality and be active in harmonizing new strategic interventions with
structures and processes in an organization. Since conflict and the entire
collaborative process significantly influence the functioning of an organization, it
is necessary to recognize models, procedures and methods for managing conflicts.
Faculty of Business Economics and Entrepreneurship 287
World Health Organization has suggested the following measures and activities the
manager must undertake in managing conflict situations (WHO/EURO, 1981):
? Pay particular attention to individuals or groups that are “troublemakers”
? Work intensively on improving communication
? Precisely define “superior objectives”
? Examine the nature of mutual dependence
? Accept and take the risk for proposed changes
? Show authority and “power” when needed
? Limit the activity of opposing sides
? Work on building mutual confidence
? Work on joint acceptance of satisfaction and motivation
? Work on creating empathy towards the opposing side.
Modern management refers to three main outcomes in resolving conflicts with
three outcome options, namely when both sides either win or lose, or when one
side wins and the other loses. Pragmatic approach in managing conflict involves
support for both cooperation and rivalry within the same process as they are not
mutually exclusive. One of the current approaches in managing conflict presumes
precise positive traits that must be adequately stimulated. Managers and human
resource managers nowadays have at their disposal three most important methods
for managing conflict, namely:
I. Conflict stimulation
II. Conflict minimization, and
III. Conflict resolution.
Managers should stimulate and control conflict in instances in which it is
evident that conflict may be useful for organizational development or teamwork
efficiency. Stimulating methods include:
? Bringing people from the outside,
? Supply,
? Organizational restructuring,
? Rivalry support,
? Appointing appropriate managers.
Application of the conflict minimization method is far more present than
conflict stimulation, as it reduces antagonism created by conflict. This method is
mostly employed in situations in which the conflict has already gained its full
intensity as a destructive and disharmonic force for the organization.
Conflict resolution method should be applied once conflict reaches a phase in
which any further postponing may produce serious consequences for the organization.
For that purpose four methodological forms are applied (Muller, 2009):
? Changes in the organizational structure (targeted restructuring of an
organization, changes in sections of the main organizational matrix, with
different links, adequate increase in responsibility where required and new
more efficient groups/teams in the organization).
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? Authoritarian problem overpowering (situation in which the problem is not
resolved but overpowered by forcing the losing party to accept the position
of a higher authority or higher force).
? Compromise (situation in which managers try to convince opposing sides to
‘sacrifice’ some of their positions or requests in order to allow themselves to
‘live’ with their problem even though they have not resolved it completely).
? Joint problem resolution (method for resolving intergroup conflicts with
three possible problem resolution options: consensus, confrontation or
acceptance of a higher, superior objective. It is important to note that
conflict between groups leads to a greater cohesion within a group, whereas
acceptance of a joint, higher goal creates greater cohesion between groups).
REPRESENTATI ON AND I NTERPRETATI ON OF RESEARCH
RESULTS
Research measures a wider set of elements comprising motivation and conflict in
order to study the structure and relations between those elements with employees in
education, by employing the so-called “factor analysis”. The research included a
sample of 247 respondents working in high schools. Respondents were presented with
two groups of questions. The first set of questions included questions concerning work
motivation, whereas the other set of questions were directed toward conflict.
Respondents were within each question provided with answers, each carrying a certain
number of points ranging from 1 (as the least significant) to 5 (as the most significant).
Respondents within each question assigned values from 1 to 5 to oprovided answers
based on which we gathered results further presented in this study:
Table 1: Overview of main characteristics of respondents
Characteristics N %
Gender Female 149 60.32
Male 98 39.68
Total 247 100
Education
High School 23 9.31
Associate Degree 47 19.03
University Degree 167 67.62
Masters Degree 7 2.83
PhD 3 1.21
Total 247 100
Work type Administrative staff 22 8.91
Teachers 47 19.03
Professors 151 61.13
Pedagogues and 7 2.83
Faculty of Business Economics and Entrepreneurship 289
psychologists
Lawyers and economists 14 5.67
Science workers 6 2.43
Total 247 100
GROUPS I N THE MOTI VATI ON FACTORS SAMPLE
First question “Motivation for professional orientation” explains the largest
number of the total variance, where “motivation at work” is defined by the
following elements:
Figure 1:Motivation for selected professional orientation
Analysis of obtained results represented in Figure 1 indicates that personal
income is a priority in selecting a professional orientation. The second most
important factor is personal development, i.e. intention to realize professional
desires of employees. Opportunities for professional advancement at work:
individual is motivated to professionally educate and train only if he/she is
convinced that such behavior will realize personal priority objectives regarding
professional advancement, and consequently an adequate salary. Personal
development in correlation with personal salary leads to the next specific factor,
namely “success at work” or participation in the latest work advancement
developments in a selected business activity.
Second question, “What demotivates you the most at work” is defined by the
following elements:
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Figure 2: Demotivation factors in the workplace
Selected element that influences demotivation of employees the most is
incompetent supervision, clearly pointing to the organizational management or the
organizational process within the organization. Inefficient control leads to poor
results, and therefore demotivates employees.
A third question refers to variables directly defined by the following
motivation factors:
Figure 3: Factors influencing motivation the most
The first most important variable defining the third motivation factor at work
is the “work situation characteristics”, whereas the second is “job characteristics”
indicating the significance of attitudes towards opportunities for and levels in
accomplishing work tasks in terms of their development, mutual disharmony,
partiality, lack of organization and formalism in regards to the opportunities,
expectations and social significance.
Faculty of Business Economics and Entrepreneurship 291
Conducted analyses show specific interdependence between work and
motivation in all organizational systems. The analysis also shows that work
motivation, namely positive and negative effects thereof, must be considered from
psychological, economic, sociological and other aspects, in other words, with an
interdisciplinary approach.
Scientific studies confirm that motivation is an unavoidable work and
development factor playing a significant part in encouraging and satisfying diverse
employees’ needs. Timely insight in multiplicity of human needs and motivational
impulses ensures grounds for designing and creating suitable motivational strategies
that will allow all employees to search and use available options. Changes in the work
content may further encourage and speed up introduction of new work methods and
techniques, directly and positively influencing a range of human abilities and creativity.
WORK CONFLI CT SAMPLE GROUPS
The first factor is a portion of the total “work conflict” variance defined by the
following elements:
Figure 4: The most significant positive effects of work conflict
The first response in a sample was “better understanding of the other side”,
indicating a need to work on building mutual trust and creating empathy towards
the other side. The second answer was “better decision and assessment” indicating
a need to improve communication and joint acceptance of satisfaction and motives.
The third answer was “new ideas and approaches”, in other words, creative
possibilities of opposing sides or individuals as support for innovative processes.
The fifth answer was “possibility for change” indicating a desire for change
through different types of connections, adequate increase in accountability and new
efficient teams in the organization.
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The second factor is defined by the following elements (Figure 5):
Figure 5: Causes of conflict
The first answer in the sample was “relations within an organization”,
indicating a need for joint efforts in resolving issues, considering that conflict
between groups and individuals leads to a greater cohesion within an organization
either by accepting joint objectives through a consensus and confrontation or by
accepting greater and superior objectives. The second most commonly provided
answer was “interpreting the situation”, whereas the third most commonly
provided answer was “personality structure”, indicating the significance of
situation and individual determinants of a personality (conscience, independence,
interests, values, needs, academic level, intelligence, etc.). There are also other
personality determinants such as: creativity, moral values, social status, training,
prestige, etc.
Variables presented in Figure 6 define the third factor:
Figure 6: Created conflicts by character
Faculty of Business Economics and Entrepreneurship 293
The most commonly given answer concerning the third factor was “interest” as
a consequence of different goals, different statuses, positions, etc. The second most
commonly given answer was “rivalry” containing vertical conflicts (conflicts
between various job and management levels within an organization) and horizontal
conflicts (between individuals and groups within the same level in an
organization). The third most commonly provided answer was “emotional
intolerance” including either destructive conflicts due to emotional intolerance or
disagreement with goals and/or work methods, or constructive conflicts emerging
in an attempt to increase certain creative capacities.
Prescribed scope has limited our study of these complex issues. Respondents
were able to select their priorities between three motivation factors and three
conflict factors in a work environment. All respondents provided answers to given
questions (previous ranking of answers) regardless of their group affiliation, age,
gender, employment tenure and education. The study found that there are
differences in ranking answers based on said categories, just as there are certain
correlations between said motivation and conflict factors in the work environment
and their influence on the business culture.
CONCLUSI ONS
? We investigated different influences using a sample comprising 247
education centers’ employees regarding positive and negative motivation
factors and two conflict categories: real professional differences and power
struggles and personality issues.
? The objective of this research was to establish the relationship between
organizational culture and conflict management styles together with
motivation approaches in the workplaces.
? Approaching conflicts with a positive attitude is the best way to make the
most of it and emerge at the end of the tunnel with more creative solutions.
? Business culture does influence motivational practices in terms of whether
the culture is task-orientated or person-orientated.
? Future studies on organizational and business culture must focus on a greater
number of variables, in order to learn about, understand, explain and foresee
professional and individual participation of groups and individuals in
business processes and realization of business results of any organization or
organizational unit.
? Studying these complex issue requires complex theoretical, empirical and
interdisciplinary research, which in addition to motives and conflicts must
include professional capabilities, psycho-social personality traits,
employees’ attitudes towards work and profession, and in particular,
attitudes towards acquiring knowledge and skills.
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REFERENCES
[1] Armstrong, S., Mitchel, B. (2007), The Essential HR Handbook: A Quick and
Handy Resource for Any Manager or HR Professional, Career Press, str. 173 –
174.
[2] Cheese, P., Thomas, R., Craig, E. (2008), The Talent Powered Organization.
Strategies for Globalization, Talent Management and High Performance,
Kogan Page Limited, 11.
[3] DeCenzo, D. A., Robbins, S. P. (2010), Human Resource Management, John
Wiley & Sons, Inc, 21-23.
[4] Dessler, G. (2011), Human Resource Management, Pearson, New Jersay, 33 –
34.
[5] ?or?evi?-Boljanovi?, J, Pavi?, Ž. (2011), Osnove menadžmenta ljudskih
resursa, Univerzitet Singidunum, Beograd.
[6] Grinberg, J., Baron, J. (1995), Behavior in Organizations, PHI, USA.
[7] Kanfner, R., Heggestad, E.D. (1997), Motivational traits and skills: A person-
centered approach to work motivation. Research in Organizational Behavior,
19, 1-56.
[8] Leavitt, H.J. (1964), Applied Organization Change: Structural, Technical and
Human Approaches, N.Y. Wiley.
[9] Martin, J. (2010), Key Concepts in Human Resource Management, Sage,
London, 7 – 8.
[10]Mi?ovi?, P. (2000), Menadžment zdravstvenog sistema (Health System
Management), ECPD, Belgrade, 167-179.
[11]Mi?ovi?, P., Chattopadyay, S., Ramaiah, T. (1983), Management of Conflict,
Collaboration and Team Work, WHO/SEARO.
[12]McClelland, D.C. (1961), The Achieving Society, Princeton N.J., Van Nostrand
and Business.
[13]Maslow, A.H. (1970), Motivation and Personality, New York: Harper and Row.
[14]Muller, M. (2009), The Manager’s Guide to HR, Amacom, Society for Human
Resource Management, American Management Association.
[15]Rahim, M.A. (1985), A Strategy for Managing Conflict in Complex
Organizations, Human Relations 38, No. 1, 81-89.
[16]Stoner, J., Wankel, Ch. (1986), Management, 3rd Edition, PHI, USA.
[17]Thill, J. V., Bovee, C. L. (2011), Excellence in Business Communication,
Pearson, 45.
[18]Tomas D.K., Ikson K. (2011), Kulturna inteligencija (Culture Intelligence).
Belgrade: Clio, 141-142
[19]WHO/EURO (1981), The Design of Training in Health Planning and
Management, Report on Working Group, Berlin, Germany
Faculty of Business Economics and Entrepreneurship 295
THE TRANSFORMATION OF TRADITIONAL
ORGANIZATIONS TOWARDS A MODERN APPROACH
BASED ON QUALITY MANAGEMENT AND EMPLOYEE
MOTIVATION
Marina Gasic, MSc
29
ABSTRACT
Companies must seek to optimize their business rather due o increasing
competition. Profitability is the biggest reason why companies do business, and
thus develop new approaches and ways to make operations more efficient.
Modern business is different from traditional in several aspects. First,
employees are better informed, with better systematically education. Physical work
is replaced by the intellectual and service sector dominates the production. Apart
from this, there are also changes in the business that are very fast acting, and thus
decisions are made at the time the problem occured.
The task of recruiting and retaining quality people in every organization is a
part of human resource management. Appropriate human resources are the
individuals in the organization who contribute largely achieving the objectives of
the management system.
The leaders of modern organization are significantly different from those of
traditional, because today´s economic situation often leads to layoffs to reduce labor
costs in order to improve decision-making processes, whereby to be more effective and
efficient with the aim of improving the overall quality of the organization´s business. It
is in these new situations we distinguish new styles of management such as
transformational leadership, training, „superleadership“, servant leadership and
entrepreneurial leadership. Those who stand out are leadership styles that allow the
inclusions of employees to demonstrate their abilities.
One of the main tasks of a manager is to fully understand the process of
motivation to better influence the behaviour of followers and thus make it more
consistent implementation of the organization´s objectives.
Motivating subordinates is implemented with various strategies such as
managerial communication, then the theory of x-y theory, design work place,
behaviour change, Likert management systems, in-kind and cash incentives.
Key words: Leadership Style, Employee Motivation, Human Resource
Management, Intellectual Capital, The Competitiveness of Enterprises
J EL Classification: B50, M54
UDK: 005.591.4 005.32:331.101.3 005.336.4 005.336.3
29
Marina Gasic, Croatian Employment Service, Osijek, Croatia, [email protected]
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I NTRODUCTI ON
Knowledge is becoming crucial, and thanks to globalization and the
development of technology innovation has become key to global competition.
Flexible workers are becoming a central factor in business and thus encourage the
achievement of competitive advantages. The unification of the world into one
system makes globalization that is actually achieved by constant information and
technological progress. Thus enables the transition from a traditional economy to
the "New" economy, which is also called "knowledge economy". Classic resources
of production are land, labor and capital, but in today’s modern world, the main
resource is knowledge. The only thing that could be recognized through people is
their knowledge and the most important is that it can be constantly renewed.
Employed invest their knowledge in the company in which they work, so the
employees pay should not be considered a cost, all the benefits that are focused on
employees should be considered an investment. Human resources are very
important backbone of management and governance, as well as a mechanism of
forming effective, accountable, transparent and quality of public administration.
Management flexibility creates new demands of human resources.
About mergers and acquisitions of companies is written for many years, as
well as their activities where there are numerous studies. Within society there is
divided opinion on the effectiveness of acquisitions, taking into account the fact
that the performance of the company after the takeover is affected by many factors,
that opens up space for scientific contribution in identifying the impact of the style
of management to successfully manage change in firms that are taken over.
Today, this modern world is ruled by knowledge and technology, education,
expertise and innovation of employees, and the elements which are crucial to
master change and competitive advantage for organizations, and societies as a
whole. Training and development of employees is in constantly growing, so there
is an investment in the skills of employees, regardless of whether they are on the
macroeconomic or microeconomic level.
Unfortunately the Republic of Croatia and its organizations are not particularly
aware of the level and quality of education, which is actually a key to success.
Specifically, in Croatia there are no similar studies specifically based on the
microeconomic level.
From the earliest beginnings of the existence, man was forced to learn,
develop and prosper. Hence the definition of how human learning actually is
preparing to meet their needs. The history also came to the distribution of work and
work organization, and contrast study also belongs to some kind of preparation for
life in a society.
In the twentieth century, industry and later tourism and transport have
experienced unimaginable development and progress. There have also been major
changes within the community as well as the economy. When it came to the oil
crisis in the early seventies, it comes to question the environment that become
Faculty of Business Economics and Entrepreneurship 297
unstable. The reason for this is the so-called completion of so-called Cold War and
the disintegration of the socialist and communist social system that major problems
are due to a market economy and market relations. In contrast, East Asian states
provide great economic progress, regardless of the crisis that has engulfed the late
nineties. Globalization is increasingly becoming the rule in the society and
economy and slowly affects all parts of the world. Some economic activity in some
parts of the world were created in the 21st century, and some are still in the
developmental process, and therefore there is a crisis of certain professions, while
some propulsive branches are enable to progressively develop.
The progress of the economy and economic relations is reflected in the
struggle for consumer’s preference and service users themselves. Many
international organizations are in the process of closing, while others manage to
turn their attention to other activities. Due to such situations there is a clear line
between rich and poor.
Information technology experienced the largest and fastest development. It is
important to notice that the time from discovery to using specific applications is
reduced, while the process of obsolescence of certain knowledge accelerates, which
corroborates the fact that knowledge knows obsolete before another generation of
students or student ends in their education.
Technical education of employees in production and development institutions
must follow changes in the environment in order to be competitive. Social changes
in recent times require more general education, so the general social and
technological progress must use it. It was concluded that education has become the
rule in all sectors of production, but in the economy as well as in science.
Many authors, like (Vuji?, 2004) repeatedly warrned us that a major factor in
successful organizations is to adapt to change, as well as their monitoring in the
environment. The continuous process is an ongoing training and education.
In the world there is a major problem for graduates who allegedly do not have
enough knowledge and skills to work. Therefore, many countries are trying to
incorporate mechanisms for rapid adaptation process in their education systems,
reviewing the major changes in the environment. These school systems are joined
by numerous representatives of chambers of commerce as well as scientific
institutions so the programs become more contemporary.
Science, engineering and technology are in great progress and require a quality
education. Accordingly, there is a development of organization that has its own
interests, and individuals with their needs and desires. Thus, interests are opposed, and
the success of the organization comes aligning the interests of the one and the other.
Interests of the organization and the individual one are completely different
and can lead to conflicts. It is necessary to satisfy the interests of the organization
as well as the interests of the individual, whom sometimes is not easy to achieve,
but we must weigh the effort of education and training of employees. Knowledge is
part of the organizational structure that is increasingly gaining in importance and
affects all aspects of society. Education is not only the area of human resource
professionals and managers, but the whole enterprise, which covers all employees.
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It is very important to recognize motivation as a means of managing human
resources, also recognizing the important when choosing a motivator that will in
the course of this work be the target. In addition to human capabilities and
knowledge there is increasing weight to the interests of individuals and their
motivation. Unfortunately, today's managers forget that in front of each machine
still stand a man, and his knowledge and skills they possess.
Quality management, good team spirit, meaningful planning and good
organization, in a familiar environment, encourages and rewards knowledge and
skills, thus achieving the desired business objectives in the interest of the company
and its employees.
According to Maslow theory, by Abraham Maslow (1943) Vuji? (2004) says
that every man is trying to satisfy five basic needs - physiological needs for love
and security, social needs, the need for respect and power and the need for self-
fulfillment. All needs are psychological in character part the first, which business
linked is primarily related to money.
There are many theories, like the theory of scientific management and the
theory of achievement, they try to explain the nature of motivation and especially
help explain the behavior of individuals in specific situations. There are also a
number of motivational techniques that are available to managers.
In the entrepreneurial society individual staff as well as their motivation and
specialization and promotion become part of the development program of
integrated enterprise quality. The most productive firms become one that fully
includes the premise of employees in their work. Firms has differ two different
types of strategies that must be closely linked with the way of competition in the
market, and by the development, engagement, guiding and motivating and
controlling internal resorce. Compensation strategy should be integrated with the
business strategy, formulated and to enable the achievement of long term
objectives of the business policy and human resources policy.
MOTI VATI ON, I TS THEORY AND MEASUREMENT OF
MOTI VATI ON
In the process of introducing into work it is necessary to inform applicants that
the volume of his work relates to the structure of the organizational unit, to point
out the role that the unit has in the overall enterprise. It is very important to create a
sense of importance, because it will be because of that candidate socialize in the
company. On top of the charts is to develop strong motives, to describe the goals of
behavior.
Motivation may ultimately be viewed as a series, which consists of a need to
feel, and needs lead to the goals to which we aspire, which eventually leads to
satisfaction or dissatisfaction, depending on the performed action.
Faculty of Business Economics and Entrepreneurship 299
The motivation is affected by many factors, which can be divided into three
groups
1. Individual characteristics
2. Characteristics of work
3. The characteristics of the company.
Individual characteristics are those that describe the needs, interests and
character of the individual. Some are in turn driven by money, some with work
security; some are looking for adrenaline, so forth. Characteristics of individuals
almost always have to be in the form of companies to encourage employees who
contribute to the achievement of company objectives.
Job characteristics describe a job where unanimity is essential, team-
mindedness, and above all the responsibility. It is necessary to harmonize the
relationship between individual characteristics and job characteristics.
Characteristics of companies are simply all the elements that contribute to the
efficiency of the company, or company rules, personnel policies, a well-established
management and process rewarding. They are designed to attract new and retain
current employees.
In the modern system of business, knowledge and application of the foregoing
represents an exceptional way to direct the individual and thus successfully predict
individual and organizational goals.
Motivation precedes motif that represents the inner psychological and
emotional boost for a particular activity. One can look back at a few parties; it may
be of material or psychological character.
Defining motif come to the idea that motivation is defined as the collective
notion of human behavior where it involves a lot of interconnected and interacting
factors transforming into a motivational system.
Motivational system is a system of employed measures, advancement
opportunities and training, achieving compliance and more.
The motivation for the work is the totality of the various methods and
procedures for finding, maintenance and growth of the activities of labor. It
represents the activity to encourage success at work.
The person who is responsible for making motivational system must be
prepared to anticipate the interests and reactions of employees, because, of course,
they are all of the different nature. Therefore, the motivational elements affect
different on each person.
We distinguish several incentives for work, most notably are content and
process theories of motivation.
The content theories (Vuji?, 2004) include the theory of scientific
management, followed by interpersonal relationships, then known Maslow's theory
(Vuji?, 2004) of needs, a theory of two factors and three stage hierarchy theories
and the theory of achievement.
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The theory of scientific management, by author Frederick Winslow Taylor
reduces the human motivation to one motive, and that is paid. It occurs at a time
when the earnings of employees were so low that they were concerned with
existential needs.
The theory of interpersonal relationships, by author George Elton Mayo
describes the relations within the group and the relationships between employees
and managers of the company.
Hierarchy of needs theory or Maslow's theory is one of the most researched
and most prominent theory as the author points out that motivation is a process that
never ends. It warns that greater emphasis should be placed on continuous
employee development. It is based on the assumption on the complexity of the
human personality and its needs that are hierarchically structured.
The theory of two factors, the author Frederick Herzberg described as job
satisfaction as an intrinsic factor, and job dissatisfaction as extrinsic factors.
Intrinsic factors to motivators are achievement and recognition for a job well done.
Extrinsic factors are caused by interpersonal relationships, financial or material
incentives, work environment and more.
Theory of three stage hierarchy is also known as the "erg" and is based on
Maslow theory. According to Aldelfereru there are existential needs, the needs of
the connection, and the demands of growth and development. Existential needs are
basic physiological and material needs; the needs of connectivity are needs of
social character. The needs of growth and development describe the initial needs of
individuals who use and develop their potentials where lower needs need to be
saling, in order to execute multiple purposes.
The theory achievements of Mc Clelland and Atkins (Vuji?,2004) highlight
strong desire of employees for achievement and success. It is based on individual
assessment of probabilities.
Further studies of individuals, groups and entire system of an organization are
finding new strategies and principles of scoring, stimulation of workers. The
process theories talk about it. It is such rules mostly are applied in procedural
theory.
Process theory defines how a man motivates and how he makes each decision
in certain situations (Vuji?, 2004). Therefore, we distinguish between the theory of
"path-goal", "VIE" theory, Fishbein model since 1975 (Vuji?, 2004), the theory of
commitment, fairness and expectations.
The theory of "path-goal" describes the path worker chooses in order to meet
his personal goals. He will conduct them in a way that he ordered his vision of
leading the line for their own advantage.
"VIE" theory was given by Victor Vroom in 1964 (Vuji?, 2004) as a theory of
valence, instrumentality and expectations. Valencia is assessment of the
achievements of a particular goal. Instrumentality estimates that the employee may,
for example to achieve a higher salary. Expectation is the attitude with which the
individual can achieve his goal.
Faculty of Business Economics and Entrepreneurship 301
Fishbein model describes how some people can not make certain decisions
without the opinion of others that are very important in their lives.
The theory of commitment by Patricie Smith and C. J. Cranny since 1968
(Vuji?, 2004) is described as a model of what the ultimate effect of employees does
not only depend on the amount of wages, but also on the amount of satisfaction
level. Sometimes the only effect acting on his personal commitment.
The theory of justice J. Stacy Adams since 1963 (Vuji?, 2004) evaluates the
relationships between profit and investment. It is unfair if two people are taken for
comparison, and are not really equal.
The theory of expectations by Edwards since 1954 (Vuji?, 2004) is the driving
force of a man with multiple goals should be and will always choose the one goal
that makes the most impact.
Measuring motivation should be done at least once a year, because this is a
very complex and demanding job. In the process of measuring motivation to work
the problem arises because individuals are not aware of their behavior, and given
that, they are unaware of their motives that initiate their behavior. When
implementing the measures of motivation it is especially important to pay attention
to the shape, weight and tone of the questions, if it is through conversation
Satisfaction at work is an individual's mental attitude towards work
environment.
Various studies (Maruši?, 2001, p. 264) have led to a ranking list of motives
which is led by wages, then advancement, is the work interesting, working
conditions. Most interesting in the above ranking is that wage-led, and in last place
as the motive is knowledge. The problem in Croatian organization is because there
is no built system of evaluation of human capital and promotion of staff.
Manager in order to predict the behavior of employees must know something
about its goals and methods in order to know what to do to achieve those goals.
I NNOVATI ON KNOWLEDGE AND ACHI EVEMENTS OF
EMPLOYEES
Innovating knowledge of employees is contributing to their independence and
greater business excellence. New knowledge takes time before it goes into
technology and application, and it can not acquire and limited to the school.
Knowledge is life-long and very important because it changes the person and
makes it more capable for different and more effective action.
The modern economy is constantly renewed, it's advancing due to the large
investment, but that investment can not exceed those investments relating to
knowledge. The European Union has proposed to allocate at least 6% of the gross
national (Vuji?, 2004) income of all member countries for education. Investing in
knowledge should be seen as an investment in existing and future business.
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The effectiveness of economic and other activities are increasingly dependent
on the general state of science and the level of development of technology,
especially in manufacturing. Science is not just learning or gaining knowledge, but
also the educational activities of people. Technology becomes the sum of
knowledge.
Employer somehow becomes an educational institution, and the manager
professor of his fellow colleagues.
In Croatia, the labour law even prescribe obligations to the employer, it is
obliged to comply with the conditions of work and business, to provide employee
training, but there is also a law in reverse (Vuji?, 2004).
The policy consisted of principles, criteria and specific requirements is an
integral part of the business and development policy of the company.
We distinguish between formal, unformal and informal education. Formal
refers to the classical education through regular educational system and its
institutions. Informal education is reflected in the guild associations and is
available to all citizens through the Internet and other communication flows
individuals which are more accessible than teachers or mentors.
Performance management of employees is an important part of the job of
management of human capital because it contributes to improving satisfaction of
staff and business enterprises. Without effective feedback between managers and
employees that process will be resulted in poor business success or a failure.
Throughout the year, employees are monitored and measured their working
ability in the form of an unformal conversation or in more elaborate form lasting
several days, which includes a variety of procedures. Such a process, depending on
the results of the assessment, contributes to increased wages, then a higher level of
hierarchical work, various benefits and personal development career.
Personal career combines individual and social interests as individuals and
organizations actually become partners. It reflects the ability, interest and
motivation of the individual through its activation during education and work.
Professional development includes a period from sixth year of human life until
retirement. Career progressively advancing depending on the status, remuneration
and responsibilities.
QUALI TY MANAGEMENT AND THE REMUNERATI ON OF
EMPLOYEES
Management has multiple functions, most prominently is the conduct. The key
competitive advantage is the ability to lead, leadership. Leadership is a very
important element of business success of the company. Leadership is a process in
which an individual influences a group or organization in achieving a common
aim.
Faculty of Business Economics and Entrepreneurship 303
The functions of leadership are setting goals, then the motivation of others to
achieve these objectives, management processes during the achievement of goals,
the achievement of unity of effort, innovation knowledge, and adaptability of
groups to local and global changes.
The difference between leaders and managers is that leaders have to take a
vision, people and business excellence, and strive to keep together a group of
people leading them in the right direction while managers are preoccupied with
efficiency. Knowledge, temperament and other capabilities of leaders are important
elements in the process of leadership.
Rational leaders listen subordinates, it participate in decision-making, and is
accessible and tries to solve all the problems in its domain. Often this style is called
socially sensitive. The leader structure and assigned tasks, highlights expectations
that are expected of employees, as well as terms which subordinates must abide by.
Further research is drawing a line between autocratic and democratic
leadership style. Autocratic style is based on a decision by one person that has
completely unlimited power. In this style of management employees have no right
to participate in decision-making, but subordinates are only notified of changes.
This style allows for fast decision making, no employee view, and thus the leader
increases its power. Contrary to this style of democratic leadership style, where
employees are involved in the decision making process. Sometimes leaders held
meetings on a particular topic, where employees share their opinions and base that
counted the votes.
Author Renesis Likert in the 1970s (Vuji?, 2004) developed four models of
management systems: authoritative-exploitation, authoritative-benevolent,
consultative and participatory democracy. Authoritative-exploitation consists in the
fact that employees have no motivation, no communication in the organization's
work, but only receive decisions from the top. Accountability is centralized at the
top of the organizational hierarchy. Authoritative-benevolent system is described as
approachable style of leadership where there is still some kind of reward system, as
well as the communication and teamwork that is on a deeper level than the
previous system. In addition, the authority is not only at the top, but it is distributed
to the secondary level. In consultation system employees are involved in decision-
making, communication is developed in all directions, there is developed teamwork
as well as the system of motivation and responsibility extends throughout the entire
organizational structure. Participatory democratic system is a leadership style in
which the complete trust is in employees hands. In addition, we recognized a
laissez-faire style of leadership where the leader does not behave like the leader.
Actually they provide complete freedom to employees who are trying to achieve
the goals set by managers. I can say that laissez-faire leadership style stands out as
the most successful when managers collaborate with doctors, engineers and other
professionals.
Reward system is located inside the motivation of workers, but also the system
itself can cause unwanted behavior of workers. Reinforcement theory defines the
access to the worker who has earned the award, and to repeat the same behavior in
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the future, whereas expectancy theory emphasizes he expected rewards. In such
cases, we distinguish between external and internal motivation where external
depends on the rewards and inner stems from the very nature of work. From this
context, it can be concluded that it is not always the rule that money is the only
way to motivate employees.
Award program for results and operations in various companies is based on the
criteria for calculating the bonus. Total bonus fund is determined for business year
and consists of the sum of individual bonus amount for each employee. The criteria
for calculating bonuses are systematized for each employee depending on
workplace in organizational structure and the structure of the competence of the
organization. Bonus performance is defined for each employee and contracted by
annex contract for the current business year. The amount of possible realization is
determined in advance by the rank and structure of competence.
Linkage between success criteria with the annual business plan is based on a
monthly basis. Bussines rebalancing plan is ssociated with the share of the total
prize fund. Standards are associated with monthly operating results to a practical
way eliminating the problem about pre paid bonus that was not made.
Organizations typically set limits bonus payments ranking between minimum and
maximum realization of the plan, to the prize fund was stable and thus not be
subject to constant revisions.
The criteria are related to the indices of gross accounts of individual
companies and are connected to the system of calculation of wages. This system is
suited for lower-ranked jobs with the criteria for a larger share of customer
managers.
The sum of the individual criteria for each employee created a set of key
elements of successful performance. The purpose is to select the criteria for the
calculation of the annual bonus and the amount of shares in a percentage.The level
of competence is different, and so is a measure of success, so as the amount of
realized bonus. Employee accomplishing the tasks in a satisfactory manner has
provided a constant bonus for months. But, for example, the Commercial Manager
in addition to the task achievement of sales growth and profit must provide
accounts receivable and purchase high-quality resources. As to his level of
assessment is less, but consequently the work is judged on a stricter manner.
The annual bonus is provided for payment at the end of the bussines year and
is a good mechanism for development workers. The organization benefits from a
quality and efficient operation in terms of increasing the volume of business
results, while the owner is assigned with a motivated and committed to the work
employees, which, moreover, rewarde themselves with operating results. With this
procedure it is achieved its main task, to transform the business environment in a
modern system. Realized are the investments in the most important resource of a
business organization, which are people.
Faculty of Business Economics and Entrepreneurship 305
CONCLUSI ON
In modern society, knowledge is a key factor in achieving competitive
advantage. Employee knowledge and skills are the basic resource of organizational
success, and continuing education and development have become a basic need.
Organizations in the Republic of Croatia, unfortunately not sufficiently improve
the knowledge and skills of their employees to meet the requirements of new
technologies, increase their productivity and become more competitive. Hence
there is a need for significant investment of Croatian organizations in the education
and development of their employees, not only in order to be successful in the
domestic market, but also to achieve competitive advantage in a growing and
integrated European and world markets.
Productive forces such as land, labor and material capital that in an industrial
society were the main elements of competitiveness in the modern information
society is increasingly replaced by intellectual capital, and human resources. To
help organizations become competitive is not so more essential to have the latest
equipment, but people who are capable at all levels and who are willing to
constantly improve their knowledge. Rapid changes in the business environment
had a significant impact on changes in business philosophy and turning the man to
knowledge. Education and training is no longer a privilege of only managers, but
have to be implemented at all levels of the organization. Employees have become
the most important resource of the organization, and their satisfaction is placed in
the first place. Labour productivity and business performance mainly depends on
the knowledge and motivation of staff. Many authors consider that the motivation
should be the sole task of human resources management as motivated staff
provides their full potential.
Education and training, and motivating employees is one of the most important
forms of management and human resources development, and the transformation
of human capital as the biggest investment of each company. People represent
potential which is valid for a maximum, because by innovation knowledge and
skills also with motivation is necessary to improve staff and converte them into
equity by which the organization achieves competitive advantage.
Giving autonomy to employees relating to their work performance is
something to deal with the psychological and managerial research. It may surprise
you how much this case giving autonomy really powerful and how can help only if
used correctly. Let's look in the mirror and think about what we would require to
accomplish a good deal with customers every day.
People have to have a reason that will make them happy when they wake up in
the morning and the reason it should not be the only one that applies to wages. It is
not enough motivation. As a good employer it is necessary to allow employees to
know exactly why they do their job and the best methods to get the job well done.
It makes the difference between an employer who cares and one that does not care
about people in its own company.
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Flexibility plays an important role, not one that is obtained when the job is
complete, but one that allows employees to do the job in the way they think is best.
It is necessary to involve employees in the whole process of doing business so that
they felt the importance of the work itself. Employees must have a good excuse
why they go early in the morning for work, and if they are motivated on this issue
means that they are well explained about the work and if there is a fair worksharing
for the job. Payment only for quality work is not enough, because the quality work
done will be difficult to become a reality if employees do not get the impression
that something about them depends. It is that freedom that employees receive, and
the employer it gives them because it gives them the importance they deserve and
the space they need to be creative and the more the better.
REFERENCES
[1] Babi?, M. (2006), Just a happy employee is a good employee. World Insurance
9 (4): 64-67.
[2] Pološki Voki? N.; Grizelj, H. (2007), Education and Employee Development in
Croatian organizations. Economic Review 58 (12): 851-880
[3] Šunje A.; Rahimi?, Z.; Filipovi?, D. (2012) The role of the compatibility of
management styles to successfully manage change in firms taken over.
Economic Review 63 (8.7): 379-396
[4] Vuji?, V. (2004), Management of human capital. Zagreb: Grafo Mark d.o.o.
Faculty of Business Economics and Entrepreneurship 307
ENABLING EMOTIONAL INTELLIGENCE: EXPLORING
THE SOURCE OF MOTIVATION
Vaibhav Birwatkar, PhD
30
ABSTRACT
To optimize organizational performance and ensure their long term
competitiveness and sustainability, organizations need to be able to fuel their
employees to work at or near their peak level. It is difficult to understand what
motivates people without assessing what people need and want from their work.
Motivation is commitment and obligation to perform tasks without discouragement
or despair in face of failures and as well optimism regarding the future. Decades of
interest in better understanding the determinants of and the processes though
which employees decide to extend varying levels of work effort has resulted in a
proliferation of work motivation theories into the determinants of work related
behaviours. Emotions are a significant determinant of an employee's judgement
about referents, rewards, and equity. Emotional intelligence is emerging paradigm
discussed and researched widely in many organizations to improve businesses and
employee performance. It can help an employee to identify his/her emotion and
deal with it in a more effective manner. Once employees understand their subtle
emotions, they can break the circle of causality and are motivated by the
opportunity to develop their skills or capabilities.
Key words: Emotional Intelligence, Motivation, Emotional Management,
Empathy, Interpersonal Skills
J EL Classification: J28
UDK: 005.32:331.101.3 159.942:159.95
30
Vaibhav Birwatkar, YCMOU, Maharashtra, Mumbai, India, [email protected]
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I NTRODUCTI ON
The major concern of man has been work which has been a cogent and potent
feature of both the old and modern societies. Work plays an important role in the daily
lives of a person, in that it allows individuals to support themselves and others. It also
takes a considerable part of the overall time at man's disposal during his life time, and
the economic benefits accruable to him become a major index of his standard of living.
Attitude is the single most important factor that directly translates into the
level of success achieved in many situations. It impacts success because it
influences perspectives, interpretations, decision-making, actions, and results.
Workplace emotions and attitudes are receiving a lot more attention these days in
many other organizations. That is because emotions and attitudes can make a huge
difference in individual behaviour and success, as well as in the organization's
performance and productivity. Over the past decade, the field of organizational
behaviour has experienced a sea change in thinking about workplace emotions. It
has been said that people join organizations but leave their supervisors. It is a
problem of relationships which is one of those core motivators.
Successful employees present an attitude that reflects positivity, competence, self-
confidence, and a genuine intent to tap their full potential. The emotional drives and
behavioral tendencies that feelings motivate are part of emotional intelligence.
Emotional intelligence is the set of personal characteristics that have an impact on the
way we feel, behave, relate to others, and handle job responsibilities. Emotional
intelligence strengths help employees in remaining optimistic about their work
challenges and in maintaining a high level of work ethic. Factors such as courage,
consideration, and sociability are some other outputs of good emotional intelligence. In
today's challenging world where uncertainties and cutthroat competition are virtually
indistinguishable phrases, motivation is key to success. Motivation keeps employees
interested and drives them to focus their efforts and take actions that help them attain
their targets and taste success. Absence of the right attitude, lack of good emotional
intelligence, and a low level of motivation could make them incompatible with others,
lose direction, feel dissatisfied with their career choices and jobs, underperform in their
roles, lose self confidence, and sub-optimally handle stress.
To be effective, today's leaders have to connect with people on a personal level
and understand what drives their people. Emotionally intelligent leaders are attuned
to their people. They see their people's strengths and weaknesses clearly, so they
can foster that essential sense of competence. They become aware of how their
words and actions support each employee's autonomy, competence and relatedness
and either build or flatten relationships.
Emotional intelligence is the primary driver in leader effectiveness because
leadership is about using influence and building effective relationships, which are
largely emotional tasks. Leaders who put emotional intelligence into action are able
to foster genuine collaboration. This fuels stronger interpersonal connection,
motivating people through relatedness.
Faculty of Business Economics and Entrepreneurship 309
EMOTI ONAL I NTELLI GENCE
Emotional intelligence is defined as "the capacity to deal effectively with one's
own and others" emotions', and encompasses a range of personal, emotional and
social skills that help a person to cope with environmental demands and pressures.
Emotional intelligence and understanding the role of emotions with regards to
behaviour, performance, and development and maintenance of relationships is a
new and emerging area.
It is an important factor in determining a person's ability to succeed in life and
will influence their psychological wellbeing. Emotional intelligence provides an
individual with an understanding of their emotional skills, and therefore a better
understanding and awareness of how to use emotions effectively.
Our thoughts influence our emotions, and in turn our emotions influence our
behaviour and actions. Therefore, given that leadership largely involves personal
interaction and people management, it is essential that leaders possess the skills to
access their thoughts and emotions, and to display sufficient emotional intelligence.
People with better emotional intelligence typically have more success in personal
and interpersonal interaction compared with people who have less effective ways
of dealing with emotions.
The emotional intelligence is a subject that attempts to describe and explain
the emotions status, feelings and human capabilities ( Zadeh, 2007). The emotional
intelligence has been defined as the ability to comprehend and understand the
emotions as to appraise thoughts and dispositions and adapting hem in such a way
that results in the emotional and rational elevation and growth (Goleman, 1995).
The concept of the emotional intelligence has given a new profound depth to the
human intelligence. This is the tactical capability intelligence (personal
performance) while the cognitive intelligence is the strategic ability (long term
ability). The emotional intelligence allows for the prediction for the achievement,
because it shows how a person immediately applies his knowledge for
achievement. The emotional intelligence is a form of the social intelligence that is
efficiently a suitable predictor with respect to the specific areas such as
professional and educational performance. In other words, the emotional
intelligence is the ability to control one's own feelings and emotions as well as the
others' (Bar-on, 2000).
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TWO EMOTI ONAL I NTELLI GENCE MODELS (THE ABI LI TY VS
MI XED MODEL)
There are two predominant models of emotional intelligence: the Ability
Model (Mayer, Salovey, 1997; 2002) and Mixed or Trait-based Model (Bar-On,
1997; Goleman, 1995). The ability model is represented by Mayer and Salovey
who view emotional intelligence as an actual domain of intelligence composed of
specific emotional and mental abilities (Mayer, Salovey, 1997). Ability emotional
intelligence requires the use of maximum performance tests with correct and
incorrect responses and pertains primarily to the realm of cognitive ability, which
is accordingly most appropriately measured by performance tests (Petrides,
Furnham, 2000). The latter, mixed or trait-based model, takes a narrow approach to
emotional intelligence combining emotional abilities with elements of personality,
motivation, and social skill (Bar-on, 1997, Goleman, 1998). This type of emotional
intelligence pertains to the realm of personality which can be assessed by self-
report questionnaire (Petrides, Furnham, 2000).
Mayer and Salovey's (1997) emotional intelligence model encompasses four
interrelated abilities: perceiving, using, understanding and managing emotions.
Each of the four abilities is discussed below.
? Perception of Emotion is the ability to perceive emotions in oneself and
others as well as in objects, art, stories, music, and other stimuli. It entails
identifying information conveyed by facial expressions, tone of voice,
gestures, body posture, colour and other cues.
? Emotional Facilitation is the ability to generate, use, and feel emotion as
necessary to communicate feelings or employ them in other cognitive
processes. This entails the capacity to associate mental images and emotions.
It also includes knowing how emotions influence cognitive processes such as
deductive reasoning, problem solving, creativity and communication.
? Understanding Emotion is the ability to understand emotional information,
to understand how emotions combine and progress through relationship
transitions, and to appreciate such emotional meanings.
? Managing Emotion is the ability to be open to feelings, and to modulate
them in oneself and others so as to promote personal understanding and
growth.
The mixed model of emotional intelligence, represented by the work of Goleman
and colleagues (Goleman, 1998; Boyatzis et al., 2000), includes emotional abilities, but
also a number of elements that are best described as personality dimensions, as well as
some aspects that may have little to do with emotions or personality (e.g., recognising
the need for change; challenging the status quo, choosing team members based on
expertise). The most recent version of the Goleman mixed model measures 20
competencies which can be organized into four dimensions: Self-Awareness, Self-
Management, Social Awareness, and Social Skill. According to Goleman (1998), these
emotional intelligence abilities are considered independent (each contributes to job
Faculty of Business Economics and Entrepreneurship 311
performance); interdependent (each draws to some extent on certain others with strong
interactions); hierarchical (the emotional intelligence capabilities build upon one
another); necessary, but not sufficient (having an emotional intelligence does not
guarantee that the competencies will be demonstrated); and generic (different jobs
make different competence demands). Each of the four emotional intelligence
dimensions is discussed below:
? Self-Awareness concerns knowing one's internal states, preferences,
resources, and intuitions. Self-awareness involves emotional awareness,
which is deemed as the fundamental core ability of emotional intelligence,
and ability to know one's strength and limits and self-confidence.
? Self-Management refers to managing ones' internal states, impulses, and
resources. The self-management cluster contains six competencies, including
self-control, being trustworthy, conscientious, adaptable, taking initiative,
and having a drive to achieve.
? Social Awareness refers to how people handle relationships and awareness
of others' feelings, needs, and concerns. It involves empathy, a service
orientation toward customers or clients, political awareness and
understanding others as well as ability to cultivate opportunities through
different kinds of people.
? Social Skills concerns the skill or adeptness at inducing desirable responses
in others, including general communication ability, ability to influence
others, manage conflict, inspire others via a vision, recognize and catalyze
change, collaborate with others, and promote teamwork.
WHY EMOTI ONAL I NTELLI GENCE?
In recent years, widespread attention has been given to the concept of
emotional intelligence. Much of this can be attributed to the popular book
Emotional Intelligence written by Goleman (1995). In this book, Goleman made
strong claims about the contribution of emotional intelligence makes to individuals'
success and work performance. He identified IQ as contributing 20 percent towards
life success and intimated that the remaining 80 percent of life success may be
attributable to emotional intelligence. Bar-On et al.,(2000) conducted a study
examining the impact of emotional intelligence on occupational performance, and
the results indicated that the ability of emotional intelligence on identify
occupational potential accounts for approximately four times (25 percent) more
variance than IQ (6 percent) when compared with Wagner's extensive meta-
analysis of emotional intelligence (Wagner, 1997). In addition, Stein and Book
(2000) in their book entitled The EQ Edge, which draws on research across 30
professional and managerial career fields, revealed that anywhere from 47 percent
to 56 percent of work/life success is the result of emotional intelligence, with the
range being related to job type. Although there is not a consensus amongst
researchers as to the extent to which emotional intelligence predicts one's
312 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
performance, these studies have revealed that emotional intelligence is a strong
predictor, even more powerful than IQ, in determining one's success and
performance (Abraham, 2000; Ashforth, Humphrey, 1995; Ashkanasy,Daus, 2002;
Goleman, 1995, 1998).
Martin (2004) noted that people are sometimes successful not because of their
knowledge of the tasks, but due to their ability to manage people socially and
emotionally by using charismatic personalities in their communications. This is
embodied in the emotional intelligence concept as "the ability to effectively reason
about emotions and use emotions to aid cognitive processes and decision making"
(Mayer et al., 2000). It reflects the ability to understand and manage emotions and
their interrelations with cognition both in the self and in others to enhance effective
functioning. Martin (2004) suggested that people with high levels of emotional
intelligence have a natural aptitude for emotional perception and can utilize this to
move people to respond positively to them. Mount (2006) conducted a study to
examine the relationship between IQ and emotional intelligence in five roles in an
international petroleum industry, and the results revealed that emotional
intelligence competencies, such as self-confidence, empathy and teamwork, act as
catalysts that enable the cognitive intelligence competencies and the individual's
skills and knowledge (expertise) to achieve international business successes.
In other words, the emotional intelligence competencies created an
environment that allowed the other competencies to be maximized, thereby giving
them traction for performance. Most importantly, emotional intelligence is thought
to be highly malleable and can be developed through appropriate learning
interventions, life experience and is amenable to training (Goleman, 1995; Mayer,
Caruso, 1999; Jaeger, 2003, Lopes et al., 2006). This statement is supported in the
research conducted by Sala (2002) in developing a programme to increase
emotional intelligence at work. The results showed an improvement in emotional
intelligence of individuals who had participated in an emotional intelligence
training programme compared to those who had not.
MOTI VATI ON OF EMPLOYEE
Increasing motivation, commitment and engagement levels are key organizational
aspects nowadays. The development of compensation policies has an important role in
motivating workforce to deliver high levels of performance, discretionary effort and
contribution. The process of motivation usually starts with someone recognizing an
unsatisfied need. Then a goal is established to be reached and that way to satisfy the
need. Rewards and incentives can be established for people to better accomplish the
given goal. The social context will also affect the motivation level. This context
consists of organizational values and culture but it also includes leaderships and
management as well as the influence of the group or team in which a person works.
Motivation can be intrinsic or extrinsic. Intrinsic motivation can be described as the
process of motivation by work itself in so far as it satisfies the personal needs of the
Faculty of Business Economics and Entrepreneurship 313
employee. Intrinsic motivation is self-generated and it is thought that people seek for a
job they think will most satisfy their needs. The factors affecting intrinsic motivation
include for example responsibility, freedom to act, courage to use and develop persons
own skills, interesting tasks and opportunities for advancement. Extrinsic motivation is
the amount of effort other people give to the person to motivate them. Extrinsic
motivation is for example the rewards management provide such as pay rise, praise or
promotion. Extrinsic motivators are efficient but the influence doesn't last long.
Intrinsic motivators tend to have a longer effect as they are inherent and not imposed
from outside. As the needs of individuals differ a lot, it is important to concentrate
carefully on the attachment of goals and incentives given when goals are
accomplished. Motivation theories help to understand different motivators. Motivation
theories have been examined for decades. These theories can be implemented to the
company's human resource policies to get the best out of the employees.
EMOTI ONAL I NTELLI GENCE AND EMPLOYEE MOTI VATI ON
Emotional intelligence can contribute to the achievement of a person. For
example, reflected with the salaries, salary increases with the increase of the
position of the company. Emotional intelligence allows a person to build positive
relationships at work, work well in teams, and build social capital (Yao, 2009).
Motivation often depends on the support, advice, and other resources that available.
Emotional intelligence also can contribute to the motivation of a person to enable
someone to set their emotions in order to cope with stress and perform well under
pressure, and it also can help someone to adapt with organizational change.
Thus, organization is a social system in which members always interact with
each other and also with the external members. The interaction with the external
member is referring to the interaction between customers, suppliers and others.
These interactions are usually needs the great of emotional that can form the basis
of human behavior. The employee that has a high level of emotional intelligence
can clearly feel the emotions of colleagues and managers and accurate
understanding of the meaning of other behaviors, until they can make the accurate
evaluation about their working role that expected by others, and then performs
adaptive behaviors. Therefore, they are more harmonious and more quickly
integrated into in organization, and achieve higher performance.
In conclusion, there are many researches that have shown a positive
relationship between emotional intelligence and motivation. Therefore, this study
was conducted to propose a theoretical framework highlighting the link between
emotional intelligence and motivation.
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THE THEORETI CAL FRAMEWORK
The sample was delimited to managers from various manufacturing as well as
service sectors including equal representation from domestic as well as MNC
companies. The study was further delimited to managers of only Mumbai corporate
sector. The population consists of all the managers of the various industries in the
Mumbai corporate sector. This includes managers of both domestic as well as
MNC companies.
The sample of the study comprised of 780 top management level managers
from manufacturing and service companies of the Indian corporate sector. A total
of 52 companies were selected as the final sampling unit. Out of these 52
companies, 26 companies were of manufacturing type and 26 companies were
belonging to the service sector. Out of the 26 companies of manufacturing 13
companies were domestic and rest 13 companies were MNC's and from each
company 15 managers were selected.
Emotional intelligence levels and competencies will be assessed through a pre-
designed Questionnaire. The areas covered by this questionnaire can be briefly
summarized as follows:
? The first part was related to finding the awareness level regarding emotional
intelligence as well as its related competencies.
? The second part consisted of a 5 point rating scale of 20 questions related to
the four clusters of emotional intelligence namely self-awareness, self
management, social awareness and social skills.
? The Part 3 consists of a 5 point rating scale consisting of questions related to
leadership whether managers used emotional intelligence to enhance their
leadership skills.
? The Part 4 consists of a 4 point rating scale consisting of questions related
multiple constituents and how far the managers recognize emotions of
multiple constituents and attend them in designing organization functions.
A Two (2) hour workshop on emotional intelligence was conducted in each
company and the data was collected and analyzed quantitatively for each objective.
In the present study both Descriptive Analysis as well as Inferential Analysis were
used. The data was analyzed in terms of frequency and percentage. Mean and SD
were computed and 't' Test and ANOVA were used as part of inferential data
analysis.
Awareness level of emotional intelligence amongst managers
? Informed Awareness - Unprompted awareness
The study proved that that nearly all managers of both Manufacturing as well
as Service did not know as they were not able to name the component with no
prompting.
? Prompted Awareness – Manufacturing – Service comparsion
Faculty of Business Economics and Entrepreneurship 315
Table 1: Prompted awareness - Manufacturing – Service comparison
Manufacturing Service
Emotional Self Awareness 4% 5%
Accurate Self Assessment 2% 2%
Self Confidence 10% 9%
Self Control 8% 7%
Trustworthiness 6% 6%
Conscientiousness 3% 3%
Adaptability 5% 6%
Achievement Orientation 3% 3%
Initiative 7% 6%
Empathy 3% 5%
Organizational Awareness 5% 4%
Service Orientation 3% 3%
Developing Others 6% 5%
Leadership 8% 8%
Influence 4% 4%
Communication 8% 7%
Change Catalyst 2% 2%
Conflict management 3% 4%
Building Bonds 3% 4%
Team work & Collaboration 8% 8%
Total 100% 100%
The levels of prompted awareness varied considerably by the specific sub-
competency concerned. In particular, awareness among the sample of self-
confidence competency was the most widespread in both manufacturing and
service sector of the 20 sub-competencies covered, and awareness of accurate self-
assessment and change catalyst was least widespread.
Table 2: Emotional intelligence of Managers in Manufacturing and Service sector
(both Domestic and MNC)
Manufacturing
N=26 companies
390 managers
Service
N=26 companies
390 managers
Mean SD Mean SD 't' value 0.01 0.5
Self Awareness 8.93 1.6 8.78 1.69 1.26 NS NS
Self Management 16.16 2.9 16.04 2.91 0.58 NS NS
Social Awareness 8.12 2.52 8.21 2.09 0.54 NS NS
Social Skills 22.84 4.6 22.57 4.96 0.79 NS NS
Total EI 56.05 8.78 55.6 8.62 0.72 NS NS
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Table 3: Leadership skills – Managers in Manufacturing and Service sector (both
Domestic and MNC)
Table 4: Multiple Constituents – Emotional intelligence of Managers in
Manufacturing and Service sector (both Domestic and MNC)
Manufacturing
N= 26 companies
(390 managers)
Service
N= 26 companies
(390 managers)
MEAN SD MEAN SD 't' value .01 .05
Employees 13.66 2.40 14.03 1.78 2.49 NS S
Customers 10.78 1.76 10.72 1.67 0.50 NS NS
Investors 7.97 1.68 8.12 1.52 1.30 NS NS
Competitors 7.66 2.69 7.55 1.89 0.66 NS NS
Total 40.07 6.52 40.42 5.31 0.83 NS NS
Table 5: Experience wise comparison using ANOVA
Sum of Squares df Mean Square F Sig.
Self-Awareness
Between Groups 2.269 2 1.135 .412 .662
Within Groups 2077.362 755 2.751
Total 2079.631 757
Self-Management
Between Groups 14.249 2 7.124 .846 .430
Within Groups 6359.515 755 8.423
Total 6373.764 757
Social Awareness
Between Groups 5.039 2 2.519 .464 .629
Within Groups 4100.412 755 5.431
Total 4105.451 757
Social Skills
Between Groups 192.953 2 96.477 4.213 .015
Within Groups 17290.251 755 22.901
Total 17483.204 757
Total EI
Between Groups 345.733 2 172.866 2.279 .103
Within Groups 57279.634 755 75.867
Total 57625.367 757
Manufacturing
N=26 companies
390 managers
Service
N=26 companies
390 managers
Mean SD Mean SD 't' value 0.01 0.5
Leadership skills 13.57 4.18 13.94 3.51 1.33 NS NS
Faculty of Business Economics and Entrepreneurship 317
Table 6: Education wise comparison using ANOVA
Sum of Squares df Mean Square F Sig.
Self-Awareness Between Groups 20.594 2 10.297 3.776 .023
Within Groups 2059.037 755 2.727
Total 2079.631 757
Self-Management Between Groups 32.498 2 16.249 1.935 .145
Within Groups 6341.266 755 8.399
Total 6373.764 757
Social Awareness Between Groups 25.142 2 12.571 2.326 .098
Within Groups 4080.309 755 5.404
Total 4105.451 757
Social Skills Between Groups 597.716 2 298.858 13.363 .000
Within Groups 16885.489 755 22.365
Total 17483.204 757
Total EI Between Groups 1472.253 2 736.127 9.898 .000
Within Groups 56153.113 755 74.375
Total 57625.367 757
Table 7: Age wise comparison using ANOVA
Sum of Squares df Mean Square F Sig.
Self-Awareness
Between Groups 10.358 3 3.453 1.258 .288
Within Groups 2069.272 754 2.744
Total 2079.631 757
Self-Management
Between Groups 93.319 3 31.106 3.734 .011
Within Groups 6280.445 754 8.330
Total 6373.764 757
Social Awareness
Between Groups 3.766 3 1.255 .231 .875
Within Groups 4101.685 754 5.440
Total 4105.451 757
Social Skills
Between Groups 191.358 3 63.786 2.781 .040
Within Groups 17291.847 754 22.933
Total 17483.204 757
Total EI
Between Groups 680.263 3 226.754 3.002 .030
Within Groups 56945.103 754 75.524
Total 57625.367 757
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Table 8: Gender wise comparison
Gender N Mean Std.
Deviation
Std. Error
Mean
't'
value
.05 .01
Self-Awareness Male 594 8.89 1.640 .067 0.424 NS NS
Female 164 8.70 1.717 .134
Self-
Management
Male 594 16.10 2.993 .123 0.141 NS NS
Female 164 16.02 2.550 .199
Social
Awareness
Male 594 8.18 2.128 .087 0.249 NS NS
Female 164 8.04 2.949 .230
Social Skills Male 594 22.82 4.902 .201 0.907 NS NS
Female 164 22.15 4.416 .345
Total EI Male 594 55.98 8.939 .367 1.090 NS NS
Female 164 54.90 7.868 .614
FI NDI NGS
Amongst the sample a strong correlation was found overall and between each
of the four emotional intelligence abilities (self-awareness; self-management;
social-awareness; and social skills) and leadership skills, emotions of multiple
constituents were recognized in designing organization policies.
In essence what the study revealed was that most of the managers in the
manufacturing sector and in the service sector not very well informed about the
concept of emotional intelligence indicating the lack of awareness regarding
emotional intelligence. Managers in the service sector were more informed
regarding the concept of emotional intelligence in comparison to manufacturing
sector. The managers of both manufacturing as well as service were not able to
name the components of emotional intelligence without prompting. Since scores
were mostly below average, efforts to improve emotional intelligence among
managers has to be implemented. Managers were fairly aware of the emotional
intelligence however they are not capable of expressing or describing the term
emotional intelligence in a verbalized way or be unable to even know that they are
using it as they use. The reason behind this could be that managers are not skilled
at expressing themselves and their beliefs or opinions.
The second objective in the present study concerned the measurement of
managers emotional intelligence level for both manufacturing as well as service
sector including domestic and MNC company managers. Emotional intelligence
concerns the degree to which you are able to repair negative moods and emotions,
Faculty of Business Economics and Entrepreneurship 319
and maintain beneficial positive moods and emotions both within yourself and
others at work. Proficiency in this area is typically reflected in congenial
dispositions such as genuineness, warmth, optimism and charisma. The results
indicate mostly an average emotional intelligence among managers. Emotional
intelligence levels for managers of both manufacturing as well as service
companies did not show much difference with most of the managers in the
manufacturing as well as service sector showing to have average level of emotional
intelligence. Self awareness, self management, social skills and social management
all were in the average category. It may be that managers in both types of
organizations possess similar skills that prepare them for their managership
positions. That is, perhaps the manager's share similar experiences overall and
those experiences result in similar levels of emotional intelligence.
The overall leadership skills for manufacturing sector as well as service sector
(both domestic as well as MNC) was found to be moderate with most managers in
the average range closely followed by high range. Differences in emotional
intelligence scores among managers by type of organization showed no significant
differences. Scores indicated that the managers of these organizations were
average, indicating adequate emotional capacity. It may be that managers in these
companies of both the sectors possess similar skills that prepare them for their
managership positions. That is, perhaps the manager's share similar experiences
overall and those experiences result in similar levels of emotional intelligence.
Managers were far below the satisfactory range as far as considering emotions
of multiple constituents in framing organization policies was the concern. To be
adept at an emotional competence like customer service or management of other
multiple constituents requires an underlying ability in emotional intelligence
fundamentals, specifically, social awareness and relationship management.
However, emotional competencies are learned abilities: having social awareness or
skill at managing relationship does not guarantee that one has mastered the
additional learning required to handle a customer adeptly or to resolve a conflict. A
person be highly empathic yet poor at handling customers if he or she has not
learned competence in customer service. Although emotional intelligence
determines the potential for learning the practical skills that underlie the four
emotional intelligence clusters, the emotional competence shows how much of that
potential one has realized by learning and mastering skills and translating
intelligence into on-the-job capabilities.
For self-awareness, self-management, social awareness and total emotional
intelligence there was no significant difference in the mean scores of managers
having different number of years of experience. However for social skills, the
difference was significant. Low emotional intelligence scores in terms of social
skills can be attributed to problems with interpersonal relationships as well as
difficulty changing or adapting. As the number of years of service progress, the
tendency to become adjustment in particular mould becomes intense with the result
that one tries to shun any external changes which might prove to be a hurdle in
routine way of working to which he is accustomed.
320 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
As far as self-awareness, self-management and social awareness is there is no
significant difference in the mean scores of managers having different educational
qualification. For both social skills as well as total emotional intelligence there
exists a difference in the mean scores of managers with different educational
qualification. Improving managers' emotional intelligence would involve education
and specific job-related training. Managers should also be encouraged to enhance
their skills through continuous self-learning.
As far as self-awareness, social skills, social awareness and total emotional
intelligence are concerned there is no significant difference in the mean scores of
managers belonging to different age groups. One possible explanation could be that
emotional intelligence is not a function of age and with the advancing years it does
not get strengthened. Emotions are individual and their expression and
manifestation depend upon individual's profile. Managers belonging to different
age groups may not remarkably differ in their emotional intelligence competencies.
Emotions can be trained probably with experience and exposure.
There is no significant difference in the mean scores of emotional intelligence
gender wise with respect to self-awareness, self-management, social awareness,
social skills as well as total emotional intelligence. The findings indicate that
women score somewhat higher on measures of emotional intelligence than men.
Extensive reviews of the data on leadership and gender indicate that women leaders
are devalued in comparison to their male counterparts, but especially when women
employ a stereotypical male leadership style, namely an autocratic as opposed to
democratic, style. If emotional intelligence plays a role in effective leadership, and
if women, as a group, are higher in emotional intelligence than are men, then we
need to realize that women possess a critical leadership skill.
RELEVANCE
In so far as the management of social behavior involves the management of
emotions (Hochschild, 1983), emotional intelligence has the potential to be a
strong predictor of performance. Hence many organizational researchers have
recently called for more focus on the role of emotions at work.
As the competition heats up and the pace of change is getting faster and the
world more complex, we cannot continue doing business as usual. We need a new
approach that transcends linear thinking and goes across barriers. As organizations
downsize conflicts arise and undue stress is placed on every person within the
organization. Extra pressure from increased workloads and financial stress, coupled
with intra-individual conflict has created the need for and understanding and
regulation of emotions in the workplace. Emotion detection is particularly
prevalent at critical periods for instance during appraisals, promotions or
retrenchment. However, since emotional processes can work faster than the mind,
it takes a power stronger than the mind to bend perception, override emotional
circuitry, and provide us with intuitive feeling instead. It takes the power of the
Faculty of Business Economics and Entrepreneurship 321
heart. The senior and middle level managers' behavior and treatment of their people
determine turnover and retention. They interact daily with individuals who have
distinct needs, wants, and expectations. They significantly influence the attitudes,
performance, and satisfaction of employees within their department and of other
departments.
As organizations begin to understand and implement emotional intelligence
training they can reestablish the sense of a secure caring and people first
atmosphere in their organization. This reestablishment is a key element in meeting
the fundamental need described by Maslow's Hierarchy, of security and sense of
belonging. Emotional intelligence is a simple yet effective route to establishing this
sense in an organization. Furthermore, establishing an emotional intelligence
organization now will ready an organization for the future influx and prepare them
to become a streamed lined and more effective organization.
I MPLI CATI ONS OF THE STUDY
The implications of this study for organizations include a more socially
interconnected, motivated, emotionally healthy workforce, the retention of talent in
Mumbai in the global economy, and increased revenue. A practical implication of a
manager recognizing and developing improved emotional skills, that is, exercising
emotional leadership, is improved individual performance with inherent benefits,
including improved health and well-being, status in the organization and financial
reward.
Organizations may use the results of this study to design training activities to
enhance particular components of emotional intelligence. If these professionals
know the emotional intelligence levels of their managers, they can design
programmes around specific emotional intelligence components. Knowing the
emotional intelligence levels of managers in different types of organizations would
help identify areas for further managerial development.
Furthermore, this study revealed that managers in all of the organizations
studied were average or low in their emotional intelligence scores. If a managerial
program aspires to train managers with exceptional emotional intelligence – like
skills, then this study is of value because it illustrates the need for emotional
intelligence training among all organizations.
Results of this study may also be used by organizations for human resource
development practices and assigning the work profile. If managers are aware of
their strengths and weaknesses in relation to emotional intelligence
subcomponents, then they may be persuaded to participate in managerial
development programs that help them strengthen areas of weakness. Managers may
also use the results of this study to further their understanding of how to enhance
their emotional intelligence in relation to managerial and organizational activities.
322 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Activities that promote active involvement and a sense of commitment will
develop a sense of dependability and collaboration among the membership.
The implication of this study is that by using their own emotional
competencies managers can encourage subordinates to enhance their problem
solving strategy. The perception of subordinates of their supervisors' use of these
skills may have compound positive impact on the subordinates' problem solving
strategy of managing conflict and job performance. Therefore, the challenge for a
contemporary organization is to enhance the emotional intelligence of their
managers. Improving managers' emotional intelligence would involve education
and specific job-related training. Managers should also be encouraged to enhance
their skills through continuous self-learning. Organizations should provide
appropriate reinforcements for learning and improving employees' essential
emotional competencies needed for specific jobs. Education and training may be of
limited value when it comes to improving supervisors' emotional intelligence.
Organizations may have to adapt the policy of recruiting managers with vision and
charisma who are likely to be high on emotional intelligence.
VALUE
The value of this research resides in the directness of the approach, the insight
gained in the experience of managers going through processes of self-management
and regulation. This research provides analysis on the emotional skills of managers
and perceptions of senior executives and managers on the influence and importance
of emotional intelligence for organization effectiveness and individual
performance.
The research points to the need for organizations in Mumbai to establish
emotional intelligence at the forefront of their employee value proposition and
focuses the need for training in emotional intelligence if companies are to compete
successfully in the global economy.
Faculty of Business Economics and Entrepreneurship 323
CONCLUSI ON
The idea of emotional intelligence, and the findings of this research which
supports it, indicates that organizations which select managers on the basis of IQ and
other "traditional" measures will not develop the talent and capabilities which will
deliver their future success. It is clear that managers with high levels of emotional
intelligence have greater career success, foster stronger personal relations, have more
effective managership skills, and are healthier than those with low emotional
intelligence. Further, they are able to monitor and evaluate others' feelings empathize
with others and excel in interpersonal skills It is recommended that organizations seek
out managers with high emotional intelligence and seek ways to enhance the EQ of
current managers. Because this component of managerial success can be developed, it
is also suggested that firms develop programs that enhance the EQ of their managers.
This will enable them to motivate themselves and their subordinates and to work in
more creative, more fulfilled, and more enthusiastic ways.
Results of this study may also be used by organizations for human resource
development practices and assigning the work profile. If managers are aware of
their strengths and weaknesses in relation to emotional intelligence
subcomponents, then they may be persuaded to participate in management
development programs that help them strengthen areas of weakness. Managers may
also use the results of this study to further their understanding of how to enhance
their emotional intelligence in relation to managership and organizational activities.
Activities that promote active involvement and a sense of commitment will
develop a sense of dependability and collaboration among the membership.
An important area of future research concerns carefully designing and
evaluating the effects of intervention on supervisory emotional intelligence in
enhancing positive conflict management styles and effectiveness. Additional
research in this field could be conducted in an attempt to correlate managerial
practices and organizational climate with concepts of emotional intelligence.
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F. & Mount, G. (Eds.), Linking emotional intelligence and performance at work
(pp. 97 – 142). New Jersey: Lawrence Erlbaum Associates, Inc.
[19]Petrides, K.V., & Furnham, A. (2000). On the dimensional structure of
emotional intelligence. Personality and Individual Differences, 29, 313–320.
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International conference on management science & engineering: 14-16.
Faculty of Business Economics and Entrepreneurship 325
THE MORAL VALUES OF BUSINESS IN VIRTUAL
ORGANIZATIONS
Katarina Majstorovic, MA
31
Dejan Radulovic, PhD
32
ABSTRACT
The context of stakeholder theory specifies the aim of business in a complex
way, taking into account the need to attach importance to the interests of all
stakeholders in an optimal way. Thus defined the framework of business leaves
room for evaluation in terms of ethical standards. The beginning of this evaluation
is the determination of corporate social responsibility. That fact brings researchers
in the position to separate economic and moral values of the business. Our focus is
on moral values. The aim of this paper is to point out the specific articulation of
moral values of business within the virtual organization. First, we`ll point out
which are the basic moral values of business in general, and then we`ll try to
determine how they seem in the framework that is defined by the parameters of the
virtual organization. The theme that emerges as central in this context is the value
of trust and its place in traditional and virtual business concept.
Key words: Social Responsibility, Moral Values, Virtual Organizations, Trust,
Confidence
J EL Classification: Z19
UDK: 005.71-021.131:174
31
Katarina Majstorovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected].
32
Dejan Radulovic, Deputy Minister of the Regional Development and Local Self-Government,
Belgrade, Serbia
326 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
The times we live in set up the requirement to consider the finality of every
experience in which we participate as an imperative. So the research of such a case
is dominantly turned into the functional analysis. If there is something we do, if we
act in a certain way, we sense his actions and proceedings largely founded on
purpose or reason. If you deal with what in ancient times was considered the crown
of our building knowledge, knowledge for knowledge, you can easily be declared a
futile man. In this paper we will try to find the purpose of our business practices,
looking back at the foundation of business practices that comes from the area of
moral values. This will, hopefully and at least partially, be enough for avoiding the
label of futility. First, let us consider the relationship between the action, purpose
and value, the notions that we have already used to announce the topic.
Let's try to find a place in human nature which belongs to the activity of setting
purposes. The will is the power to set purposes. The action is the subject of ethical
analysis. That action is intended, and a presumption of intent is the freedom of the actor
to choose stages on his path. Striving to reach the set purpose is the feature of the
action so conceived. In other words, the decision of reaching the end is mortgaged in
the action. When it comes to values, things are different. Namely, if we have
successfully attained the aim, our action may be declared as valuable from the
standpoint of value that we call success. If so, the actor feels pleasure and happiness.
But such an action is not automatically assessed as valuable in the moral sense, that is,
from the standpoint of moral right. There are at least two reasons for this. First, the
successful realization of the objective can be fully or partially beyond the power of the
actors, so the result is not a matter of their responsibility. Then, it is possible that the
very thing that makes the action positively marked from the success standpoint, to
classify the same action as morally wrong (Babi?, 2007). In terms of axiology the items
that define the actions are not the same if we look from the success as a value
standpoint as if we look from the moral values point of view.
We pointed out that the subsets of successful and morally right actions do not
match, because the values that determine these subsets are not constituted on the
basis of identical characteristics. Their overlapping is accidental, as far as we are
concerned for the characteristics that constitute these values. Let us concern now to
the moral values. What is it that defines an action as morally right? The answer to
this question is different for philosophers whose teachings represent different
ethical theories. Our response arises from deontological ethical theory. We believe
that utilitarianism, as the strongest rival option, is a form of rationality that does not
provide strict ethical arguments. The main reason for that becomes from the very
value field, because utilitarianism defines ethical values through values of utility,
pleasure and happiness, and we have already seen that they are completely
different values and they do not form the basis for the moral evaluation of the
action. In Kant's ethical theory is morally worth action is the action that has been
Faculty of Business Economics and Entrepreneurship 327
done from motives of duty, or out of respect for the moral law. So, if something is
morally right, it is because it is done in accordance with the express intention of
respecting moral standard, and that standard is the moral law. Kant so clearly
points out that the fulfillment of duties is made in the form of serious desires, not
by the indirect causes of success (Kant, 1975, pp. 330). In other words, the
question is not whether we are happy, which occupied a prominent place in the
utilitarian estimates, but whether we are worthy of happiness, as Kant holds.
After these short basic settings, it is clear that we are interested in the nature of
standard for moral right action, when it comes to business practices. So, on the
source of Kant's ethical preferences, we wonder if we are worthy of happiness in
business? In particular, we are concerned by the values that are particularly
important if we ask the same question about virtual teams.
CONCEPTI ONS OF THE NATURE OF BUSI NESS
What are the characteristics of the business practices area? What complicates
the simple application of ethical standards is precisely what defines business
practices. If the goal of business practices is achieving success as measured by
economic parameters, it is difficult to apply the standard of moral right to
something that is defined using the value of success, because we have found that
substantial heterogeneity parameters constitute these values. It is therefore
important to address in the goals that determine the nature of the business more
carefully. On this basis it will be possible to determine the scope for ethical
analysis, and thanks to this we will be able to realize the importance that belongs to
ethics in business.
There are two basic views about the nature of the business, as seen through the
way in which we define its goal. The first point of view is the traditional
stockholder (or shareholder) theory, while the second one is the stakeholder theory.
These theories are confronted primarily in the way they envisage the aim and tasks
of the business subject, ie. In the way they consider the social responsibility. The
traditional approach, whose founder is an American economist and Nobel laureate
Milton Friedman, argues that the sole purpose and obligations consist in profit
maximization. And that defines the corporate social responsibility too. Stakeholder
theory, advocated by Edward Freeman points out that the direct social
responsibilities of the company can`t be reduced to the profit maximization, but to
the obligations concerning social responsibility. Which interest groups and whose
interests should be taken into account? Who are the stakeholders? Stakeholders are
all those who affect the company's operations, or those in which the business of the
company affects. There are several ways to clearly determine who are stakeholders
that should be taken into account. Frequently, economic theorists referred to
primary (directly involved in business) and secondary stakeholders. In more
detailed list we can found shareholders (owners), managers, employees, consumers
(customers), suppliers, creditors, competitors, local communities, government,
328 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
environment, international community and humanity. Each interest group has its
own aim: shareholders want capital (money for his independent values), the
managers want to succeed against the competition, employees want cash and
promotion, consumers want cheaper and better products, etc. Since resources are
limited and there are many preferences, the optimal result involves scarcity and we
have a range of unmet interest. In this conflict of interest situation it is not possible
to find a solution that can make everyone be happy. It is crucial that one gain and
others lose. The manager can`t remain innocent, because the manager is the one
who decides whose interest to sacrifice, and whether that sacrifice was "worth it."
The manager does not bring his money into the business, and his freedom of
decision making is less than the freedom of capitalists, and he deserves his freedom
by his successful enterprise. This does not diminish the complexity of his position,
and daily efforts in making decisions. Sometimes the sacrifice of interest, which is
attached to someone who seems to be far away from business in question, turns out
to be much more expensive for the company's image. So, it turns out that the long
run fact is important moment in the decision making.
What are the limitations of managerial decisions? In the framework of the
classical theory, the manager is required to make decisions that will lead to the
maximization of profit, while respecting the legal restrictions and general rules of
the game (derived from the basic guidelines of business practices and values of the
society). This is often referred to as the principle of moral minimum mandatory for
the business world, because it should, equally as the law and business practices, set
limits to decisions. The moral minimum in business practice determines the
prohibition of harming others. Does this mean that companies have a duty to
prevent harm and are they in the position not to do good? The answer to this
question would require that we thoroughly expound the problem of perfect and
imperfect duties, as well as the concepts of positive and negative responsibility,
which is not the part of our ambition in this paper.
According to the proponents of the theory of interest groups, the task of the
manager when making a decision is to take into account (and to give them weight
to the extent they estimate is necessary and appropriate) all the conflicting interests
of different stakeholders and to respect them, in proportion to their importance. The
regulation, which is present in the business world is legal (external coercion, often
reactive character), derived from the internal code of the company, the normal
behavior and business culture. What would it actually mean, depends on "company
policy", the people who make decisions and those people who are affected by such
decisions. Discussion about the stakeholders is connected with the ethical analysis
of the duties of managers. Do they have a fiduciary duty to shareholders, or they
have a duty of equal respect for the interests of all stakeholders?
What is the ethical aspect of the dispute over the determination of business
purposes? We have found that it does matter whether we're in the business on the
ground of only material interests that require the sacrifice of something that is not
recognized as valuable, or our position is the one that allows us to determine values
that business should affirm, even because that is the way to make some effect on
success of business practices. Business ethics should perceive the target business
Faculty of Business Economics and Entrepreneurship 329
more realistically, in order to have a chance to success in this area. We'll call for
the words of Peter Drucker, who claims that handy epigram of satisfied and happy
employee who is also efficient, shows only half the truth, because "the company
does not have a task to produce happiness, but to produce and sell shoes" (Drucker,
1961, pp. 313). Thus, the world of business is clearly defined with values that are
instrumental. In that area the measures of the success are efficiency, money,
knowledge of opportunities and knowledge, if unfailingly manages to find its way
to the application, ie. cashing. And it would be the best that monetize is
"monetize", ie. not to be at the level of cash, but on the level of capital. On the
other hand, ethical norms are focused on our actions, and we, as people whose
conduct is partly manifested in the business, follow their dictates. We should apply
these standards to the successful and the less successful actions, and these
standards are not defined in terms of instrumentality. But, it is not possible to act
on business alone, in the sense that the field of business has absolutely nothing to
do with morality that is incorporated in us (as well as in business, and society in
general) and with, more or less expressed, awareness of it. Sphere of morality does
not match with the sphere of success in business. But the sphere of morality in the
context of successful operations of business is determines business subject through
the dimension of its social responsibility. Socially responsible corporations have a
greater chance of long-term good business image, and that is certainly something
that significantly affects the performance of the corporation.
The real determination of the business aim as well as the determination of the
factual situation when it comes to responsible business, can use the results of
relevant researches. At this point our attention should focus only on one of them,
which monitors the impact of compliance with ethical standards and principles of
CSR on corporate governance in Serbia. Research has shown (Pržulj,
Radovanovic) that Serbian managers believe that companies have a responsibility
to their stakeholders, and that moral behavior and business success go hand in
hand. Immoral behavior in business is considered unjustified. However, business
practice in Serbia currently testifies that the actual situation is not in accordance
with these views. If the practice is the only criterion, then the request for ethical
and responsible conduct would rest without its base.
BUSI NESS AND MORAL VALUES OF BUSI NESS PRACTI CES
From the standpoint of business values, it looks like the manager within the
classical theory has the task of fighting for one value- profit, and that he is
accountable only to the owner (shareholders). According to stakeholder theory of
values, the profit is one value among others (in addition to personal, legal, moral,
civilized, cultural). The decision about the dominant theoretical conception is the
decision about the acceptance of the sole economic value or the holistic horizon of
values, where the economic value is only one among others. If we include the long
life moment into consideration, making profit as the primary objective that defines
330 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
business, requires that we take into account the values that are not strictly
economic. Thus, the struggle for social responsibility is at the same time the
struggle to build a successful corporation. If so, traditional and stakeholder theory
meet at some point (Beauchamp, Bowie, 2004, pp. 49).
Ethical business means morally right business. Good business can be
determined according to the functional analysis of good, which has been in use
since ancient times. As this analysis assumes that the quality good is attributed on
the base of the use of things, its role and its intended purpose, good business
means business that is successful, which brings profit. Within the stakeholder
theory, which determines the purpose of business by relying on the concept of
corporate social responsibility, business success, by definition, involves respect for
the moral standards. Is the successful business at the same time morally right
business, and what is the nature of this connection? Ethical behavior in business, in
a situation where the moral and successful requests are inconsistent, has a price,
but, as we have seen, brings profit. Here the aspect of the situation in which to get
to the goal involves the elimination of unethical competition cross our mind. But it
is necessary to have knowledge about the tendencies of competition behavior
(problems of game theory and strategic behavior) if we want to make that happen.
We should consider how in this case the hierarchy of interests look like in decision-
making, and whether the costs (care for the environment, employees and the like)
which turns out the dictate of morally right are greater than the profit it is about to
bring.
Thus, we have good reasons to believe that the basic ethical value of business
is trust. If the value of trust defines the functioning of business frame, it`s easier to
understand how does the quest for respecting the moral integrity of the business
participants fit into the broader evaluative picture that shapes the bases of business
practices.
Without trust there is no agreement or contract. The value of confidence can
be attributed to the expression of the moral integrity of the actors, and the respect
for these values at the same time makes room for professional integrity. Observing
the cruel capitalism through the prism of trust as a basic value might seem utopian.
This is justified if we are concerned only with bare facts about business practice.
The basis of business ethics can only be stable and meaningful if it is defined in the
way that affirms values that we claimed to be the basic ones. Also, we believe that
trust as a basic ethical value of business can provide the performance and
profitability of the business. It would be good to address the arguments that support
that thesis, and to show how the idea of ethical business contributes the affirmation
of business values that have nothing to do with ethics. Such an argument would
follow instructive observation of Kenneth Arrow:
"If we look closely, we`ll discover that a large part of the vitality of economic
life depends on a certain limiting degree of commitment to ethics. Completely
selfish behavior of individuals is totally incompatible with any regulated economic
life. Almost without exception there is an element of trust and reliability. A lot of
work is done on the basis of verbal guarantees" (Arrow, 1963, pp. 314).
Faculty of Business Economics and Entrepreneurship 331
If we need to do the job on the basis of a verbal guarantee that anything else
does not ensure, we can`t skip the evaluation of the reliability of the other side. It is
important to explain what it means reliability. In business our expectations of other
stakeholders are related to the expectation of their reliability (trustworthness), ie.
their actions should be such that we can trust them. To specify, they should not
cheat, ie. should not lie, should fulfill promises and respect contracts. That requires
that we should really believe them, and that is our faith (trust) to other participants.
But some authors, such as Ed Soule, distinguish between reliability as confidence
and reliability as trust, holding that only the reliability as confidence has inductive
origin that means that it stems from previous experience that confirmed positive
behavior. And that is why the basic activities in the work place require just the
reliability as trust, for which there is no precise inductive support. Just because of
the risk that is part of this kind of reliability, as there are no guarantees, we
emphasize the need for it; its necessity for the sake of functioning and most basic
business transactions is used instead of the guarantee, we do not have.
We see that the relationship of trust is formed in a complex game of
interdependence, whose duration is uncertain. That fact prevents withdrawal of
strategic moves from one side in favor of purely personal promotion. Without trust
there is no reciprocity. If one of the parties in this relation is worse or weaker, you
never know if the other party will interact in the way to abuse the weakness, if
there is recognition of the fact that trust is not complete. Bearing in mind that it is
almost impossible to do business if the business moves are drawn only within
precise guarantees, it is irrational to claim that cheating in business is a natural
thing. Albert Carr (Carr, 1968, pp. 145-148) is famous just for that position, but he
mistakenly placed contradiction of the business world, arguing that the game of
poker, which mostly resembles the business practices, requires not to trust other
players and to ignore requirements of the friendship.
WHAT ARE VI RTUAL ORGANI ZATI ONS?
There have been many attempts to define a virtual organization. As an
illustration, we will give two definitions: „To the outside observer, it will appear
almost edgeless, with permeable and continuously changing interfaces between
company, supplier, and customers. From inside the firm the view will be no less
amorphous, with traditional offices, departments, and operating divisions
constantly reforming according to need. Job responsibilities will regularly shift, as
will lines of authority- even the very definition of employee will change, as some
customers and suppliers begin to spend more time in the company than will some
of the firm`s own workers” (Davidow, Malone, 1992, pp.5-6) or „virtual
enterprising is a process through which companies team their capabilities, building
upon their ability to define and redefine multiple cross- functional team as needed.
These teams may include not only members of the company, but also people from
vendor or customer companies“ (Savage, 1996, p.231). Without exaggeration, we
332 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
can say that the concept of virtual organization follows and represents the
development of business skills. If we follow the definition that the authors such as
Mowshowitza (Mowshowitz, 2002) have suggested, we will notice that lots of
features are specified but they all are around the basic idea: the virtual organization
is a term used to encompass the capacity of management to meet, again and again,
permanently changing demands of business. Initially, the virtual organization is
supposed to signify that a corporation has a greater capacity than is actually
manifested in a given time. So this concept originated by analogy with the concept
of virtual computer memory (Mowshowitz, 2002, pp.xiv). However, the term
virtual organization is very flexible and includes many forms of business practices
today. Many organizations do not realize that they are in fact a true example of a
virtual organization.
Due to the complexity of the definition of virtual organization and the scope of
literature with this topic, we have chosen to consider the characteristics of the
virtual organization using the example of virtual project teams, for the needs of this
particular study. The reason is based on the simple fact that the virtual project
teams are one of the most modern editions of virtual organizations (the text from
the following paragraph till * is modified according to the source Majstorovi? et
al., 2013, pp. 54-71).
Virtual project teams are teams that have appeared as a result of new demands
caused by the globalization of business. They consist of groups of people who achieve
cooperation almost exclusively via computer and communication networks in order to
get the common goal they have. Face-to-face communication is an exception.
In order to highlight the degree of change, we compare the virtual team with
traditional one. In the traditional business environment, employees physically depend
upon each other. These are people who share office space. Their communication is
manifold in formal and also informal levels. Their manager is a man who knows a lot
about employees and maybe even about their families. He is monitoring their work and
interaction every day. He invites them to individual counseling if needed, and makes
efforts to improve their motivation. Manager includes the new-comer to the collective
by considering his qualifications, as well as examining his ability of fitting into the
existing team. This concept, according to a growing number of virtual teams, dies.
New web technologies (LAN, WAN, Internet) radically altered the appearance of the
project team. What has not changed is the fact that members of the team are also
working on a common goal, and that there are resources that are necessary to achieve
this goal. Everything else is different. The teams bring together people who live in
different countries. It happens that there are people from 26 countries in a team of 35
people (Schneider Electric), and this is just one example. Their office is our planet, as
well as information they possess are limited only by achievements of web technology.
So, these people do not meet in offices, nor are they able to lead informal discussions.
In the traditional model, moving to another place because of business requirements was
a major problem. It isn't easy to leave family and friends, and to put aside relationship
with people at work. Virtual Team was set up as a team of experts in a particular field,
not in a specific country. People in the labor market have become available and are
able to offer their skills to a wider market. The concept of a virtual team saves the cost
Faculty of Business Economics and Entrepreneurship 333
of frequent travel for business meetings, and at the same reduces the effort that travel
brings to people (fatigue, sickness, frequent adaptation due to climate changes). Lot of
money must be invested in improving the informational infrastructure that is supported
by the new technologies. The team members and their managers do not meet at the
same desk in the office, but in front of the web camera, sitting at home in front of the
computer, participating in web conference.
Now, let us mention one important feature of virtual teams, and that is cross-
culturalism. The request for gathering the most competent people, typical for the
virtual team, erased geographical and cultural borders. Geographic dispersion of
the team resulted in a cross-cultural nature of the team. Cross-culturalism is
demanding brand new conditions.
Cross-cultural aspect became an academic and scientific challenge in 1937.
Then Peter Murdock (Murdock, 1940) led a project organized at the Yale
University with the aim to draw attention to specific sociological and
anthropological problems that this phenomenon entails. Today, in the context of
the business problem, specific features that multiculturalism brings seek an equal
effort from researchers. On the one hand, it is necessary to preserve and if possible
enhance focus all team members toward a common goal. On the other hand, it is
important to note the differences that could lead to weakening of pursuit of an end.
It is necessary to know which the differences and to what extent are threatening the
functioning of the team and develop an appropriate treatment for these differences.
It is important to take into account the fact that the funds that can be used are
limited, because the dominant or exclusive communication model is virtual
communication.
What does the aim of managing the cross-cultural virtual team imply? At the
beginning it is necessary, as with any team, to make a team. This means
transforming a group of individuals into a coherent team, able to create a plan of
action that meets certain tasks defined by that plan. This is achieved through
teamwork orientation, which becomes integrally connective tissue of the group.
Creating a team is crucial task. After that, performance management and team
development are two other tasks (HunsakermHunsaker, 2008).
If you gather experts and agree to specific geographically dispersed company,
we have to deal with the requirement to minimize the importance of cultural
differences in order to have successful and effective team. To minimize does not
mean to eliminate cultural differences, because that could harm the integrity of
individual and lock creativity. We should not forget that cross-culturalism makes
coming to creativity and innovation easier. To make this actually happen, it is
necessary to provide an atmosphere that will encourage these values.
It seems that the position of manager of virtual team is extremely delicate. He
needs to mitigate the cultural specificities of the team members, in order to make
them achieve appropriate level. On the other hand he needs to keep them at the
right level and also to encourage those constructive among them. He has to find the
principle of limiting cultural freedom that is legitimate from the interest of the
company point of view. This principle shouldn't harm the moral and business
334 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
integrity of team members. Inventing this principle is a remarkable effort, which
will lead managers to the position of the multidimensional challenges, requiring
substantial ethical weighing. This manager has a much more complex task than
managers in traditional team. Hence his qualifications have to be different.
There are many challenges for managing the cross-cultural virtual team.
Virtual team manager's role looks like the role of manager of traditional team, but
only in some respects. It could be argued that their roles share the same formal
frame. This frame is defined by the prescription of responsibility for their choices
and through connection of the realization of these decisions and the expected
effects. That, in long term conditions, must be interpreted as beneficial. Within this
frame, there are different settings. The work of the virtual team is determinated by
virtual settings. The most prominent challenge in this specific set is the value share
challenge, with the problem of trust as its main subject.
MORAL VALUES OF VI RTUAL ORGANI ZATI ONS
As we have already stated, the crucial condition for making a successful team is
trust. Trust is a value that limits many business practices and makes ethical norms and
principles useful for business. Management theorists have discovered trust as an
important ingredient for competitive success. They needed trust because lack of trust
raises transactional costs and complicates collaborative efforts. It is easier to have trust
as an assumption in business relationships, because without it everything would be
impossibly complicated and expensive. For example, think about the role of contracts
in everyday business, and how often we use them. Without trust as an assumption,
contracts would be endlessly long, spelling out every possible contingency and
defining every conceivable obligation (Fukuyama, 1995, pp. 152).
Some authors name five main disadvantages to a virtual team as: lack of
physical interaction, loss of face to face synergies, lack of trust, greater concern
with predictability and reliability and lack of social interaction (Cascio, Shurzgalio,
2003). In our opinion the problem of trust, which is closely related to specific
treatment of predictability and reliability, is the basic value problem for virtual
teams. The issue of trust is increasingly complex in a virtual environment, though
trust is important condition for the success of any team. Furthermore, this problem
is much more visible in the virtual cross cultural team setting, than in the
traditional one. There are many reasons for this claim, and the first one is
concerned with the way we build trust among each other.
How does phenomenology of coming-to-trust look like? According to one
model (Zaccaro, Bader, 2003) there are three stages of trust. The first stage is the
trust that economists hold to be calculative: there is a good reason for each side to
trust the other. In the new team this stage of trust is recognized as the benefit of
working together. The problem for virtual settings is that there are no guarantees of
future contact, so the calculus, as the base of trust, can’t work. If the only reason
for trustworthy is “because it pays” when we move the possible transaction, we do
Faculty of Business Economics and Entrepreneurship 335
not have the reason that leads to action any more. Trust must rely on the more
solid ground, and maybe that ground can be reached on further stages. *
We may address the problem of trust in various ways. Trust is recognized as
an important issue in organizational psychology, management, public
administration, organizational communication, education (Bachmann, Zaheer,
2006, pp.15). The authors agree on the view that the focus of the management
literature of the 1990s is topic of virtual organization and confidence. As an
example, we refer to the observations that amount to Jones and Bowie (Jones,
Bowie, 1998, pp. 273-292). The authors talk about the economic and social reasons
due to which the trust is recognized as a value that underlies the success of the
virtual organization. Significantly, their observations concern the paradoxes of
virtual corporations (ibid. 273). In fact, it is clear that coming to an agreement in a
short period of time and in terms framed by standard specificity of virtual
organizations may not be possible if we don`t have mutual trust and strong bonds
of cooperation that connect participants of business transactions. The relationship
of trust that we talk about is the trust that no contract can guarantee. Indeed, the
situation in which are stakeholders in the business situations of which we speak
looks like the situation in which are people in so called natural position, before the
occurrence of the state. Their confidence in the political entity that has yet to occur
recalls the confidence of businessmen. There is no contract that guarantees that the
government will fulfill its promise and ensure people the security of life and
property. Nevertheless, people still give up the part of their freedom in exchange
for security services. This is one of many explanations of the origin of the state.
According to that we can interpret the state as a protective agency. However,
although this theory about the origin of the state is commonly called the social
contract theory, there is no contract, because the state can only provide the
contract. If you want to find a contract that is basically in the name of the famous
theory, the most appropriate concept would be determined by a psychological
contract. This agreement has its basis in the will of individuals on both sides, when
it comes to business transactions, too. When it comes to the analogy of the political
sphere, the state guarantees the validity of the contract, and the emergence of the
state enables trust. Such confidence is essential in the business we're talking about.
Jones and Bowie argue precisely the thesis that only such, they call it the moral
concept of trust, which is ethically-based and which does not have the usual
guarantor, can enable business success.
This is a very strong notion of trust, and thus there is a demanding condition
posed to virtual organizations. Ethically-based trust, hard-core trust, as otherwise
we call is a conditio sine qua non for the success of virtual organization. One
justification for this claim is found in Norman Bowie`s arguments. Bowie`s moral
treatment of trust provides the answer to our normative ethical orientation of
Kantian type. Bearing in mind our core ethical beliefs, Bowie's arguments are very
interesting to us. He argues that the definition of the capacity of the negligence of
trust as inappropriate maxims that express the neglect of trust can`t be practically
universalised. Drawing on observations of Kosgaard, he emphasized that there
actually is a pragmatic contradiction, which occurs whenever the success of
336 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
achieving a goal depends on the exception to the application of certain practices.
Thus, a false promise is a pragmatic contradiction, because the success of such a
promise in reaching the specific goal (money), depends on the fact that most of the
promises we do not use in that way. This means that a false promise is not
promising paradigm, on the contrary, it is an exception, and can lead to target only
accompanied with the background assumption that it is the exception to the
standard cases of promising. This way Bowie's argument fits into standard of
practical universalization- the maxim of a false promise passes the test of logical,
but not of practical universalization. And practical universalization is the
paradigmatic ethical test, which detects the moral right. Finally, we can conclude
that if the Bowie`s argument of ethical grounding of trust is valid, it would have
important implications to the way we comprehend the notion of trust. Trust is not
only a descriptive term, but essentially a normative concept. Thus, the requirement
for trust in business can`t be excluded by the fact of numerous scandals, as they
miss the nature of the real requirement.
Virtual organizations are very specific. So, people whose conduct would be
otherwise in accordance with the ideal of education and the aim of moral autonomy
would be the best to engage in virtual organizations. That is partly because the fact
that only autonomous personality can successfully take part in the organization that
incorporates laissez-faire style. The main feature of such a style is high level of
individual freedom. Virtual organizations are much alike such model of leadership,
and that is why management has a coordinating role unlike its role in the classical
styles of guidance.
CONCLUSI ON
We offered factual and normative arguments to demonstrate the essential
importance of the existence of trust in business practices. To ignore the trust means
not to understand the purpose of business, because without trust this purpose
generally is not achievable. As we have focused on the trust that does not an
inductive origin, so- called hard-core trust, it is clear that we don`t have strong or
any guarantees for that kind of trust. The insistence on the affirmation of the trust
value within the overall business environment goes hand in hand with the
insistence on giving priority to moral reasons (which is an essential feature of
moral integrity) at the individual level, when speaking of participants in the
business activity. And that is a significant task for business ethics.
Faculty of Business Economics and Entrepreneurship 337
REFERENCES
[1] Arrow, K. (1963), Social Choice and Individual Values. Yale University Press.
[2] Babi?, J. (2007), Sre?a i moral. Filozofski godišnjak, pp.121-151.
[3] Beauchamp, T.,Bowie N.(2004), Ethical Theory and Business. New Jersey:
Prentice Hall.
[4] Carr, A. (1968), Is Business Bluffing Ethical?. Harvard Business Review,
january- february, pp. 143-153.
[5] Cascio, W.F.,Shurygailo, S. (2003). E-Leadership and Virtual Team.
Organizational Dynamics, 31 (4), pp. 362-376.
[6] Davidow, W.H. ,Malone M.S. (1992), The Virtual Corporation. New York:
Harper Bussines.
[7] Dirks, K. (2006), Three fundamental questions regarding trust in leaders, in
Bachmann, R. and Zaheer, A. (ed.), Handbook of trust research. Glos UK:
Edward Elgar Publishing, pp. 15-27.
[8] Drucker, P. (1961), Praksa rukovo?enja. Zagreb: Privreda.
[9] Friedman, M. (1962), Freedom and Capitalism. Chicago:Chicago University
Press.
[10]Fukuyama, F. (1995), Trust. New York: The Free Press.
[11]Hunsaker, P.L.,Hunsaker, J.S. (2008). Virtual Teams: A Leaders Guide. Team
Performance Management, 14 (1/2), pp. 86-101.
[12]Kant, I. (1975), Kritika mo?i su?enja. Beograd: BIGZ.
[13]Majstorovi?, K., Pavi?, Z., ?ilerdži?, V. (2013), The challenges of managing
cross-cultural virtual project teams, in Entrepreneurship, finance and education
in the digital age, Germany: LAP Lambert Academic Publishing, pp. 54-71.
[14] Mowshowits, A. (2002), Virtual organization. Westport: Quorum books.
[15]Murdock, G.P. (1940). Cross-Cultural Survey. American Sociological Review
vol 5, No 3, June, pp. 361-370.
[16]Pržulj Ž., Radovanovi? B. Affirmation of principles and improved governance
in Serbia- Business ethics and corporate social responsibility.http://www.ien.bg.ac.rs/images/stories/download/managestr_ch18.pdf
(20.04.2014.).
[17]Savage, C.M. (1996), 5th generation management: co-creating through virtual
enterprising, dynamic teaming and knowledge networking. Boston:
Butterworth – Heinemann.
[18]Zaccaro, S.J.,Bader, P. (2003). E/Leadership and the Challenges of Leading E-
Teams: Minimizing the Bad and Maximizing the Good. Organizational
Dynamics, 31 (4), pp. 377-387.
338 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ORGANIZATIONAL DIAGNOSIS AND MANAGEMENT
OF CHANGE IN ORGANIZATIONAL CULTURE OF
BANK INSTITUTION
Miryana Stancheva, PhD
33
Snezhana Ilieva, PhD
34
ABSTRACT
The identification and comparison of the current state of an organizational
culture and the desired future state allow the planning and implementation of
subsequent interventions in the ways an organization functions. This article aims to
present the results of a study of organizational culture in a bank institution and to
outline the main areas in which the necessity of future organizational change is
proved. A profile of this organizational culture is established, which represents it
as a purposeful, clearly structured, and highly market-oriented one. The good
relations, cooperation, and willingness to disclose innovation and development are
highly appreciated. Stability and continuity between current and desired
organizational culture are established with emphasis on the need of strengthening
the orientation of the external environment, on one hand, and on the other, on the
need of autonomy and independence of the employees in the working process and
also on the importance of good relationships and traditions. The results of the
study of the preferred future organizational culture in the banking sector can be
obtained in process of change management and in determining the domains where
an intervention is needed to achieve an organizational change purposes. They can
be combined in the following sectors: providing more independence and flexibility,
and improvement of the inter-bank communication channels.
Key words: Organizational Culture, Organizational Change Management,
Types of Organizational Culture, Bank Sector
J EL Classification: L20, M14
UDK: 005.32:336.71
33
Miryana Stancheva, Sofia University “St. Kliment Ohridski”, Sofia, Bulgaria,
[email protected]
34
Snezhana Ilieva, Sofia University “St. Kliment Ohridski”Sofia, Bulgaria, [email protected]
Faculty of Business Economics and Entrepreneurship 339
I NTRODUCTI ON
Bank sector is one of the most dynamically developing and strongly
competitive sectors in which mergers and acquisitions are often applied. This
requires of its management not only to manage the process of continuous changes
implementation in service quality and to resist the pressure of the competitors, but
also to know how to build and maintain an organizational culture which is
congruent to the requirements of the external environment, and, in the same time,
reflects the specifics of the particular bank and gives it an uniqueness.
Culture is broadly defined as a “system of basic assumptions, beliefs and
values found, identified, developed and taught by a group in the process of dealing
with its problems of external adaptation and internal integration, and adopted as
valid by all members of the organization for the correct way to perceive and solve
problems” (Schein, 1992).
In order to make a successful change in the organization it is necessary the
totality of intentional and goal orientated actions to be precisely planned on the
base of organizational diagnosis of the recent state of the organization, which
results in developing of strategies for accomplishing the change and applying the
relevant approaches, interventions and organizational practices. The main goals of
the organizational change include increasing of the organizational ability to adapt
to the external environment and to integrate the changes that were done, which
reflects in change of the organizational culture and behaviour of the employees, i.e.
organizational change should achieve simultaneously adaptation to the market
environment and internal integration, on one hand, and shared values and patterns
of behaviour, on the other.
Exactly because of this, the success of organizational changes can be evaluated
by the dimensions of organizational culture which not only differs one organization
from the others in the same sector, but also ensures sustainable development and
effectiveness. The organizational culture has many functions which prove its
significance for the development of one organization. The most important among
these functions are the adaptation function or adjustment to the changes in
organizational environment and context, and the integration function which is
focused on the processes within the organization (Schein, 1985). The role of the
integration function shows itself in the influence of the organizational culture on
team effectiveness, and on the commitment and identification with the organization
as well as in the coordination and communication between different structural
sections which ensures internal organizational stability regardless of the crises that
occur outside the organization (Ilieva, 2006 b).
According to S. Robbins, there are six major forces that promote
organizational change: the changing characteristics of the workforce, technology,
economic shocks, changing social trends, the "new" world politics and changing
characteristics of competition (Robbins, 1983). All these destabilizing forces affect
340 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
organizations because they put them in a new situation, which imposes new
internal and external conditions of existence. For this reason, organizations must
continually adapt to the environment and this is only possible if there are changes
in the culture of the organization according to the context requirements.
Achieving these two main organizational culture's functions - external
adaptation and internal integration (Schein, 1992) can be found in bringing to four
main types of organizational culture, which are subject of research in the
competitive model of organizational values (Quinn, 1988). This model provides a
possibility to compare the main types of organizational culture and to assess their
influence according to the dominant value orientation in every one of them. The
four types differentiate between themselves according to two main value
orientations - orientation towards internal and external environment, and
orientation towards flexibility and independence in actions, and towards stability
and control (Cameron, Quinn, 1999).
The values inherent for the organizational culture of clan type include traditions,
loyalty, interpersonal relationships, team work, and accepting the organization as bigger
family. The manager is expected to be a father figure, mentor, and facilitator of the
processes, whereas the organizational strategic goals are human resources development
achieving high degree of attachment and labour moral. The orientation in the adhocracy
type of culture is towards external environment and the strategic goals and values
comprise dynamism, growth, innovations and creativity. The successful management
requires the managers to be innovators and entrepreneurs, and to be ready to take risks.
The hierarchy type of culture stands on the processes within the organization and the
stability, order, clear rules and procedures have priority. The managers' role is to
coordinate and organize the implementation of the work and the interaction between the
employees. The market type of organizational culture supposes searching for competitive
advantages and, in the case of administration, recognizing the external environment and
the requirements of the citizens. Motivation for achievement and determination are the
preconditions for effective leader's style in market organizational culture (Cameron,
Quinn, 1999). Organizational culture contains characteristics of every type of culture, but
the dominance of one particular orientation defines its specifics and differentiates it from
the rest organizations (Meschi, Roger, 1994).
Organizational diagnosis incorporates the assessment of the current level of
functioning in order to plan an appropriate future intervention and change.
Organizational diagnosis process requires collecting information about the
problems and their origin and the existing organizational difficulties, exploring the
possible solutions and ways of organizational improvement and choosing the
appropriate organizational interventions.
Organizational diagnosis could be viewed as a comparison between the current
and desired organizational state (Beckhard, Harris, 1987), as a process of data
collection for discrepancy between the ideal and current behaviour manner (Blake,
Mouton, 1989) or as a means for outlining the differences between the
organizational situation now and the situation that ought to be (Weisbord, 1985).
Main goal in the organizational process analysis is to disclose the forces and causes
Faculty of Business Economics and Entrepreneurship 341
led to the current situation in the organization, and to define ways and tendencies
toward achieving a new desired organizational state. Organizational diagnosis's
main purpose is data collection about the current "picture" of the organization,
which would serve as a basis for short-term and long-term changes and
improvements in its functioning (Ilieva, 2006 a).
The goal of this survey is to measure and to establish the recent organizational
culture and the desired future culture in the chosen, representative for the sector
bank, by defining the dominant type of organizational culture and, on this basis, to
diagnose the spheres where future optimization and organizational change should
be made. Congruence is expected to exist between the perceived and the desired
future organizational culture (stability), as well as to be observed clearly dominant
type of organizational culture, focused on market success.
RESEARCH METHOD AND SAMPLE
To measure the recent organizational culture and the desired future one, K.
Cameron and S. Freeman’s model of competitive values is applied which gives an
opportunity to define well each type of organizational cultures (Meschi, Roger,
1994). The questionnaire is based on the theory of competitive values and it shows
appropriate psychometric qualities (Cronbach's alpha, ? = 0, 731, current state;
Cronbach's alpha, ? = 0, 813, future desired state) (Ilieva, 2006 b). It contains 16
questions which measure four types of organizational culture - clan, hierarchy,
adhocracy, and market cultures. Questions are divided equally in four scales and
are evaluated by a 5 point Likert scale.
The questionnaire was given to the respondents to fill it twice. The first evaluation
is relative to the way they perceive the recent state of the organizational culture,
whereas the second evaluation is relative to their personal perception and concept of
the desired future state of the organization. In this way, comparing the results we can
diagnose the employees’ perception of the organizational culture dimensions and its
strengths and weaknesses. Thus, spheres of discrepancy between the real and the
desired organizational culture in the Bank could show up and preconditions for future
structuring of effective plan for organizational change could be created as well as what
is necessary to maintain and to improve in organizational culture.
For conducting an organizational diagnosis we used the R. Preziosi
questionnaire, based on the six-component model of Marvin Weisbord (Weisbord,
1985; Hamid, 2011), which contains the following components: goals, structure,
relationships, rewards, support, leadership. This model is based on the systematic
approach and it is aimed to analyse the interrelationships between the particular
variables that affect the ways the organization is managed. Preziosi had added to
these spheres another one – change that measures the attitudes and resistance to
change. The questionnaire shows good psychometric properties (Cronbach's alpha,
? = 0, 926) and is composed of 35 items, divided by 5 in 7 subscales (Preziosi,
1995).
342 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
SAMPLE
The data were collected in international bank institution which has more than
17 years of history on the Bulgarian financial market. This bank has Central Office
where more than 250 employees work, and financial centres throughout Bulgaria
where the employees are approximately 400. The respondents that took part in the
survey are 70 specialists who work in functional, business and risk departments.
They were randomly chosen and 90% of them work in the Central Office. 44 of the
respondents are women which is 62, 9% of the sample and respectively 26 are men,
which is 37, 1% of all the respondents.
RESULTS AND DI SCUSSI ON
RECENT STATE OF THE ORGANI ZATI ONAL CULTURE
The expectation that one dominant type of organizational culture has been
established was justified to a certain extent, but results show that the Bank’s
organizational culture is a balanced combination of the 4 types of organizational
culture (Figure 1). The employees define the organizational culture as market-
orientated ( = 3, 88, SD = 0, 5) and that has given a reason to define the
following characteristics of the Bank organizational culture which are: orientation
towards stability and control, on one hand, and orientation towards external
environment and result achievements, on the other. The manager is perceived as
responsible to reach the organizational goals and tasks which is extremely
important for the organizational stability and success.
Figure 1: Organizational culture types
Faculty of Business Economics and Entrepreneurship 343
There is a statistical significant difference between the employees who work in the
Central Office and in the Financial Centres (? = -2,081, ? = 0,041 (p? 0, 05). Those who
work in the Bank branches/Financial Centres evaluate the organizational culture as
market orientated ( = 4, 37) much more than their colleagues from the Central Office
( = 3, 84). The difference comes from the job specifics of the employees in the
Financial Centres – every day they meet clients, work with the Bank trade products and
make direct efforts and actions toward goals achievement.
The results indicate for peculiarities of the organizational culture of the current
bank and meanwhile the culture types can be defined as typical and representative
for the whole banking sector. Being mainly market-orientated culture, it
emphasises innovation, dynamics and development (adhocracy type), notices the
requirements of the work and specific job procedures (hierarchy type) and
meanwhile appreciates the unity, loyalty, ethics, traditions and good relations. The
competitive advantage is based on stability of organization achieved by combining
the orientation towards external environment which can be seen in the higher
values of the market type of organizational culture with the orientation towards
keeping the internal rules, order and hierarchy which are typical characteristics for
the hierarchy culture. Flexibility towards external environment can be achieved
through the adhocracy type of culture which increases the innovativeness and
develop organizational ability for adaptation and maintains its competitiveness.
DESI RED FUTURE ORGANI ZATI ONAL CULTURE STATE
(COMPARATI VE ANALYSI S)
The results about future desired culture state show employees’ preferences that
the characteristics of all types of organizational culture be expressed more strongly,
except the characteristics of hierarchy type of culture which respondents would like
to decrease a little or to keep them in the recent state (Figure 2).
Figure 2: Comparison between recent and future desired state of organizational
culture types
344 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
The biggest differences are observed between the clan and the adhocracy types of
organizational culture. This result indicates that employees have preferences to
increase the flexibility and autonomy, which the organization allows them in the recent
moment and, in the same time; they have readiness for innovations (adhocracy
organizational culture). The change towards creating an organizational culture which
contains characteristics inherent for the clan type is also pronounced (recent state: =
3, 18; desired future state = 3, 90; SD= 0, 67). Employees would like to develop
further the good relations and teamwork they have with their colleagues and are ready
to commit and involve stronger in the organization activities.
Comparison of the profiles of the recent and future desired culture gives a chance
to bring out tendencies in the practices of support and improvement, which should be
taken into consideration in the future bank management actions toward leading in
changes in the strategy, structure and human resources management (Figure 3).
Figure 3: Recent and future desired organizational culture’s profiles
The tendency for agreement in sustaining the market and hierarchic types of
culture is kept, but obvious preferences for change and improvement of clan and
adhocracy types of cultures are also demonstrated. To summarize the established
differences, it could be concluded that the desired image of the future Bank’s
organizational culture is based on the already existing recent orientation towards
stability and control, but at the same time organizational culture is expected to be
much more open to and orientated towards the external environment, which will
give the employees more freedom, independence/autonomy and flexibility in the
working process and will put higher the importance of good relations and traditions
which give a sense of social and organizational support and loyalty.
Faculty of Business Economics and Entrepreneurship 345
ORGANI ZATI ONAL DI AGNOSI S
The analysis of the results of the conducted organizational diagnosis provide
comprehensive picture of the way in which the Bank operates and give additional
information about needed changes (Figure 4).
Figure 4:. Values of organizational functioning components
The surveyed employees evaluate positively the relationships they have in the
organization with their colleagues ( = 3, 84; SD = 0,55) which give them a sense
of support and security, and allow them to show good job performance. Important
components to sustain this atmosphere are the relationships with the line manager,
which are good for 87,2% of all the respondents. A confirmation for those results is
the fact that employees and their teams are supported by the line managers through
new ideas and advice, that help them in the successful performance (support
mechanisms: = 3, 63; SD = 0, 54). Overall, they have been satisfied with the
information they received about their tasks, but do not highly appreciate the
mechanisms for assuming obligations. With regard to possible future changes,
surveyed employees, albeit moderately, find out a potential in the banking
institution ( = 3, 35; SD = 0, 46). According to them, when new strategies and
implementation procedures are introduced, the organization does not have a strong
resistance, but it does not actively support the innovation. Respondents have a
positive attitude towards change, confirming the results obtained from the study of
current and future organizational culture.
With regard to the structure ( = 3, 65; SD=0, 54), according to employees,
the existing division of labour is dependent more on the achievement of the
346 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
organizational goals and is not assessed as very flexible. The top rated
organizational functioning component is leadership ( = 3, 87; SD = 0, 46). With
respect to the development and success of the bank, employees attribute great
importance to the initiated rules and the management approaches, and appreciate
the efforts of the entire leadership to achieve the goals.
Employees clearly understand the goals and priorities of the organization
(goals: = 3, 87; SD = 0, 47), they are aware of their personal goals, which
largely correspond to group goals. The lowest rated organizational component is
the rewards they receive (rewards: = 3, 12; SD = 0, 68) and they do not perceive
the options for personal and professional growth, available to them, as viable.
According to them, the proportion of the efforts they make, the job they do, and the
rewards they receive is satisfactory, but they are not quite convinced how equitable
the payment levels of all the subordinates are.
CONCLUSI ONS
The data allow establishing an organizational culture’s profile which can be
considered as representative for the banking sector. The studied organizational
culture is strongly orientated toward goals achievement and results, and toward
market stability. It is clearly structured, and focused on following, and keeping the
rules and procedures, which create stability and order inside the organization. In
this regard, good relations, friendly support, and cooperation are highly appreciated
in the organization, and the readiness and willingness for innovation and
development are revealed.
This tendency strengthens even more in the employees’ notion of the desired
future image of the organizational culture. It shows that there is congruence
between the recent organizational culture and the desired one, by demonstrating the
stability of organizational values in the future. Bank’s leading competitive
advantages expressed in stability and control, on one hand, and in achieving
results, on the other, are kept and require purposeful managerial actions of
maintenance and development. Employees would work even harder in order to
fulfil the business goals and they would not change anything in the division of
labour, subordination and management style which they highly appreciate. But
besides that, employees’ preferences about the future organizational culture’s
profile contain a desire for more flexibility and action independence which would
stimulate them to develop their initiative and innovativeness, and to identify
themselves with the organization and with the teams they work in, by developing
higher level of unity, loyalty and commitment.
A long-term organizational change planning could be built on the basis of the
survey and diagnosis, which would be focused on increasing employees’ job
satisfaction without being necessarily related to changes in the reward system. The
results from the survey on the desired future organizational culture could be
Faculty of Business Economics and Entrepreneurship 347
considered as a starting point for the areas which need intervention for fulfilment
of the desired state, and the following ways and approaches for organizational
culture improvement and change could be designed.
The implementation of more independence and flexibility for employees could
be made by applying of the following techniques of organizational change: group
decision making and team development; giving opportunities for personal planning
and organizing the delegated tasks; rotations and in-the-job trainings. Improvement
in the interrelations within the bank and creation of a higher identification, loyalty
and commitment could be developed by elaborating common projects and tasks,
which enlarge the collaboration between teams and organizational units, improve
inter-bank communication channels and help to prevent and manage conflicts.
It could be concluded that the main organizational culture’s characteristics of
the bank researched provide its competitive advantage and meanwhile reflect the
tendencies and requirements toward the organizational culture, which is inherent
for the banking sector as a whole. These tendencies are the following: balance
between the main values orientations, with focus on the external environment and a
simultaneous combination between flexibility and stability. Maintenance of the
organizational culture and its change in order to ensure wider initiative and
innovativeness, on one side, and internal integration, loyalty and commitment, on
the other, would create preconditions for more successful functioning and
development, and would help to plan and manage actions towards stabilizing its
market position and towards creating new competitive advantage.
348 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Beckhard, R., Harris, R. (1987). Organizational transitions: Managing complex
change. Addison-Wesley OD Series.
[2] Blake, R., Mouton, J., McCanse, A. (1989). Change by design. Addison-
Wesley Publishing Company, Reading, MA.
[3] Cameron, K., Quinn, R. (1999). Diagnosing and Changing Organizational
Culture: Based on the Competing Values Framework. New York: Addison
Wesley.
[4] Hamid, R. (2011). The Anaysis of Organizational Diagnosis on Based Six Box
Model In Universities. Higher education studies (Vol. 1).
[5] Ilieva, S. (2006). Organization development. Sofia, University Press “St.
Kliment Ohridski”.
[6] Ilieva, S. (2006). Organizational culture. Sofia, University Press “St. Kliment
Ohridski”.
[7] Meschi, P., Roger, A. (1994). Cultural context and social effectiveness in
international joint ventures. Management International Review, 34 (3): 197-215
[8] Preziosi, R. (1995). Organizational diagnosis questionnaire. In: Daft, R.,
Sharfman, M. (Eds.) Organization theory. Cases and applications. (4th ed.),
West Publishing Company, Minneapolis.
[9] Quinn, R. (1988). Beyond rational management. San Francisco: Jossey-Bass.
[10] Robbins, S. P. (1983). Organization Theory: Structures, Designs, and
Applications, 3/e. Pearson Education India.
[11] Schein, E. H. (1985). Organizational Culture and Leadership. San
Fransisco:Jossey Bass
[12] Schein, E. H. (1992). Organizational Culture and Leadership. San Fransisco:
Jossey Bass.
[13] Weisbord, M. (1985). Organizational diagnosis: A workbook of theory and
practice. Addison-Wesley, Reading, MA
Faculty of Business Economics and Entrepreneurship 349
STAFF MANAGMENT AND EVALUATING THE STAFF
EFFICACY
Borko Somborac, MA
35
Dejan Ilic, PhD
36
ABSTRACT
Every modern corporation where people are a secondary factor carries a high
risk of unfavorable results of work, which leads to inconsistency in the
development of the productive forces. Managing modern organizations must be
based on the human resources, which allow them to their activities, awareness and
enthusiasm to develop and improve work processes and relationships. People are
leaders and economic development factors, which determine the development of
the productive forces and production relations and the fundamental creators of
expanded reproduction and its organization. Of the great importance for personal
management is the performance of staff at all levels of management and
leadership. In human resources researches there is an area that deals with
evaluating the effectiveness of staff, although the practice confirms that this field is
not yet been sufficiently examined. The aim of this paper is to establish a balance
in the flow of human resources development and material resources and the
satisfaction of the principle of “adequate human resources for the proper
technology." It’s not possibly always to measure the results of staff by using the
available instruments, but it can be set a system of evaluation of their performance.
Evaluating of staff performance represents characteristics, behaviors and analyzes
the results of their work. The value of such evaluations is reflected in the
comparative review of individual results and to provide opportunities for the most
capable to take the key places in company with an intention to achieve optimum
results based on available resources.
Key words: Management, Staff, Resources, Efficiency
J EL Classification: L21
UDK: 005.962.131
35
Borko Somborac, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
36
Dejan Ili?, Faculty for Strategic and Operational Management, Belgrade, Serbia,
[email protected]
350 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Management comprises a number of interrelated functions that are present in
all organizations and at all organizational levels. One of the major problems facing
modern management is how best to use the resources of the company in a rapidly
changing and turbulent environment. The optimal combination of available
resources and their best use is one of the most difficult problems faced by the
management at the beginning of the XXI century. In order to solve these problems
there is no single management practice, which would be universally applicable to
all kinds and types of business.
Personnel management as part of operational management lately attaches great
importance. Since man is the only living factor in the organization, there is no
universal pattern of work and dealing with people who would guarantee the success
of the company. Task functions of human resource management in the enterprise
relates to: filing and maintaining jobs in the organizational structure, education,
development and training of employees. Since people, as individuals, have to be
organized in work teams, i.e. groups, this means that the organization depends on
interaction and coordination among people to accomplish their goals (Stojanovi? et
al., 2013, p.78) Management system in a broader sense includes research human
resources, recruitment, employee development, their fees and salaries, promotion at
work, health care and life of employees, relationships with employees and unions.
Only selection can not guarantee success of that company, if it is not accompanied
by action of continuous improvement, education and training, and retention of
quality staff. At a time when the knowledge of employees to expand and multiply
at short period of time, the success and survival of any enterprise is caused by
continuous development and training of employees. Only those companies that are
able to recruit, develop, promote and retain their employees will be able to achieve
its planned objectives and survive on the market. Companies must continually
search for quality personnel, in order to achieve the planned objectives. The main
objective of human resource management in any company is to place the right
people in the right jobs. (Jovanovi? et al.,2007) The economy of the XXI century
management personnel is facing new challenges of the business environment.
Requires new ways of thinking and acting, new policies and practices, new
technology and new business needs. Today, enterprises are subject to
organizational change, change management and the role of employees. (Farkaš,
2008) Construction of management function is not complete yet and it must
necessarily be developed in accordance with enterprise development and social
relations. Otherwise, he threatens her risk of bed development and stagnation. In
connection with the development of business, it’s necessary to build a profile of
leading personnel (Stefanovi?, 1996).
Faculty of Business Economics and Entrepreneurship 351
ENTERPRI SE DEVELOPMENT AND HUMAN CAPI TAL
The organization is also the product of human intention to create 'perfect'
structure/system that would provide maximum benefits/profits/gains with
minimum costs.Support and cooperation is an important aspect of enterprise
development (Stojanovi? et al., 2013, p.76).
The properties of these enterprises are change, innovation, openness and trust.
If we look at the company, the starting point should be a system of enterprise
value, because companies that are focused on the development are based on values.
The main values that are the key element and directed the development of the
company are: quality, knowledge, skills, competencies, expertise, knowledge
sharing and innovation. Successful utilization of the expertise of employees is main
quality performance of companies, which is why personal competence plays an
important role in the value of the company. This means that the company must
nurture an appropriate long-term philosophy focused on the development. The
philosophy of the company development must have the place it deserves, and this
leads to the improvement of individual employees and at the same time
contributing to the achievement of the strategic goals of the company. Orientation
on development policy will inevitably lead to individual success of each manager.
Just based on the introduction of new techniques and the improvement of the
productive forces leads to an increase in the social productivity of labor, one of the
factors playing a society.
Development planning is a specific form of leadership and decision-making
basis, leads to the fact that the creative role of the main lever of leadership in
policy development. For this policy are crucial these moments: (Stefanovi?, 1996)
? Provide support to all staff
? The selection of objectives
? Alignment of interests
? Financing strategy and
? Constant activity in the implementation of (consistency).
In the long-term development policy must come to the fore especially
economic interests and principles. Economic interests consist in increasing profits,
achieving full employment capacity and human resources, increase labor
productivity and, in this regard, earnings, and also in economic stabilization and
job security companies. One must not forget the increase in the educational level of
staff and strengthening the position of enterprises in the market mechanism.
Economic development principles require that each plan must be realistic,
achievable and consistent.
It should be noted that the long-term development policy has a broader
meaning than it does in practice. She includes many elements of development, such
as increasing production and productivity, long-term contractual obligations,
market expansion and export, but also its contents are rationalization,
352 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
specialization, integration processes and self-organization, reconstruction,
replacement, expansion and new production. The width gives each company to
enter into the general mechanism of economic development. Optimal investment in
material and human resources make effective business results and promotion of
human work. Important role in that process are a long-term policy development
and personnel policies designed to interrelations and reconciliation. The main
driving forces of production are the staff with its knowledge and experience in the
function of carriers and employees, and the organizers and the steering wheel.
Adequate staffs with continuous systematic training are equally important as the
introduction of new technologies. Technical progress and adequate staff profiling
are two essential conditions for the development of the productive forces. Human
resources and means of production are indivisible unity in initiating economic
development. Funding alone can not achieve results without man nor can man
perform productive activities without the means to work. They are the two essential
elements and indivisible factors of production and the productive forces (Pelevi?,
2004). Human capital is the accumulation of investments in people. Education is
the most important type of human capital. Like all types of capital, education is a
waste of resources in a given period in order to increase productivity in the future.
Unlike investments in other types of capital, investment in education is related to a
particular person and it is a bond that makes the human capital. Not surprising that
workers with more human capital on average earn more than those with less human
capital. For example, people with a university degree in Europe and North America
earn almost tree times more than workers who have earned a high school
education. The big difference is even greater in less developed countries where the
supply of educated workers is limited. From the perspective of supply and demand,
it is easy to determine why education increases wages. Companies are willing to
pay more for highly educated workers because such workers have higher marginal
products. Workers are willing to bear the cost of acquiring education only if such
efforts are paying off (Mankiw, Taylor, 2000, p.58). According to the analysis of
the labor market, employers and leaders want employees to continuously
modernize and further develop their skills and to communicate effectively and
work independently. In the publication, "Why the sphere of business worry about
education?" it was concluded that the new economy require individuals who
possess a wide rang of high-level skills and competencies such as critical thinking,
problem solving, teamwork and decision making skills (Maksimovi?, 2006). The
world today is a sophisticated and multifaceted. People need to have a high level of
skills to act, respond, learn and react to various changes. The success of every
profession and every individual will largely depend on his ability to think, learn,
adapt and communicate. In these conditions, a special place for technology in the
future it will continue to be the main power in the workplace, community and
individual lives. For all individuals, especially those who belong to the sphere of
management, it is necessary to understand how to use the tools of technology
(Maksimovi?, 2006, p.37). These tools are: computers, networking, and other
technologies, audio, video and other media and multimedia tools. These tools
enable people to effectively monetize their work and daily life and to set of tasks
Faculty of Business Economics and Entrepreneurship 353
such as electronic commerce, multimedia programs, presentation, preparation and
processing of database research, networking and communication with others.
Given these estimates of analysts and theorists, the question in the academic world
is how to develop or even better refine the appropriate skills and student’s
knowledge in higher education institutions. If we talk about management studies,
business and administration (because these areas are often linked) it receives
alarming significance and requires special involvement of higher education
institutions and those who manage them or implement programs (Ostoji?,
Damnjanovi?, 2013, p.519). Consequence of the specific human capital relative to
physical is that there is a material embodiment of human capital. Therefore it can
not be possible to establish an effective lien against such capital. This makes it
difficult to finance investment in human capital, particularly education financing.
Because the capital market does not provide the socially desirable offer of debt to
finance investment in human capital. Those who invest in human capital, and
education, is not able to internalize the overall yields of these investments, so there
is a difference between private and social rates of return.
There are significant implications for the behavior of companies in terms of
capital investments of its own employees, and education of the labor force
employed in the company. The company acts so that equates the present value of
future returns engaged workforce and the present value of the cost of investment in
human capital. The greater the share of investment in the workforce, the less
fluctuation, since workers will remain in the company, seeking to appropriate the
returns as long as such investments in equity. Practice has shown that the standard
accounting categories are not reported in full production potential available to a
company. Existing accounting categories of fixed assets or equity does not include
fund of human capital that have employees in the company, thus effectively
disposes of that company (Pelevi?, 2004).
SUCCESS RATE AND APTI TUDE
The process of production and management are increasingly dependent on the
role and importance of human resources. Staff is in the process of reproduction
occurring as drivers and factors of economic development and a factor of
development of the productive forces and production relations. So far, the staff was
neglected ("minor factor"), which adversely reflect on their personality and
performance, especially in creativity. This led to a series of contradictions and
inconsistencies in the development of the productive forces, and had come to the
question of the redefinition of leadership in our conditions.
One of the basic requirements for access to assessing the success of any staff
profiles is that, to meet the main principle of the operation: "adequate staff for the
proper technology", it means every man to "own" the right place. This principle
reaches its appropriateness thereby ensuring the success of the enterprise, and
individual satisfaction. The worker can achieve optimal results only on jobs and the
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next workplace where the best come to the fore of his abilities. He will be happier if
you achieve success in the workplace that suits his skills and abilities, more than
assigned to the position of the status and out of range of his abilities and not achieve
the expected results.
Our economy is measured and assessed part of the work and come up with
undesired phenomenon that staff are allocated to jobs that require higher skills than
theirs, because it brings higher status and greater profits. Accordingly, the first
phase of evaluation of personnel in all companies and institutions related to the
fact, whether they are adequately distributed in the work process. This will justify
the "cost" only if they have been systematized jobs and established measure of
success in work and the criteria for it.
The result of the work can not be measured by precision instruments, but it can
introduce a system of evaluating personnel and evaluating their effectiveness.
Performance appraisal system of staff is important from the standpoint of
optimization success. That system is very suitable for the proper progression of
staff and their change from responsible places.
Evaluating performance of staff is evaluating the properties and behavior of
staff, measurement and analysis of the results of their work. Assessment process
consists of several stages: assessment of personality, assessment activities, as well
as the analysis and evaluation of the success of an individual. Each category of
personnel requires special methods of assessment, their adaptation conditions, the
complexity of the tasks and functions and social relationships. Previous methods
have a universal character, a certain element method are subject to change, given
the nature and purpose of performance evaluation of staff (Stefanovi?, 1996).
The success of the work includes motivation, creativity, and performance
evaluation. The motivation for the work is the biggest problem in the field of
human resources management. An important reason for the purposes of designing
work motivation is the need to understand the mechanisms of behavior as a basis
for building motivation. One of the tasks of a manager becomes successful
management of human resources and building motivation. The problem of long-
term retention of high quality staff and employee motivation is a constant creative
input and includes two basic questions:
1. How to measure the performance of and contribution to the people and
2. How to reward their work?
For the first question are related to the problem of criteria and methods for
measuring and assessing the work contribution, and success in one or more
dimensions (quality, quantity, innovation, etc...), and the second question
elaboration best remuneration policy and its implementation of a range of
instruments. The company must start from the objectives to address the issue of
how to achieve these goals and to measure their performance. Managers design
tasks in jobs that are in line with organizational goals employ people with the
necessary skills, then train, motivate and reward. These are the basic aspects of
staffing that allow successful operation, and evaluation of the work is used
primarily for monitoring the implementation of the objectives to develop corporate
Faculty of Business Economics and Entrepreneurship 355
strategy. One of the most popular and most widely used control method as
successful managers and staff management by objectives. The advantage of this
method is that the managers and staff familiar with the objectives to be carried out.
Creativity that carries the individual comes to the fore in a particular climate and
enterprise value to the social environment. The task of management is to recognize
the creative individual in the company and provide the conditions in which they
will be his ability to play. The success of the work of the permanent care of the
entities and personnel management. An important role in that, have the motivation,
creativity and evaluating success (Ostojic, Damnjanovic, 2013, p.522).
THE METHODOLOGY OF EVALUATI ON OF PERSONNEL
The success of the staff, especially managers assessed in different ways and by
different methods, which are conditioned by the general terms and conditions in
society. In relation to "the object" of assessment, there are three levels of managers.
Each level requires specific methods, given the complexity of the functions,
powers and responsibilities. There are three methods of evaluation for system
performance evaluation of staff,: first, the assessment made by others managers
(board, commission, researcher on the basis of specific methods - tests, reminders,
surveys and results); Second, the assessment given by the head manager thru
methods "control shares"; Third, evaluations are conducted by team (appropriate
manager to other managers and authorities, as well as the research team) using the
"Chart of leadership." Methods for assessing the success of managers are:
(Stefanovi?, 1996)
? Method of ranking
? Scales courts method
? Free choice of method claims
? Method of forced choice statements
? Method of critical vessels
? Content analysis method biography (dynamic score last time in preparation
for a new feature),
? Method of continuous "control their own actions"
? Method "chart management"
? TAM - method (evaluation capabilities, performance and features)
The above methods are based on the familiar grounds and used objective
criteria and standards with the help of mathematical and statistical indicators,
which means that instead of bureaucratic - administrative assessment managers, it’s
used impartial assessment of the appropriate people, comparing the obtained value
with the valuation requirements of the respective functions. Correlation between
these two levels of parameters, is the condition that someone can be a candidate for
appointment or reappointment to the position from which he will manage.
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There are two basic criteria for evaluating managers: relative score value and
performance evaluations, which restrict the choice of the appropriate method. The
procedure of the evaluation requires certain principles, systematic, and contains a
number of elements, such as the purpose and program evaluation; draft scheme
assessment; choice timeline evaluation; rules of evaluation and accuracy assessment.
The choice of method depends on the evaluation criteria and elements of the
assessment, but also on the specific conditions and the appropriateness of that action.
Method of ranking in the evaluation of managers consists in ranking the group of
managers to total abilities and quality from best to worst. It is suitable for the
assessment of workers and managers to lower organizational units for comparison.
Scale vessels, containing the bad side, which are reflected in the lack of precision in
grading. The method of free choice of the claims made in the selection of those
statements that best characterize a particular function, and the person who is
performing. Assess the behavior, performance, and accountability of the head, in order
to choose the positive and negative sides of the person. Claims are converted into
points on a given system, which provides numerical expressions and measurement.
Thus, the assessment can be compared with the heads of other companies. This method
is suitable for assessing the performance leading staff, particularly because of the
possibility of quantification. Methods such as mandatory choice statements and critical
cases are of more recent date. They are complex and time consuming, and did not show
confirm proper value. The first time the long-term preparation (selecting several groups
claim to good and bad), and in the second, it takes longer to wait for the critical cases
that characterize the evaluated person. Method of analyzing resumes suitable in the
appointment of managers as gaining insight into the overall operation. To do this,
collect all the data about the person, since it is necessary for the success of the sum of
all the characteristics and behavior in different situations. The most important criteria
are achieved efficient economic outcomes, and the quality and level interpersonal
relations in those business units where the specific manager acted. It’s important to see
business results and attitude towards co-workers, agencies, and organizations. Data are
obtained by objective methods, surveys and direct conversation. The method of
"control shares" is a method of self-assessment. The aim is to achieve stability, balance
and efficiency of the organization, and the adaptation of his own work. It has its own
self-assessment of creativity in setting up the organization of work in the production
and social frameworks and way that it is optimal, consistent and appropriate given
situation, in order to allow maximum efficiency of operations. This method is the self-
awareness and monitoring of the situation and the organization of work. It can serve
others (board) as the ability to control the current work. Figure leadership is the latest
method of assessing the success of managers. It covers all stages of company
development: creating the concept and construction of the organizational structure,
training executives, setting up the organization and its implementation, measuring the
efficiency and rationality of organizational change. Prior to the evaluation of the
success of the program makes enterprise development this is of particular importance,
because the assessment has a complex personality of leaders in all stages, from concept
to results. Given that specifies the powers and responsibilities through the program, and
trained personnel for the proper function of the company, it is possible to monitor the
contribution of each manager. Who it fails, or is the weakest link in the chain must be
replaced. The work is organized in teams, evaluate the team, a determined individual
Faculty of Business Economics and Entrepreneurship 357
responsibility. Phase of the program include: seminars, team building, integration of
various teams by profession and status, setting organizational goals, achievement of
goals and overcoming "resistance to change" and stabilize the organizational structure.
This method provides tangible results in business, education leaders, strengthening the
company and the opportunity for realistic performance evaluation of managers. TAM -
method is complex and multidimensional, as it allows the right image for the
promotion of staff. Managers are the "driving force", their impact and effect felt
throughout the company, not only in his country. That is why it’s important to be so
significant the role of manager evaluates by certain principles, which will allow a
delegate certain roles. This will be the most successful seen by the following principles
for evaluating managers (Stefanovi?, 1996)
? Management functions are evaluated by a separate system, because they are
fundamentally different from other functions in each company,
? It is necessary to choose the elements for assessment (knowledge, quality,
experience, competence, responsibility, influence),
? Establish measurement of functional duties and responsibilities,
? Each element to give proper meaning of the wide variety of facilities and
activities and
? Score to tie the components and the complexity of the corresponding
function, because it is the foundation of every grade behavior and
understanding tasks.
Choice of elements in evaluating is the question of principle in achieving the
purposes of evaluation. With the evaluation of results, and evaluating the subject
property managers such as properties important for successfully solving tasks, refer
to the members of the collective, general personality traits and moral properties. It
would be difficult to enumerate all unbundled properties that are related to
personality characteristics and functions, because it’s always should keep in mind
that the selection and ranking depend on the specifics of individual functions.
Generally speaking, it seems that the following features of the profile manager are
the most important: (Stefanovi?, 1996)
? Ability to apply knowledge
? Persistence for understanding and resolving complex problems
? Sense of organization
? Sense of rationalization
? Talent for coordination and cooperation
? Courage to take responsibility and
? A realistic assessment of their own capabilities.
Each selected attribute for evaluating the weighted and weighted results are
added, which allows the comparison score between the evaluated individual
people, according to the relative satisfaction requires certain functions. Evaluating
the success of managers must contain the principles of professionalism, application
method, building assessment system, impartiality, transparency of results and
achievement of program objectives rater. The procedure is performed through the
evaluation of evidence, analysis, synthesis and control.
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ELEMENTS FOR EVALUATI ON
The ability of managers is evaluated by how he mastered the strategy and
tactics of business policies in the market economy. In other words, how he was
able to organize the business and what results have been achieved in the company.
Assessment skills and performance of employees in a company subject to scientific
investigation. This task is the evaluation of management actions in terms of market
relations and the study of the level of control in certain collectives.
Evaluates the effectiveness of achieving the basic functions of the company by
managers with special powers and responsibilities such as planning, organizing,
delegating, coordinating and controlling. The evaluations are the result of specific
solutions that perform complex functions of any business executive in our conditions,
within a complex range of problems, since the managers management as a profession
deserves to be treated with different aspects: economic, technological, organizational -
human, psychological, sociological, legal, social, medical and even.
The function of leadership consists in balancing the available resources to achieve
the objectives, where it is necessary to coordinate the multitude of specialties. Expertise
is absolutely necessary, but more in the form of gaining knowledge for their
application, given that the manager must be able to organize, control and fit. He has his
creative imagination to have a vision of a new mechanism for the creation and
implementation of new business policies. A man can be trained for that through the
teaching or educate at schools for managers. Achieve such a manager profile, with
some personal predispositions, can and must be achieved through learning.
Training and education for managerial function must be understood as an
ongoing process, since many of the functions have a dynamic character, and that in
the conditions of market economy must not stagnate. The function of the
management body should be creative, and less operational. It is intended for the
role of policy and organization, and operational tasks necessary to delegate to its
assistants. Business executive coordinator who by delegating, directing and
controlling realize the responsibility that can not be fully delegated. This role
manager can be achieved by mastering and applying the three essential functions of
the company: long-term policy development, personnel policies and deliberate
scientific organization of labor. It necessary to set up the thesis that concentration
on these three basic functions leads to the development and optimization of
interpersonal relations.
It’s not about the managerial staff with only these three functions, that is, they
only keep to themselves, but to the predominant activity in this regard focus to
these essential functions for the success of the business. Actually manager delegate
functions to the appropriate partners and service to professional elaborate ideas and
concepts. Delegate tasks to the experts, which means to execute them cheaper,
more professional, faster and more efficiently. Today managerial personnel asked
not to be "scrapbook", but experts - the organizers.
Faculty of Business Economics and Entrepreneurship 359
GRADI NG SYSTEM STAFF
The study of human nature occupied the experts in different times and spaces.
When the pre 2.5 millennia asked Confucius what is wisdom, he said that wisdom
is "knowledge of mankind." With the help of scientific knowledge, now can be
assessing and evaluating personnel to predict the level of achievement in the career
of the individual and the degree of its success at work.
An evaluation of actor in work processes is an expert job, but it also means the
democratization of interactions between staff of different structure and position.
The purpose of the evaluation, the possibility of the most able to take key positions
in the system of promotion, in order to achieve optimum results from available
resources. Rating capabilities and performance of staff enables the promotion of
staff in relation to the vertical, horizontal, diagonal and spatial mobility.
In parallel with the needs arise resistance evaluation for various reasons, such
as: the inertia of the organization which makes a change, "freeze" status positions,
the vested interests of certain power, neglect of public work, promotion without
criteria. The transition of an economy dominated by innovation at all stages, and in
the personnel policy. Forms of cooperation in work processes as an important
factor in efficiency means joint effort of skilled individuals in an effort to achieve
collective goals. This principle demands and evaluating capacity and performance
of personnel, especially management.
The practice is said to be appointed by the head manager by ability. And when
it comes to optimal staffing solutions, the ability to be increased through education
for the position of leadership. Successful cooperation in the work is role and tasks
of managers, embodied in their actions and behavior, of which the most
characteristic as follows (Stefanovi?, 1996):
? treat the workers as individuals
? learn workers' about their rights, duties, and obligations
? give appropriate recognition to employees
? Promptly inform workers about the events and the set changes
? Optimal use the ability of workers
? Motivate employees to work and education and stimulate results
? A balance of common interest
? Provide a creative atmosphere and mutual trust
Good management is achieves that gives the best possible results with the
corresponding structure of workers. Given that the results obtained by all the staff,
they are the core responsibilities of managers for the success of the business which
makes homogeneous power to companies. Any demands from the outside can not
successfully change the lack within the company, but it can own forces. The
grading system of staff displays the following elements of staff character:
? Type of ability (primary mental abilities and organizational skills)
? Character traits (primary traits of temperament and primary traits)
? The ethical virtues of personality (ethical principles and moral habits of
behavior interpersonal relations).
360 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 1: Contained method of feedback
Figure 2: The basic elements of staff development
Motivation
Feedback
Evaluation
Education
Staff
Evaluation
Development
Staff
Faculty of Business Economics and Entrepreneurship 361
THE I MPACT OF QUALI TY MANAGEMENT I N THE
EVALUATI ON OF STAFF
To order to evaluation of each worker could have its full effect, as one of the main
mechanisms to comprehensive results lies in the quality training and multi-system
management. To make managers aware of how and what parameters should be
evaluated primarily employees is essential to the training of the managers at the highest
level possible, which will include all modern trends in business. The knowledgeable
staff is a blend of theory and practice, the best and the real, the possible and necessary.
One of the part of this paper shows how managers should be trained to had from
employees the highest degree of respect, credibility, loyalty and motivation, but also
themselves to have sufficient knowledge to evaluate the other. In the early stages of the
emergence of corporate society, it was thought that the manager should be an 'iron fist'
of the companies, where there can be no compromise and deviation from the standards
and quality that are set before them, and that one mistake can lead to loss of job. An
important part of the appraisal process involves recording incidents and behaviors that
is out of the ordinary. These are referred to as ''critical incidents'' and ''significant
behaviors''(Max, Bacal, 2011). However, at the present time, these phenomena must
be eradicated, because companies need to recognize the dearth of quality manpower
which is on the market, a particular need to focus on staff who are in their own ranks
and recognizing them as future potencial managers or persons whose knowledge and
dedication can help increase company profits.
At the present time, when the recession practically 'destroys' human resources
managers within the company played a major role in the recognition of the problem
and the need to find a way to highlight the personnel policy as a capital for quality
business, but also with the continuous control and evaluation to reach a clear
success indicators or potential downtime.
Modern managers are all aware of the importance of skills working with
people and is of crucial importance since their following capabilities:
? to select, train and empower employees,
? to shape and lead group meetings of all kinds,
? to manage all sorts of conflicts between powerful individuals and groups,
? to influence and negotiate on an equal basis
? to integrate the efforts of people of different professional specialties.
? to implement best options to evaluate the work of employees and then send a
clear feedback
So the managers can assess the work of their employees, it is crucial their level
of knowledge, in which leading next abilites:
? Humane
? Technical and
? Conceptual,
because their unification, the manager becomes highly competent person who can
evaluate in a full form perform of existing staff.
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KEY PARAMETERS OF EVALUATI ON
Assessment of job performance is a process that measures the contribution of
employees in achieving the goals at a time. If such an assessment is not done
properly can damage relationships, in contrast, accurate assessment can encourage
employees to better realization of the goals and set tasks in front of them. Today, in
addition to higher-level managers and associates and colleagues all over the
process of assessing performance, and includes self-assessment, which should
contribute to a single dose of reality with the employee (McCourt,2003).
Control should not defend anyone. On the contrary, everyone should be
content, for it provides better results. Also responsible leaders should not omit the
control for the alleged trust they have in their co-workers, and thus to make a big
mistake.
The trust should not become a naivety or even abuse, but there needs to be
both, and the control should not be exaggerated, as there would be no resistance to
the employees.
Excessive control may cause adverse effects. (McCourt,2003) For a good and
successful control required many assumptions and the best control system will fail
if not set good plans, norms and organizations to function.
Regular employee evaluation helps remind workers what is expected of them
in the workplace, and provides employers with information to use when
making employment decisions, such as promotions, pay raises, and layoffs. In a
traditional employee evaluation, the manager or supervisor writes and presents the
employee's contributions and shortcomings to the employee. The manager and
employee then discuss improvements. Some organizations ask the employee to
write self-evaluation before the meeting. The performance evaluation process in
organizations is ongoing - every day - as the manager or supervisor observes and
coaches each employee's performance. In many organizations with a formal
employee evaluation process, employees are ranked and rated in comparison to
other employees. Depending on the employer's practices employee evaluation can
frustrate and demoralize employees. All previous mentioned elements of evaluation
alone can not provide a complete picture of the performance of employees.
Combining all the available parameters can contribute to a clearer and
comprehensive picture, as an individual as well as all sectors of the company. Key
synergies in the evaluation of employees, as well as improving individual and
group performance are:
? Improving the training and education of employees
? Improved work plan
? direct conversation
? Clear and unambiguous way that assesses the performance of work
? Establishing feedback
Faculty of Business Economics and Entrepreneurship 363
Without quality training and development of workers, managers will not be able to
ask for high grades of employees, because they will have sufficient knowledge to
perform a given operation, which will in most cases lead to negative results in the
performance evaluation. Therefore it can be concluded that neither the planned work
process will not be correlated with expected if employees do not have a sufficient level
of competency, so that is one of the key elements in corporate success today, the fact
that the adopted plans must constantly revise and harmonize with the current market
needs in order to achieve long-term competitiveness. Every action must have a
reaction, which is the directing relationship between the manager - employee, because
through communication can greatly enhance the effect of a real transfer of information
to the employee. Through directing conversation, should be transferred expectations,
deadlines and parameters of success that will continue to measure through a clearly
defined form of evaluation. As the final phase of this part should be presented feedback
to all employees’ on the current state of work, level of success, segments where there is
a deadlock and how they expect it to be resolved in the future. The joint action of these
items leads to the best possible results in the understanding of the tasks and removes
errors.
METHODS TO I MPROVE THE PERFORMANCE OF STAFF
Whether it is about the results of the performance of employees, the question
of wages or of implementation of the new evaluation plan employees, there are
several elements that have been identified as essential in improving the above
mentioned elements of functioning and decision-making. Through this approach to
employees, managers, unless they come to clear results of performance evaluation,
they also improve their ability to interact with employees. Control of results relates
to the quality, quantity and value of output of certain processes of the organization
(products, services and decisions) (Petkovi?, ?oki?, 2012),
In the case of today's modern corporate world, the following approaches
should be taken into account as a key to developing perception among workers
about the importance of evaluation as a process of improving the performance, not
as a repressive methods which included a penalty for errors. That is why the
interaction is very important for the improvement of the performance of each
individual. Primarily be addressed to the following parameters:
? The employee should never hear about positive performance or performance
in need of improvement for the first time at formal performance discussion
meeting, unless it is new information or insight. Effective managers discuss
both positive performance and areas for improvement regularly, even daily
or weekly. Aim to make the contents of the performance review discussion a
re-emphasis of critical points.
? No matter what are the components of performance review process, the first
step is goal setting. It is imperative that the employee knows exactly what is
expected of his or her performance. Managers periodic discussions about
364 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
performance need to focus on these significant portions of the employee’s
job. Manager need to document this job plan: goals and expectations in a job
plan or job expectations format, or in employer's format. Without a written
agreement and a shared picture of the employee’s goals, success for the
employee is unlikely.
? During preparation and goal setting, manager needs to make how he will
evaluate the employee’s performance clear. It’s important to describe exactly
what he is looking for from the employee and exactly how will evaluate the
performance. Manager need to discuss with the employee its role in the
evaluation process. The employee needs to understand that if he does what is
expected, he will be considered a performing employee.
? If managers company uses a form that manager fill out in advance of the
meeting, it’s good to give the performance review to the employee in
advance of the meeting. This allows the employee to digest the contents
prior to her discussion of the details with manager. This simple gesture can
remove a lot of the emotion and drama from the performance review
meeting.
? Preparation is an important part for the discussion with the employee. It’s
not good to go into a performance review without preparation, because in
opposite performance reviews might fail. It can be missed key opportunities
for feedback and improvement and the employee will not feel encouraged
about his successes.
? When manager meet with the employee, it’s important to spend time on the
positive aspects of his or her performance. In most cases, the discussion of
the positive components of the employee’s performance should take up more
time than that of the negative components. The employee will find this
rewarding and motivating. But, is necessary to mention the areas that need
improvement either. Especially for an underperforming employee, manager
needs to speak directly and not to mince words. If he is not direct, the
employee will not understand the seriousness of the performance situation.
? The spirit in which manager approach conversation will make a difference in
whether it is effective. If manager’s intention is genuinely to help the
employee improve, and he have a positive relationship with the employee,
the conversation is easier and more effective. The employee has to trust that
he want to help him improve his performance. He needs to hear him say that
he have confidence in his ability to improve. This helps him believe that he
has the ability and the support necessary to improve.
? Conversation is the key word that should define a performance review
meeting. If manager doing all of the talking or the meeting becomes a
lecture, the performance review is less effective. The employee will feel as if
he was yelled at and treated unjustly. This is not the way how manager wants
employees feeling as they leave their performance review. Manager want an
employee who is motivated and excited about his ability to continue to grow,
develop, and contribute. Aim for performance review meetings in which the
employee talks more than half of the time.
Faculty of Business Economics and Entrepreneurship 365
This kind of approach is very complex and requires a lot of effort by
managers, as well as some time as he could in the right way to master these
methods. Such an approach to the evaluation of performance improves relations of
the manager and employees, improving work within the organization, raises
communications manager-employee at a higher level, which will have a positive
effect on customers, as well as relations within the working community.
LI NKI NG EMPLOYEE PERFORMANCE TO RESULTS
If an organization wants to improve the performance of its employees, it must
think in terms of everyday communication with employees. To talk about the new
tasks, plans, terms, ideas, purpose. This segment of corporate cultures is important
because in this way remind employees that are stored in a serious system which
largely depends on the quality of their work. Why is it important? Because in this
way the effect of employees associated with the resulting company.
It is important to emphasize the employees that when they give their reports on
time and express their views on improving the business, it immediately gives a
time limit within which the management will have to respond. It reduce time for
the adoption of certain plans. Another thing that should be encouraged among
employees is to attend meetings where they will be senior managers and will then
have the opportunity to interact express their particular opinions and ideas. Also,
by participating in some project employees will have the opportunity to become
familiar with the company's strategy.
The main reason this results-based approach works is because manager is able
to explain the value of positive performance from different perspectives. Manager
can talk about results that are important to employees and results that are important
to the organization. Manager is also able to use multiple reasons to explain why
something is important or why something is not important. So if employees react
negatively to one result (ie impact another employee), manager can use a different
result (ie impact customer service) to illustrate his performance conversation. That
means manager do not have to say, "Do it because it's your job."
Correlation between quality of work of staff with company success is one of
the most important design feature to the evaluation of the performance of the
individual. At the individual level, you can link employee performance to desirable
outcomes such as greater autonomy, less stress, reduced workloads, or increased
visibility. On a broader level, employee performance can be linked to organization
mission, goals office, customer service, or team performance. These require
employees to look at the larger impact of their performance results. Connection
between the employee's work is in many aspects relates to a given overall
evaluation. If an employee manage to link at all levels that are listed in the table,
then we can talk about the greatest possible work performance of the individual
with the group (company).
366 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 3: Primary tasks linked to employee success
Evaluation and assessment of performance of the individual or sector brings
with it a number of methods and approaches. Access to link employees and the
performance of enterprises, primarily given the importance of each individual to be
in an organized system of work, his contribution to evaluate, assess, and always
improving. Consequently gets a sense of belonging to an employee and his desire
to continue to provide its full contribution to the companies development and
market competitiveness. Direct access to the employees, who are not only applies
to the written word, or by filling out the form of reports, but direct interpersonal
communication, employees are given the opportunity to be a listener and proposer
and critic. That's why the conclusion should be that it is best to evaluate
performance of the individual comes through quality training and development,
direct contact and linking or creating an unambiguous sense of belonging to the
company.
CONCLUSI ON
The new role of managers is to improve the process of developing enterprise
flowed better. Modern division of labor shows a shift from the classical model of
employment in enterprises. Companies can analyze their field activities and expand
to new business and so open up the need for new skills. Techniques for assessing
the competence and efficiency of the staff have a clear advantage when it comes to
decisions in employment and to obtain staff with the highest qualifications that
should be introduced into the business, and also play an important role in the
selection of programs for training and development. Accurate assessment of
expertise has proven to be a very useful tool in the formulation of plans for
business development and management careers.
The new employment processes used various tests and assessments. Potential
staff must be able to create good working relationships with clients and colleagues,
and exhibit a high level of motivation and ambition in their work. Staff require a
high level of knowledge in its profession and the excellent skills of communication
and cooperation.
Employee
Performance
Job Enrichment Learning
And
Development
Career
Andvancement
Other Employees’
Performance
Money
And
Rewards
Organization
Success
And
Result
Faculty of Business Economics and Entrepreneurship 367
Without quality staff and business can not be well done. The main question in
this equation is the improvement of techniques and skills that lead to increased
ratings and long-term competitiveness of the company. System of training and
education, evaluation, flexibility in policy decisions and implementation of modern
business trends lead to the highest possible results.
The aim of this study was to demonstrate the importance of education at all
levels in the company, the importance of planning management, the establishment
of methods of evaluation of performance, his individual and collective approach
and the methods by which the employee is the best way tie for the success of the
company and thereby increase their level of motivation and commitment, all with
the aim of providing quality services that are in accordance with the wishes and
needs of consumers and market.
REFERENCES
[1] Bohlander, W. G., Snell, S., (2010), Managing Human Resources, Cengage
Learning
[2] Farkas, F. (2008), Strateški menadžment ljudskih resursa u organizacijama
usmerenim na znanje, Razvojne strategije preduze?a i privrede, Beograd:
Univerzitet Megatrend, pp. 13-22.
[3] Ivancevich, J., (2006), Human Resource Managment, McGraw-Hill Irwin
[4] Jovanovi?, M., Živkovi?, M., Cvetkovski, T. (2007), Organizaciono ponašanje,
Beograd: Univerzitet Megatrend.
[5] Max, D., Bacal R., (2011), Perfect Phrases for Performance Reviews 2/E,
McGraw-Hill
[6] Maksimovi?, I. (2006), Obrazovanje menadžera za 21 vek, Beograd:
Univerzitet Singidunum.
[7] Mankiw, G., Taylor, M. (2000), Ekonomija, Beograd: Redaktor izdanja na
srpskom jeziku Hani?, H.
[8] McCourt, W., (2003), Global Human Resource Management: Managing People
in Developing and Transitional Countries, USA, Edward Elgar Publishing
[9] Ostojic, S., Damnjanovic, N. (2013), Permanentna edukacija menadžera,
Nacionalna konferencija sa me?unarodnim u?eš?em, „Reinženjering poslovnih
procesa u obrazovanju RPP013“, ?a?ak: Fakultet tehni?kih nauka, p. 517-524.
[10] Pelevi?, B. (2004), Ekonomisti nobelovci, Beograd: Ekonomski fakultet.
[11] Petkovi?, V., ?oki?, A., (2012), Menadžment ljudskih resursa, Beograd,
VSPEP
[12] Rudman, R., (2004) Performance Planning & Review: Making Employee
Appraisals Work, The Australian Copyright
[13] Stefanovi?, V. (1996), Menadžment kadrova, Niš, Europrojekt.
[14] Stojanovi?, T., Djoki? A., Djoki? S. (2013), Organizational Behavior-Creative
Tool for Creating Value, International Review, Faculty of Business Economics
and Entrepreneurship, p. 76-84
368 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
EMPLOYEE PERFORMANCE AND DEVELOPMENT:
ALCOHOL AND ITS EFFECT ON ORGANISATIONAL
PERFORMANCE
Samuel Osei-Nimo, PhD
37
Imani Silver Kyaruzi, PhD
38
I NTRODUCTI ON
It has indeed been recognised at least since the 1940s that alcohol is a
‘problem’ in the workplace although it may seem surprising that serious efforts to
cope with the ‘problem’ were initiated as recently as the late 1980s (Pratt,Tucker,
1989). Pratt and Tucker add that, as was with the case of alcohol as problem on
the roads, it took about a half a century from the first official recognition of the
problem until the Criminal Justice Act of 1925 when prevention became
reasonably effective. However, the case of alcohol use or misuse in the workplace
is not a straightforward issue, as this paper will identify. In the case of the
workplace, the main problem areas that are seen to be of concern as a result of
alcohol use or misuse are identified as alcohol-related accidents, reduced work
performance and loss of working time.
The need to focus the study of this paper on the workplace is based on an
understanding that work, and for that matter the workplace, offers a setting and an
opportunity where one might conveniently scrutinize some of the most important
factors shaping the lives of individuals. Therefore, based on the aims of this paper,
emphasis will be particularly placed on multinational companies (MNC)
(Interviews for this study were carried out with individuals from MNCs based in
the East Midlands, United Kingdom) to address the overall aims of this study.
Key words: Employee, Work, Organizational Performance, Alcoholism
J EL Classification: I12, J24
UDK: 005.958:613.81
37
Samuel Osei-Nimo, QA Business School – University of Ulster, United Kingdom, samuel.osei-
[email protected]
38
Imani Silver Kyaruzi, QA Business School – University of Ulster, United Kingdom,
[email protected]
Faculty of Business Economics and Entrepreneurship 369
I NTRODUCTI ON
ALCOHOL AND EMPLOYMENT
Alcohol misuse in the workplace has long been perceived as being associated with
accidents, inefficiency and absenteeism (Gill, 1994). In response to these claims, a
considerable amount of literature has been produced and these relate to drinking habits
and alcohol-related problems amongst workers in different settings and to initiatives
designed to curb, prevent or respond to alcohol misuse in employment. According to
Newman and Sell (1992), the initial problem related to alcohol misuse in the workplace
is finding a realistic definition for the term ‘misuse’. Even the widely accepted medical
definition which characterises it as a long-term disease creates much controversy. It is
added that the conflict over the diverse views on the definition of alcohol misuse or
abuse will not be resolved soon. Banta, Tennant (1989) made two observations on the
issue. Firstly, while there is a debate over whether alcoholism is an illness and what
causes it, most definitions agree that it is a condition of dependency on alcohol.
Secondly, alcohol is, of course, a drug and suggestions have been made that efforts
employed in addressing alcohol misuse in the workplace should be similar to that of
drug misuse.
Newman, Sell (1992) add that the causes of alcohol misuse, especially in
employment, are as elusive as a true definition. Steele (1988) suggests that
potential causes range from social influences to organisational pressures and Ames
(1987) argues that the workplace can strongly promote alcohol misuse if the
employees feel alienated and if manager adopt a permissive and ambiguous attitude
toward alcohol. It is clear that most studies relating to alcohol use and the
workplace have intended to prove alcohol’s detrimental influence on the workplace
and has thus ‘criminalised’ the act of consuming alcohol in any form or amount.
Further emphasis on the susceptibility of the workplace to alcohol misuse among
employees is drawn by Newman, Sells (1992) who refer to the notion that drinking on
the job usually evokes some form of major sanctions. It is further stressed that many
companies are hesitant to specify policies beyond on-site consumption or condition on
arrival at work. Most organisations (including some stakeholders) view policies or
positions taken on situations beyond work as invasion of privacy.
Roman, Trice (1972) claim that factors within an organisation that may be
potential causes of alcohol misuse include low structural visibility, occupational
obsolescence, absence of social controls (such as required on-the-job drinking),
severe role stress and competitive pressure. Campbell and Graham (1988)
contribute to this by stating that a lack of personal achievement and recognition
and unchallenging work may also contribute to job-specific causes of alcohol
misuse. To add to this debate Holland (2005) adds that the nature of work has an
association with a culture of use and misuse of alcohol and illicit drugs. It is
reiterated that workplaces with high stress factors, job insecurity and isolation or
combinations of these factors are seen as catalysts for such cultures.
370 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Typically, discussions about alcohol misuse have been centred on blue-collar
industries such as mining, building and transport. However, the fundamental change in
the nature of work across society and the volatility of the global economic environment
(Holland, 2005), which the United Kingdom is a part of has seen professional and white-
collar workplaces also mirror many of the traits linked with the misuse of alcohol and
illicit drugs. Therefore with both white-and blue-collar jobs now exhibiting similar
patterns in terms of increased stress, job insecurity and more longer and intensive work
duration, most workplaces have become a fertile ground for the development of an
alcohol culture. However, the IIDTW (2004) argued that there is no established link
between the nature and/or working conditions of a workplace and the presence of a
drinking culture. According to Lucas (2005), it is very important for employers
especially, to focus and examine the type of workplace that they have created or shaped
when the issue of alcohol misuse in the workplace is under discussion. Holland (2005)
therefore suggests that the culture and expectation that management set is a central issue
in any discussion regarding alcohol and other drugs misuse.
THE WORKI NG ENVI RONMENT AND ALCOHOL USE
Most organisations, and employers for that matter, often see the development of
substance misuse policies and measures as a proactive and responsible stance, without
an understanding of the reason for the problems. However this critically misses the
vital issue of workplace culture. Henderson et al., (1996) dwell on the need to identify
the relationship between general levels of drinking and particular working
environments and how consumption may relate to the type of work conducted and the
role played by ‘normal and accepted’ working practices in enabling and maintaining
drinking in the workplace. According to Allsop, Pidd (2001), workplace culture is of
central importance in framing workplace expectations and social environment and the
use of legal drugs such as alcohol and tobacco and illicit drugs. For example:
“In a variety of cultures, formal and informal pressures encourage weekly after
work team building and relaxation based on alcohol consumption. Sanctioned
drugs such as caffeine and tobacco have been embraced in ritualised breaks in
worktime” (Allsop, Pidd, 2001, pp.5).
Along with a study of workforce alcohol consumption by Midford (2001), it
was identified that alcohol consumption level among both white- and blue- collar
jobs was on par. In addition, Rigby (2005) notes that, in relation to the white-collar
environment, drug and alcohol addiction in the financial services and the pressures
that lead to addiction have been a celebrated part of popular culture since the coke
snorting, heavy-drinking yuppie made his debut in the 1980s. Callus and Lansbury
(2002) suggest that the changes in the nature of work over the past couple of
decades have seen increased pressures of work intensification and job insecurity
permeate all types and levels of work. Ames, Grube (1999) also add that issues
such as lack of control, alienation and stress linked with the individual’s
Faculty of Business Economics and Entrepreneurship 371
perceptions of powerlessness are important factors in substance misuse in all kinds
of workplaces.
On the other hand, Holland (2005) emphasises the need to assess cultural
issues, in any study relating to substance misuse, by especially dealing with the
taboo nature of alcohol misuse in the workplace particularly from the employers
viewpoint. For example:
“In the City, on Wall Street and in similar environments the world over,
there’s no doubt that alcohol and drug use and misuse are widespread and even
talked about – but almost always in the third person. And if individuals are cagey,
the banks and brokerage houses are reticent still. The attitude is very much don’t
ask, don’t tell…” (Rigby, 2005, p. 30).
Subsequent to this is the externalising of the issue of workplace alcohol misuse by
employers, which as noted by Midford (2001), in order to gain an understanding of
workplace substance misuse issues, one must look at the wide-range of factors that
influence (pressures/powers) patterns of substance misuse. It is added that, “in the
workplace, holding the view that drug use is a problem for the individual worker is
functional from the point of view of the employers, because it avoids any exploration
of how the workplace may contribute to the problem” (Midford 2001, p. 46).
The findings for the IIDTW (2005) study support this stance with regards to
the issue of alcohol and drug misuse in the workplace. For example, the IIDTW
argue that the introduction of testing and/or sanctions should not be viewed as a
quick fix solution and may be inappropriate in certain circumstances. This position
is supported by the Australian Council of Trade Unions (ACTU 1991) who state
that in any consideration of alcohol and illicit drug misuse in the workplace, broad
and diverse consideration should be paid to environmental factors that may form a
catalyst and be affected by the issue. The level of drinking in a particular
workplace may partly depend on the type of working environment that is present
within the company (Henderson et al., 1996). This environment may exert a strong
influence on the formation and continuance of drinking cultures through factors
like the accessibility to alcohol and the ease with which it may be consumed on
company premises, even during working hours. Cooper and Sadri (1991) cite the
significance of the working environment and further argue that a working
environment symbolised by overall excessive alcohol consumption is more of a
condemnation of the working conditions themselves than a reflection on the people
who consume the alcohol. The authors add that, for instance, a management may
reinforce a drinking culture if there is alcohol present in board rooms and private
bars in offices, as well as alcohol consumption within any context related to
company work.
Henderson et al (1996) are of the view that, in addition to the working
environment and job type, the attitudes of employees to drinking and the ‘normal’
working practices that exist also exert a powerful influence on workplace employee
behaviour. That is, in certain situations, such behaviour may be more influential
than the organisation’s rules about alcohol consumption. For instance:
372 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
“…there may be a formal policy about drinking mandated by upper
management that is all but ignored by the majority of the employees, who are
responding to less socially distant behavioural expectations that make alcohol use
appropriate-even desirable-under certain circumstances… For example, while
drinking on the job in a construction company may be against company policy, it
may be understood by a group of bricklayers, painters, or carpenters that Friday
afternoons are a time for ‘taking it easy’ and ‘having a few beers’. Similar drinking
behaviour in another occupational group, computer programmers for example, may
result in disciplinary action or dismissal” (Ames, Janes, 1992 cited in Henderson et
al., 1996, pp. 31)
The above example therefore indicates that company policy on alcohol
consumption may sometimes be disregarded by some employees who are
responding to the more ‘immediate and powerful understanding’ that, in the case of
the construction workers, drinking on a Friday afternoon occurs and is acceptable.
Davies (1979) notes that not all drinking ‘norms’ should be viewed in a negative
light as some of these norms have come about because they serve the immediate
needs of the employee and the organisation in general. For instance, drinking
norms may carry symbolic or actual functions significant for meeting organisation
goals, in that it may encourage social team-building and sooth the burden of long
shift-work routines.
Although there have been numerous studies (Hagen et al., 1992; Roman et al.,
2000; Phillips, 2001) aimed at linking increased alcohol consumption, job
insecurity and stress, and other harmful occupational attributes, Lucas (2005)
points out that it is not always negative factors driving alcohol consumption. That
is, the culture and structure of an organisation, and the society in general, may
permit employees to indulge in lunchtime or after-hours drinking to boost
networking opportunities.
ALCOHOL CONSUMPTI ON AND I TS EFFECT ON
ORGANI SATI ONAL PERFORMANCE
Alcohol use at work has often been considered in terms of productivity,
absenteeism, accident rates and the turnover rates of employees. The effects in the
workplace have usually been linked to alcohol use in leisure time, at the workplace
itself and in the ‘grey’ area between work and leisure such as after-work activities,
office parties or other work-related occasions. The aim of this section therefore is
to set out what is known and unknown about the alcohol use and its possible effect
on the overall functioning of an organisation. Previous research have aimed to
quantify the supposed effects, from an employer’s perspective, (Observer,
Maxwell, 1959; Godfrey, Parrott, 2005; CIPD Surveys; IAS Factsheets) of alcohol
on employees’ performance, however Register and Williams (1992) argue that
there have been no significant relationships identified between effects of substance
misuse and productivity.
Faculty of Business Economics and Entrepreneurship 373
ABSENTEEI SM
It is clear that absenteeism may incur a number of costs to organisations,
mostly as a result of decreased output due to days individuals are not available,
tardiness, early leaving and unscheduled and frequent breaks. Godfrey and Parrott
(2005) argue that although chronic use of alcohol may be associated with longer-
term absences from work, the United Kingdom in this respect usually have shorter-
term absenteeism cases reported in their particular workplaces. It is added that the
relationship between recreational, acute or binge episodes and chronic use of
alcohol or illicit drugs to shorter workplace absences in the United Kingdom is
under- researched. It is therefore difficult to create a link between alcohol use and
absenteeism because employees are unlikely to admit absences are related to
alcohol-use behaviour. Godfrey, Parrott (2005) therefore admit that the extent of
the effect of alcohol use on absenteeism among the United Kingdom workforce is
problematic to assess, hence researchers have often had to resort to estimations as
well as assumptions to support their claim.
Previous researchers who have aimed to quantify alcohol-induced absenteeism
(McDonnell, Maynard, 1985; Godfrey, Hardman, 1990) have been challenged by
Joeman (1992), who on the basis of data obtained from a General Household
Survey, concluded that there were no direct and reliable differences in rates of
absences between light, moderate and heavy drinkers. It was identified that a
relationship between alcohol intake and absence became apparent only when
general health and smoking were taken into consideration. The role of alcohol
consumption in establishing rates of absence is very vague and the number of
absences that can be linked to alcohol is uncertain (Henderson et al., 1996). This
indicates the difficulty in determining the costs associated with alcohol-related
absences, although calculations have been adopted on the basis of employees’
gross earnings and other employers’ costs to arrive at figures. Henderson et al
(1996) argue that the accuracy of such figures and the true cost to the organisation
cannot be justified. It is further stressed that in present working environments,
absenteeism should not be included as a cost in the same manner as accidents and
job performance losses can be. Besides, Martin et al. (1994) are of the view that:
“…substance abusers’ absenteeism reflected efforts protect themselves from
harm that might occur if they tried to work; obviously this protection can extend to
co-workers and to the workplace itself. While seeming absurd, the suggestion that
absenteeism can serve positive functions stands in the face of very imperfect
systems of detection of employed substance abusers or implementing effective
means for their behavioural change” (Martin et al., 1994 cited in Henderson et al.,
1996).
This point of view thus exposes a positive side to absences from work that
may be due to alcohol. For instance, in a workforce that has a developed drinking
culture absenteeism could be viewed as beneficial since it would prevent accidents
and poor performance that may result from intoxication. Hence, the cost from
absenteeism which is regarded as a major cost in most organisations as a
374 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
consequence of alcohol use is usually estimated on the amount of time lost and the
value of the lost production. However, it is clear that such calculations are open to
dispute and therefore more accurate information on the nature and causes of
absences and employee-employer agreement when assessing such costs would best
clarify the association.
ACCI DENTS
The presence of alcohol use in the workplace has been characterised and
highly publicised by its relationship with accidents. Alcohol consumption has been
implicated in many high profile cases, particularly involving transportation and
although it has not always been possible that alcohol has been the cause of most of
these accidents (Henderson et al., 1996), it has always been cited as a possible
factor. Findings from a number of studies (Health and Safety Executive, 1993;
Davies, Teasdale, 1994) imply that alcohol consumption is likely to be related to
accidents both within and outside the workplace. However, the precise relationship
is poorly understood and precludes any accurate assessment of the exact part
played by alcohol consumption (Henderson et al., 1996).
J OB PERFORMANCE AND WORKI NG RELATI ONS
Alcohol consumption may affect human performance in a number of ways
including gross motor coordination, reaction times and attention (Peterson, 1990;
Collin, 1980; Critchlow, 1983). Thus it has been concluded in most studies that
working under the influence of alcohol may affect efficiency and accurate at work.
However, Henderson et al. (1996) argue that as it is difficult to calculate the overall
effect that alcohol consumption has on performance, the decrease in productivity
due to alcohol consumption, can only be guessed. Most of the effects that the
consumption of alcohol has on behaviour and emotions are well documented
(Critchlow, 1983), most especially its effect of lowering a drinker’s inhibitions.
Thus lowered inhibitions and the perceived benefits that this provides are totally
opposite to the general view and often stated unwanted side-effects of alcohol
consumption in the workplace. While such effects may be acceptable within a
social setting, especially the United Kingdom, they have a particular relevance to
the working environment.
Numerous studies have highlighted the positive and negative consequences of
alcohol use within the workplace and some have attributed thefts, aggression, lost
promotion and encouraging informal groups (Gustafson, 1983; Pernanen, 1991). In
contrast, Davies (1981) notes that alcohol use may sustain informal groups,
improve relationships between management and employees, and also help with
team-building and work as a reinforcer to a certain extent. Example is given of how
Faculty of Business Economics and Entrepreneurship 375
alcohol plays an important role of reinforcement, at company gatherings, for
reaching production targets or reaching particular organisational goals.
Henderson et al (1996) stresses the point that it is very difficult to quantify the
costs, as done in numerous studies, be it positive or negative of alcohol
consumption has on job performance or working relations. This is because such
beneficial effects are rarely taken into account when cost of alcohol consumption is
being calculated while consumption of alcohol in small quantities may not
highlight many of the negative impediments cited in several studies.
FI ELDWORK RESPONSES - ALCOHOL AND PRODUCTI VI TY
The following section discusses a number of interviews held with different
actors and ‘experts’ about their views on alcohol in the workplace and highlights
the actual practices related to the use of alcohol in the workplace. In designing this
qualitative research, the researchers were concerned with the data to be collected
and the role of the participants in the research process. The use of qualitative
research in this study ensured that issues of validity were effectively addressed in
terms of how the data collection and analysis really addressed the aims of the
paper. Validity may be defined as the extent to which our research explains or
describes what it plans to explain or describe (Willig, 2008) and therefore its
flexibility and open-endedness allows this kind of issue to be dealt with.
In using a semi-structured interview approach to undertake a research that
involves any organisation particularly knowledge-intensive ones, it is essential to
still strategically select your sample organisation and a sample of employees and
managers to interview. For this research, three business organisations which have
office-based work environments were selected for both the fieldwork study.
Although these organisations, all located in the East Midlands, are parts of Multi-
national Corporations, they still share common characteristics of the British
workplace in terms of range of current work and employment
practices, and work-
force characteristics. These organisations are Knowledge Intensive Firms and this
industry represents a major growth area in the Midlands, and the United Kingdom
in general, and therefore relevant to consider when addressing any issues
concerning the contemporary British workplace.
The question of organisational efficiency and employee performance was
presented to the interviewees to identify whether they believe that the use of
alcohol in the workplace can be a cause of low productivity, absenteeism and high
staff turnover. Thus the interviewees were asked to share their perceptions on how
much they felt alcohol use did or could impede the levels of productivity in their
particular workplaces. Although most of them stated that they felt drinking could
affect productivity in any workplace, majority stated that this would be the case in
more blue-collared jobs that the white-collared ones that they worked in:
376 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
“I think that people in British society drink a lot, they are drinking people, and
they are drinking than most nationalities because they drink everyday. I personally
don’t drink because it is not in my personal nature. But I think typical British
factory workers do drink and it causes lots of trouble”
One interviewee in a senior role stated that in terms of absenteeism and
general performance, alcohol was highly related to productivity. The interviewee
explained that in the monthly performance appraisals that were conducted in their
workplace, it was evident that absenteeism and poor work performance often
occurred on weekends or at the start of the working week. In the interviewee’s
opinion, even though there was not much evidence to attribute this trend to alcohol,
it was important to acknowledge that it could be partly due to it as some employees
had admitted to calling in sick due to alcohol use the night before:
“But could you prove that those were related to alcohol? Not really, but pretty
much yes. I mean it was no definite proof like they came in with bottles or came in
drunk but to consistently be sick this time of the month and especially these days
you could tell. And also people would say they saw them out in clubs the night
before and they don’t come into work the next day, you don’t have to be a
detective to figure out what the problem is”
On the issues of the British society’s attitude to alcohol and whether
interviewees felt that alcohol was a problem in the British workplace, all of them
answered in the affirmative. Some said that because alcohol forms part of British
culture in general, it was not regarded as much of a problem in the workplace.
Particularly in the case of an office-based working environment, most interviewees
felt alcohol use was not as much of a problem as it would be in other industries like
the manufacturing or entertainment sectors. Moreover some interviewees stated
that if alcohol was consumed in moderation, its effects on the workplace would not
be as bad or detrimental to productivity as it currently portrayed in the media. As a
matter of fact, most of the interviewees mentioned the possible benefits alcohol
could have on the individuals in the workplace in terms of team-bonding and
socialising, although all of them stated clearly such effects were only possible in
out-of-office work functions:
“Sometimes alcohol does make people loosen up and act friendlier and so at
the party after work then it would help bonding and employees can work closer”
Such points raised by the interviewees prompted the need to acknowledge the
diverse views that arise when the topic of organisational performance and its
relationship with alcohol use or its misuse is being considered.
Faculty of Business Economics and Entrepreneurship 377
CONCLUSI ON
The many opinions about alcohol which are expressed through the interviews,
statements from the managerial and official sources like the Charter Institute of
Personnel and Development (CIPD), and the government statements are infused
with particular appreciations of and world-views on the topic when makes it a very
controversial topic. However what brings the issue of alcohol to the forefront in
most discussions regarding the workplace is the association that has been made by
the above stakeholders among others regarding alcohol and its role in workplace
accidents, reduced work performance and loss of working time. Consequently these
have been translated to economic and social costs, by numerous studies mentioned
in the research, to both the employer and employee and the wider society. Aside
these issues mentioned about alcohol and the workplace is also the notion of work
which in recent years has been increasingly separated from ‘leisure’. Thus the
‘need’ for the employer or management to ensure that there is a healthy and
productive workforce during the working day and on the other hand a similar need
on the part of the employee to feel that they are entitled to act as they please, with
regards to alcohol consumption, so long as they are ‘doing their job’ has further
strengthened the need to review and examine the issues of alcohol in the
workplace.
In the case of this research, the need to address the effect of alcohol use or its
misuse on organisational performance seems to be relevant because aside from the
above mentioned discourses being present in these workplaces, at least with the
ones studied for this research, there is also an ever increasing role of the employer
or management in the discussion. That is, there has been a recent influx of
discourses regarding employee health and safety as well as their wellbeing in the
country and subsequently this has led to many organisations introducing
restrictions and regulations regarding alcohol consumption under the guise of
protecting the ‘drinking employee’ and his or her workgroup.
However, other contrasting views have expressed concern about the
employer’s role in this situation and cited these measures are all a ploy to regulate
the individual’s actions in the workplace and mould him or her into the ‘ideal
worker’ and that alcohol just seems to be one of the media to achieve this.
Nonetheless, aside these debates, there also lie the concerns of the United Kingdom
government whom through numerous legislations and rulings have also tasked the
employer or organisations with the duty of tackling substance misuse in the
workplace. However, with alcohol being a legal and not illicit substance, it has
been as much a difficult substance to address, and for that matter study, using the
same conditions required to do so for other substances like cannabis and cocaine.
Thus the organisation’s role in this issue could, on the other hand, be viewed as
having being thrust upon them by law and therefore their actions and views
regarding alcohol consumption in the workplace, regardless of how harsh or lenient
they may appear, are justified by the fear of the repercussions of flouting these
laws.
378 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Allsop, S.,Pidd, K. (2001). The nature of drug related harm in the workplace In
Allsop, S, Phillips, M & Calogera, C eds Drugs and Work: Responding to
alcohol and other drug problems in Australian workplaces, IP Communications,
Melbourne, pp 5?20
[2] Campbell, D.,Graham, M. (1988). Drugs and alcohol in the workplace: A guide
for managers. New York: Facts on File Publications
[3] Henderson, M., Hutcheson, G.,Davies, J. (1996). Alcohol and the
workplace. WHO Reg Publ Eur Ser, 67, 1-100.
[4] Pratt, A.E. ,Tucker, M.M. (1989) Approaches to the alcohol problem in the
workplace. Alcohol Alcohol. 1989; 24: 453–463, PubMed
Faculty of Business Economics and Entrepreneurship 379
REFORM OF THE HUMAN RESOURCES
MANAGEMENT FUNCTION IN THE MINISTRY OF
INTERIOR OF THE REPUBLIC OF SERBIA - THE
STRATEGIC BASIS, KEY ACTIVITIES AND
CHALLENGES
Milan Klisaric, PhD
39
Sinisa Dostic, PhD
40
ABSTRACT
The subject of this research is the reform of the functions of human resources
management in the Ministry of Interior of Serbia. The aim of the research is that, in the
context of complex transitional changes in Serbian community, to identify, describe
and explain the strategic basis, key activities (sub-functions), and the challenges of
reforming the functions of human resources management in the MoI. For identifying
the current situation of human resources management in the police of the Republic of
Serbia, and the predictions of the future state of affairs in this area, among other
methods - the methods of content analysis, secondary analysis and examinations
(surveys) have been used. Among the strategic bases for reforming the functions of
human resources management, the following have been particularly described and
explained: the need for de-politicizing and professionalization of human resources
management function, the need for improving performance in carrying out police
duties, the need for quality personnel, etc. This research briefly describes the key
activities (sub-functions) of the human resources management function, such as
strategy and human resources management policy, analysis and work design, human
resources planning, recruitment and selection, employee training, and development of
employees and the organization. Among the challenges in reforming the human
resources management function, a special focus has been devoted to the design of the
introduction of the prestigious human resources management standard, worldwide
known as” Investors In People – IIP”. For designing of the future model of human
resources management in the Serbian police, foreign experiences and solutions of
human resources management in the police and the public sector, especially in the
Great Britain, have been used.
Key words: Reform, Human Resources Management Function, Strategic
Bases, Key Activities, Challenges.
J EL Classification: M12
UDK: 005.96:351.74
39
Milan Klisaric, Ministry of Interior, Belgrade, Serbia, [email protected]
40
Sinisa Dostic, Ministry of Interior, Belgrade, Serbia, [email protected]
380 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Human Resources Management (hereinafter referred to as HRM) can be
viewed as a scientific discipline and as a management function in the organization.
As part of the science on organization, it deals with the study of all aspects of
employment in an organization, and as a management function it is within the
competence of the human resources sector and all levels of management in the
organization. The purpose of HRM is to create and maintain the required quality of
employees, and the achievement of strategic business objectives of the organization
- the effectiveness, efficiency and economy. All managers, starting from the very
top, must act as leaders in the field of quality, because it is their task to establish a
quality system and to incorporate it into the structure of the organization (Filipovic
et al. 2009, p. 382). Human Resources (hereinafter the HR) are the most important
resources in any organization. HR quality directly affects the quality of business
processes and their products (decrease of crime rate, increase of efficiency of
solving crimes, crime prevention, improvement of confidence in the police and the
level of satisfaction with their work, etc.).
Ministry of Interior of the Republic of Serbia has been in the process of
reforming its core functions for the last decade; one of which, in the opinion of
many experts and police employees, the reform of the HRM functions is the most
important but also the most complex. The aim of this process is that the police,
from the perspective of the international community, should become a reliable
partner and the support of European integrations; and from the perspective of
citizens - a public service to which citizens can turn to for help and protection. In
order to achieve this goal, the Ministry has to raise its capacity and reputation that
enjoys as an institution, which must include the internal reorganization so as to
create a more efficient police service, which costs less to the citizens of Serbia
(statement by the former Minister of Interior of Serbia, Ivica Dacic, in his opening
address in the Development Strategy of the Ministry of the Interior 2011-2016).
The modern requirement of both the public sector and the general public that
the police should be more effective in their work and at the same time cost less,
represents a basic quality requirement that cannot be achieved without good HR
and HRM quality. Such requirement opposes to many factors of traditional police
organization and its environment, such as: system inertia, opposition of personal
interests to the organizational and general social interests, lack of awareness about
the essence and importance of the changes, political interests and the influence that
changes should not be not implemented, poor coordination and communication in
organization, excessive paperwork and outdated work technology, underdeveloped
leadership and management, human resources surplus, etc. In addition, the
tendency of politicians towards achieving a better quality of the police, is usually
associated with a conceptual misunderstanding of quality, hypocritical statements
and inconsistencies. Even though many politicians like to pay lip service to quality,
other issues, such as tax levels, are important to them. (Bovaird et al., 2009, p.
166).
Faculty of Business Economics and Entrepreneurship 381
The contemporary HRM in police organizations in the developed EU countries
is based on the developed activities, such as HRM strategies and policies, job
analysis and design, HR planning, recruitment and selection, staff training,
performance management, and other. Special contribution to the improvement of
the HRM function in organizations has enabled the creation of standards known as
“Investors In People – IIP”, a prestigious quality management model in the field of
HR. MoI of the Republic of Serbia during the past two years has adopted a number
of projects relating to the reform of the HRM function, within which the
introduction of the IIP standard has been envisaged. In addition to the many
challenges in reforming the human resources management functions, the
introduction of IIP standards will be the most demanding enterprise and the biggest
challenge of this reform.
STRATEGI C BASI S FOR THE REFORM OF THE HRM
FUNCTI ONS
Strategic bases for the reform of HRM functions make part of strategic
documents of MoI, the official reports of government bodies, the findings of the
scientific research and other relevant documents. In the Development Strategy of
the Ministry of Interior 2011 - 2016, the section relating to organization and
management, emphasizes the need that HRM be reformed from the personnel
department of the old type to a modern service that will be able to meet the
challenges of the 21st century. In order to achieve this, it is necessary to establish a
HRM system based on contemporary standards, criteria and principles of hiring,
selection, training and promotion in professional career. Such developed system
would allow competition among law enforcement personnel based on competence
and results, resulting in high level of professionalism, job satisfaction and legal
safety of employees. Moreover, the Strategy states that promotion should be based
on transparent procedures, with the use of internal open competitions as rules when
it comes to filling middle and senior level managers vacancies in the police, based
on the results of the work and advanced training, with a standard test of knowledge
and abilities.
The demographic changes in the Republic of Serbia also represent the
important strategic basis. According to the data given by the Statistical Office of
the Republic of Serbia in the publication "Population, age and gender - census
2011", Serbia has 7,186,862 inhabitants (without AP Kosovo). Compared to the
1991 census (7,822,795), and 2002 (7,498,001), a significant decrease in the
population is evident - for 20 years by more than 600,000 residents. Contrary to the
significant decrease of the number of inhabitants, in the above-mentioned period
there was a significant increase in the number of employees in the Ministry of
Interior. For example, in 2002 at the seat of the Ministry there were 7,728
employees, and at the end of 2012 approximately 18,000 (OSCE Mission 2004,
pp.95). This has caused increased financial investment in the police, mostly for
382 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
staff salaries. MoI of the Republic of Serbia is the largest employer in the state
administration, with over 46,000 employees, which is, when compared to some
other countries with similar population, incomparably much more (e.g. Kingdom of
Sweden has around 9.5 million inhabitants, and only about 28,500 police
personnel). The large increase in the number of employees in the Ministry of
Interior of the Republic of Serbia in the abovementioned period did not lead to any
significant decrease of crime. According to the data of the Statistical Office of the
Republic of Serbia, the total criminality of adult offenders in the abovementioned
period was reduced only by around 10% (Table 1). However, within this slight
reduction, there is a trend of significant growth in crimes of violence and drugs,
which indicates a reduced efficiency of the police, the judiciary and the entire
community.
Table 1: The general trend of reported adults for the period 2002-2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
104061 95733 88453 100536 105701 98702 101723 100026 74279 88207 92879
Source: Bulletin of the Statistical Office of the Republic of Serbia No 558 "Adult
offenders in the Republic of Serbia 2011 - Registration, prosecutions and
convictions" and announcement No 12 "Adult offenders in the Republic of Serbia
2012"
Juvenile delinquency in the mentioned period increased by as much as 20%
(Table 2).
Table 2: Reported minors in 2002 – 2012
Republic of Serbia
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
3,251 2,415 3,120 2,945 3,041 3,434 4,085 3,497 3,747 4,323 3,913
Source: Bulletin of the Institute of Statistics of the Republic of Serbia No 559
"Juvenile offenders in the Republic of Serbia 2011 - Registration, prosecutions and
convictions" and announcement No 11 "Juvenile offenders in the Republic of
Serbia 2012"
The above statistics indicate that a large increase in the number of employees
in the Ministry of Interior does not necessarily lead to a significant reduction in
crime rates, nor does it lead to a reduction in crime rates in certain groups of
offenses. Therefore, only the quantitative increase in human resources is not
enough to improve the quality of work in the most important areas of policing - the
prevention and repression of crime. It can be assumed that in the mentioned period
the qualitative attributes of HR and management of these resources were not at the
required level.
Faculty of Business Economics and Entrepreneurship 383
The following statistics from the Ministry of Interior - Directorate for
Analytics, shown in Table 3, indicate that there are serious problems in the quality
of staff in the Ministry of Interior. The data relate to criminal offenses committed
by police officers of the Republic of Serbia for the period 2002 - 2012.
Table 3: criminal offenses committed by police officers in the period 2002 - 2012,
in total and by categories of employees: uniformed, authorized police officers, and
other
MoI Year Employees
Total Uniformed Authori-
zed
police
officers
Other
2002 263 194 31 25
2003 346 273 44 23
2004 280 222 32 19
2005 334 289 22 27
2006 290 239 22 13
2007 385 267 76 24
2008 251 190 31 20
2009 312 226 23 18
2010 254 117 22 10
2011 537 373 67 97
2012 529 386 72 71
Total 3,781 2,776 420 347
Source: Statistics from the Ministry of Interior of the Republic of Serbia -
Directorate for Analytics
The average number of crimes, according to MoI statistics, the police officers
perpetrated during the observed period of 11 years is 343, but there is a growing
trend. Most crimes are perpetrated by uniformed police officers who are directly
responsible for the safety of citizens. Participation of uniformed police in 2012 in
criminal offenses was 72.96%, while for the remaining authorized police officers it
was 13.61%. Statistics of a large number of criminal offenses included in the above
tables indicate the major problems in the quality of police officers, especially in the
ethical dimension, as well as in the function of HRM. Of particular concern in
relation to criminal offenses committed by police officers is the lack of systematic
analysis of these crimes, drawing relevant conclusions and recommendations,
asking questions about management responsibilities, and taking preventive and
corrective measures.
If we take into account the statistics of the presented criminal offenses, the
criminal affairs of the senior police officials and managers, the existence of hidden
figures of crimes perpetrated by police officers, particularly in the area of crime,
corruption, as well as a growing trend of all these, one can say that the state of HR
384 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
and HRM is disheartening both for the police and for the society in general.
Perpetrating offenses by those who are authorized by the community, equipped and
paid to protect against crime; and coupling of some leading men of the police with
the greatest criminals of organized and drug crime in the country, which is a topic
often used in the media, are the most serious forms of tarnishing the reputation of
the police profession.
The important strategic basis for reforming the HRM function is in the attitude
of the citizens towards the police. Significant sources of public opinions about the
police are found in the public opinion research agencies: Strategic Marketing (2008
- 2010), CESID (2011 - 2012) and the Office of the OSCE - Mission to Serbia on
the attitudes of citizens of Serbia on policing, conducted in the period from 2008 to
2012. The above mentioned research show that the greatest number of citizens
demand that the quality of the police employees should be improved. 90% of the
respondents believe that the appointment to senior positions in the police is
conducted on the basis of political and other non-professional connections and
influences. In this regard, 30% of respondents demand to de-politicize the police
and to improve the education and training of the police (33% in 2008, 68% in
2012). In addition, on average, about one half of respondents require the reduction
or elimination of corruption in the police force. A particularly important
requirement of citizens is related to the role of the police in the community. On
average, around one-third of the respondents believe that the police is a service of
the citizens, and the majority believes that it currently has the role predominantly
oriented towards the Government of Serbia and the political parties.
In the recently conducted empirical research of opinions of heads of Criminal
Police in the Republic of Serbia on the quality of HR and HRM function, the
results also point to significant problems in this area. The results are shown in
Tables 4 and 5.
Question: "How do you assess the competence of crime police officers?"
Table 4: Assessment of competence of crime police officers
Quality level in %
Quality dimension
excellent good poor
Expertise 15.5 64.3 20.2
Ethics 17.9 70.2 11.9
Motivation 7.1 65.5 27.4
Experience 12 67.5 20.5
Average value 13.12% 66.87% 20%
Source: Klisaric, 2014, pp 451
Faculty of Business Economics and Entrepreneurship 385
The distribution of the responses on the quality of competence of crime police
officers is mainly at the good quality level, the average value of 66.87%, followed
by the poor level, the average value of 20%, and lastly at excellent average value of
13.12%. The highest value was recorded for the dimension of ethics (17.9: 70.2:
11.9) and the lowest value for the dimension: Motivation (7.1: 65.5: 27.4).
The lack of motivation as the biggest problem in HR, seen from the
perspective of the heads of Criminal Police, is the consequence of the poor quality
of HRM, which was analyzed in the following question:
Question: "How do you assess the quality of human resource management?"
Table 5: Evaluation of the quality of human resource management
Quality level in %
Quality dimension excellent good poor
HR planning 5 57.5 37.5
HR recruitment 3.7 52.4 43.9
HR development 6.1 57.3 36.6
Career advancement 4.9 61 34.1
Average value 4.92% 57% 38%
Source: Klisaric, 2014, pp 452
The distribution of the responses on the quality of HRM is mostly at the good
quality level, the average value of 57%, then at the poor level, the average value of
38%, and lastly at excellent average value of 4.92%. HR recruitment in the
criminal police was rated the lowest (3.7: 52.4: 43.9). Compared to the quality
assessment of crime police officers competence, HR quality management in the
criminal division was rated significantly worse.
The above research shows that the biggest problems of the human resources of
the Serbian police is the lack of systematic, strategic and modern HRM, as well as
the existence of a strong political influence on all of the key activities of HRM
functions. This has produced a disproportionate increase in staff at the Ministry of
Interior, the increased costs of the state budget and increase of the number of
criminal offenses committed by police officers. State of crime has not improved
either statistically or in the eyes of the public, and citizens believe that the police of
the Republic of Serbia is still the dominant instrument of the Government and the
political parties, and not a public service. All of the abovementioned should be
sufficient reasons, and strategic basis for the reform of the HRM function in the
Ministry of Interior.
386 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
FUNCTI ONS AND KEY ACTI VI TI ES OF HRM
THE CURRENT STATE OF AFFAI RS AT THE MI NI STRY OF
I NTERI OR OF REPUBLI C OF SERBI A
The HRM function is made up of a range of activities, policies, practices and
systems that influence the behavior, attitudes and performance of employees in the
organization (Bogicevic-Milekic, 2011, pp.5). A developed model of HRM
includes a variety of programs, such as quality management, team building
programs, measurement and management of organizational climate and culture,
organizational performance management, etc. The current state of HRM in the
Ministry of Interior of Republic of Serbia is characterized by numerous and various
deficiencies and significant deviations from the modern standard or best practice
HRM (Cezemier et al., 2012, pp.3-20). Firstly, HRM is much more bureaucratic
administering to the employees than it has been a developed strategic managerial
function. Management for HR, as the holder of the HRM function, does not possess
the necessary authority for bringing decisions in the field of HRM. Recruitment is
carried out without open competition and is strictly centralized, the deployment and
promotion to managerial and other positions is done without transparent criteria
and procedures. HR is not recognized as the potential of the organization which can
provide a significant contribution to the way in which the Ministry is being
managed in terms of labor costs and effective working practices. The key HR
activities are generally either not executed at all, or not executed properly - there is
no evidence that the best practices of HR support the MoI and its departments in
achieving goals. Duties and tasks are delegated through a number of organizational
units of the MoI, which leads to the unnecessary duplication and separation, where
problems with coordination and information arise and lead to unnecessarily high
number of employees, and similar.
The disunity of HRM affairs prevents a unique and systematic approach to
people management at the level of the Ministry of Interior. Operating procedures in
the field of HRM are not formalized and transparent. Many important tasks are not
performed: HR planning, analysis and design of work, career management,
performance management, etc. The lack of harmonization of regulations and
inconsistent treatment result in a large number of lawsuits for violating the rights of
employees. HRM processes in the MoI are slow, inconsistent and expensive. The
management system is centralized, which in practice translates into an enormous
written and verbal daily correspondence. There is the largest number of written acts
on the assignment, transfer and promotion - which all must be signed by the
Minister, but before that there are a lot of other parties that must give their consent,
which significantly slows down the procedure. Employees are largely uninformed
about HRM (surveys conducted in May 2013 by the Ministry of Interior and DCAF
on a sample of 2,400 employees), which indicates that the system is not
transparent. There is no a united approach to HRM in the MoI, ie. the HRM
Faculty of Business Economics and Entrepreneurship 387
function is disunited: Directorate for HRM collaborates with 27 police departments
(PDs), which deal with similar tasks in the local police stations. Also, the
management of HR in the MoI does not provide the necessary technical support to
the direct managers.
THE PROJ ECTI ON OF A MODERN SYSTEM OF HRM I N THE
MOI OF THE REPUBLI C OF SERBI A
A modern HRM system would primarily require a new unit for HR, which
would be positioned at the strategic level. Also, a modern HRM system would
consist of key activities as shown in figure 1.
Figure 1: Projection of the key activities of the HRM function in the Ministry of
Interior of Republic of Serbia
Source: promotional material of the DCAF project "The introduction of modern
concept of HRM in the MoI", under the title: "Reforms"
A more comprehensive scheme of the HR management function, so-called
integrated HRM system, provided by Dr Gert Ahrer is shown in figure 2.
Evaluation
Education
Staff
Employee
Performanc
e
Job
Enrichment
Learning
And
Development
Working
relations
Health and
Safety protection
of employees
HRM
Strategy and
Policies
Training of
employees
Recruitment
And Selection
388 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 2: The integrated human resources management system
Source: Ahrer, G., pp.16
For achieving the broadly set activities of the integrated HRM as shown in
picture 2, it is necessary to precisely define the key (sub) function units for HRM
within the police organization, such as (Swanson, et al., 2008, p. 387-388):
1.Preparation of political statements, including the suggestions of HR
strategies; also the standards of operational work relating to all areas of HRM, as
well as issues for decision making by the executive managers of the police
organization.
2. Maintenance of performance evaluation system (performance at work, the
characteristics of the employees and the organization).
3. Creating an integrated information management system that includes all the
necessary information about the employees.
4. Maintenance of program effectiveness for the purpose of recruitment of
qualified candidates.
5. Management of carefully thought-out selection process.
6. Establishing and maintenance of criteria for the promotion of employees at
various levels of the organization, together with a method for determining the
necessary qualifications of employees visible for each position.
Business Plan for HR
Internal Communications
Control of HR, Risk
analysis, HR systems and
audit, Quality control
quality Control
Corporate Strategy
HR strategy
Vision, mission, values
Brand, sustainability
Health, Welfare,
Safety, ecology
Healthcare
Working conditions
Office management
IT
Administration
Salaries, pensions
Employee relations
Law on Employment
Operational process
BPR (re-engineering) of the
operational process
Organizational Structure
Description of results
Job Description
Workforce Planning
Career Advancement
Recruitment
Substitute planning
Relocation
Work evaluation
Compensation
Organizational and personal development
Knowledge Management
Organizational Transformation
and Change
Management
Performance Management
Guidelines for employees
and management
Faculty of Business Economics and Entrepreneurship 389
7. The implementation of the program for the development of employees, from
entry into service to the highest positions in the police organization.
8. Developing and managing classification positions in the police
organization.
9. Developing a plan of appropriate compensations, taking into account the
different levels of complexity and responsibility for assigned tasks.
10. Presenting the police organization during negotiations with groups which
seek employment in the police, and in other meetings related to HRM issues.
11. Conducting the exit interviews with police officers who leave the service,
in order to identify and adequately correct the unsatisfactory conditions.
12. Providing advice to managers at all levels related to the problem of HR,
paying particular attention to management and issues about the disciplinary
procedure.
13. Implementation of the HR issues research program.
14. Presenting the police HRM unit to the Service of Human Resource
Management in the Government of the Republic of Serbia, trade unions and other
agencies and bodies dealing with HR issues.
For the purposes of this paper, we will include the first six activities of HRM
functions shown in picture 1 – from the HRM strategies and policies to the
development of employees and the organization.
STRATEGI ES AND POLI CI ES OF HRM
HRM strategy is an action plan that includes both: the means and objectives.
The objectives of HR may, for example, include the quality of performance,
quantity of employees and an estimated cost of those goals. On the other hand, the
means may include, for example, HR practices and HR policies (Brewster,
according to Porter, et al. 2006, p. 382). HR management strategy should be well
planned and implementable use of human resources in order to meet the objectives
of the Ministry of Interior at all organizational levels. As a functional strategy, it
should be an integral part of the development strategy of the Ministry. This means
that HRM strategy must be focused on the key dimensions of employee quality,
such as competence, ethics, character, behavior and enthusiasm. The strategic focus
must be on the role of the police to the community, on the right of employees to
fair competition in the professional development and advancement to senior
positions, employee satisfaction with the various aspects of their work, and the fact
that the quality of employees significantly affects the quality of organizational
processes and their products, and particularly the effectiveness, efficiency and
economy of operations. HRM strategy and policies provide the framework for all
HRM functions and give them the desired development direction.
390 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ANALYSI S AND J OB DESI GN
Job analysis is the process of collecting and evaluating relevant information
related to the job: the content and nature of work, the required knowledge, abilities,
skills and other requirements for the job (Schuler to Bogi?evi? Mileki?., 2011 pp
35). The analysis is focused on two groups of data. The first relates to the contents,
characteristics and performance of a particular job, and the other to the required
employee competencies at specific work position for the successful performance of
the job. Under competence we mean the knowledge, skills and behavior, and often
certain work experience is required as well. The result of the job analysis is the job
description. Job description is a document that contains the purpose of the job, job
tasks, duties and responsibilities, performance targets and reporting
responsibilities. It contains details on the conditions, compensation and working
hours. It represents the basis for the preparation of qualifications of candidates.
The conditions for a quality job analysis of each position separately in the
organization, are process and functional analysis of the scope and jurisdiction of
organization. The process and functional analysis are the framework for the
description and design of each position. There are no records that at the Ministry of
Interior of Republic of Serbia any process analysis has been conducted up to date,
therefore this organization was able to irrationally and enormously increase the
number of positions and employees in the last 20 years. What contributed to this
state was the insufficient use of information technology and software (integrated
database of human resources, training, crime, etc.), which allows the rationalization
of employment, improvement of HR management, increase of the effectiveness,
efficiency and economy of operations, etc.
The results of job analysis serve as a basis for other HRM activities:
recruitment and selection, training, evaluating and rewarding employees,
performance management. The qualitative analysis of work requires a special
methodological approach, methods and tools for collecting, processing and
interpretation of data (interviews, observations, questionnaires, content analysis,
etc.). This means that people who are engaged to carry out the job analysis should
have the necessary methodological skills. The best solution for quality analysis and
job description is to engage an external expert who will work together with
managers and executors at the specific workplace, and conduct this analysis at all
levels of the police organization. Another solution is to train the managers for that
job and for conducting job analysis following the clear, consistent, and complete
instructions.
Faculty of Business Economics and Entrepreneurship 391
HR PLANNI NG
HR planning is the process where HR needs are predicted based on the
anticipated changes in the internal and external environment. More specifically,
work staff planning is making plans to fill the future vacancies in the organization,
which is based on the prediction of vacancies and deciding whether those jobs will
be filled by candidates who are already working in the organization or candidates
outside the organization (Dessler, 2007, pp. 71). HR planning in the police of the
Republic of Serbia, which would be based on predicting the need for staff, offering
both internal and external candidates, has not been performed for the last 20 years.
There is no annual plan for HR based on needs analysis. The reasons for this can be
found in the impact of politics on employment and career system in the Ministry of
Interior, the high centralization of decision-making on the recruitment and
deployment of candidates, the absence of the list of qualifications of employees
and others. It could be said that the only exception to this is the admission of
candidates to the basic police training, which is defined by the Law on Police and
the defined standards, criteria and procedures for the admission of candidates. One
of the problems in HR planning is the outdated Act on working positions
systematization in the police. Namely, the number of police officers, envisaged by
the Act on systematization at the local level (police stations) has not significantly
changed for the last twenty years, however the changing determinants on the basis
of which this number is determined have changed, such as the number of
inhabitants and the security issues (type and frequency of security problems,
criminal acts primarily). Ministry of Interior, as all large organizations, should have
a HR plan, especially for achieving the following objectives:
? Attracting and retaining the required number of quality staff (Vuji?, 1008, p.
126). Namely, Ministry of Interior provides opportunities for high
specialization of a part of its staff in different areas (forensics, information
technology, cybercrime, analytics, etc.); however, there are no defined
instruments how to keep the staff, in which they invested significant funds,
in the situations when other agencies offer a much higher salary.
? Solving problems of staff surpluses or shortages. Rationalization of staff
number is not possible without a clear and consistent methodological staff
plan.
? Maximum utilization of employees’ potentials, including the retired police
officers, in a variety of necessary activities, etc.
392 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
RECRUI TMENT AND SELECTI ON OF CANDI DATES
Recruitment of candidates is the process of attracting qualified candidates in
such numbers that the organization will be able to choose the best for filling
vacancies. Selection of candidates is the process of selecting among the applicants
for the job and making the decision on hiring.
Organization may seek candidates internally, among the employees who desire
promotion or transfer; or externally, at the labor market. Most organizations use a
combination of internal and external candidates - promotion within the organization if
there are qualified employees, and external recruitment when they are in need of new
skills. Internal recruitment is particularly important in order to develop careers within
the organization. In this way, organizations can retain valuable and effective employees
by providing them with the opportunity of career advancement.
A number of selection techniques can be used, and they should be chosen
depending on the vacancy to be filled. The techniques are designed to reveal the
characteristics, skills and qualities of an individual for a specific job. The use of
reliable and proven techniques will help lead to the correct decision and the
appointment of a suitable candidate. Selection techniques include biographical
information, interviews, psychometric test, assessment centers, checking
references, test tasks, etc. (DCAF, 2014, pp.6).
Biographical information is information that can be objectively categorized, such
as, for example, qualifications, years of relevant experience, positions of responsibility.
Each category has its specific weight for the final score, so that each candidate gets a
certain number of points based on biographical data. Interviews are conducted at
various stages of employee’s career, and represent a useful method for obtaining
information and getting to know the person. The interview should ensure fairness and
consistency, should be planned in advance, be well structured, and conducted by
persons trained for that. The information obtained during the interview should be
considered along with other sources of information so as to obtain a more complete
picture of the respondents. There are different types of interviews, such as: the face-to-
face interview, panel interview, structured interview, interview about expertise,
focused interview, interview about behavior in a given situation, situation interview,
and so on. The discussion should be conducted by people specially prepared and
trained to avoid bad evaluation of candidates based on faulty perceptions, prejudice and
other negative effects that may occur during the interviewing. Psychological test
represents a wide range of tests that assess mental ability, behavioral preferences and
attitudes/values. The tests are result-oriented, they include points that can be used to
compare candidates one to another, or to a certain standard. It is necessary that they are
conducted and interpreted by a psychologist. They can be divided into two types: (1)
cognitive test / which measures the mental abilities of the person, such as IQ, spatial
resourcefulness; awareness, reasoning, logic, arithmetic; (2) personality test / which
evaluates the attitudes, values and beliefs. The collected responses constitute the
candidate profile which could be compared with the profile that is considered
appropriate for the job.
Faculty of Business Economics and Entrepreneurship 393
In addition to the developed selection for basic police training, there is a
selection of candidates who are already employed to work in specialized units such
as the Special Antiterrorist Unit (SAU) and the Gendarmerie (certain types of
selection training). For deployment at the managerial functions there is no
systematic selection. The promotion of police officers to police managers in the
Ministry of Interior of Republic of Serbia, unfortunately, is not conducted on the
basis of testing, i.e. verification of capabilities and aptitude for leadership and
management. The biggest problem in the selection of candidates for police work is
that there is no such test that will have all the necessary filters based on which the
latent problems in the ethical dimension of the personality would be identified.
In modern time, for the purposes of selection of candidates/applicants, the so-
called in-basket method is used: it is a candidate selection technique where the
problems and/or challenges that await them at work are presented, and includes
discussion groups without a leader. In-basket method is a test used by companies
and governments in the recruitment and promotion of employees. In this test,
applicants receive a variety of messages, phone calls, documents and notes. They
have limited time to set priorities and to properly organize and respond to messages
and phone calls. After the test, or exercise, applicants can justify their decisions
during an interview with the assessors. In the discussion group without a leader
applicants meet as a group to discuss a business problem within a given deadline.
During the meeting, the behavior of the candidates, their mode of interaction, and
the leadership and communication skills they exhibit are observed. The leader of
the group usually stands out during a discussion. From the patrol officers in the
21st century it is required that, in addition to their usual duties to submit reports,
they should also be managers who solve problems (Leonard, et al 1974, p. 522).
The quality recruitment and selection process is very expensive for the police
organization. However, as it provides the highest quality professionals for the
future, who create real value for the organization, it is also a cost-effective process
in the long-term. Only the quality employees in the police can create a positive
image of themselves in the public and the world, and provide the values of the
organization.
TRAI NI NG OF EMPLOYEES
Training is a process through which employees systematically acquire and
improve the skills and abilities that are needed in order to achieve better work
performance (Greenberg et al. 1998, p. 64). Training at any level represents a new
skill and also socializes employees into their new work roles (Thibault, et al., 2007,
p. 362). Unlike education, which is aimed at wider cognitive concepts, the training
is focused on the job description of the specific position, the competencies that are
required for successful job performance from that description, as well as solving
specific work problems and achieving the desired effect. Today's experts
increasingly use the phrase "learning and work performance" instead of the term
394 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
‘training’, to highlight the two main objectives of training – employees’ teaching
and organizational performance (Dessler, 2007, p. 152). If the recruitment and
selection are focused on filling vacancies with candidates with the best
predispositions for work in the police, then the training is focused on the creation
of quality employees. If candidates are not carefully selected with the
corresponding potential for the performance of their job duties, then the proper
training and proper management is a very expensive solution to the problem
(Iannone, 2001, p. 62). The effective operational police force depends on the area
of the qualifications of each police officer. The conscientious police managers
know that the quality of police services is not solely in the function of numbers.
Modern HR management is focused on intelligence, ability and skills that are at
disposal to the organization in terms of its operations and the realization of plans
(Leonard et al., 1974, p. 520).
The current management training process in the Ministry of Interior in
Republic of Serbia is characterized by a disconnection with the HR management
function. Specifically, the completed trainings of police officers in most cases have
no significance for the development of their careers. Directorate for Police
Education, Training, Professional Development and Science (hereinafter: the
Directorate for Education) is in the hierarchy of the Ministry of Interior positioned
quite low - it belongs to the Sector of Finance, HR and joint affairs, so it does not
have sufficient authority to coordinate, control and promote the comprehensive
training system in the MoI. Therefore, managing the training process is not
functionally or organizationally set to be part of an overall strategy for HRM.
Within the ongoing twinning project, as one of its key results the binding of
Directorate for Human Resources and the Directorate for Education in an
organizational unit – Sector for Human Resources, which will have significantly
higher organizational position (next to the minister) and sufficient authority for the
exercise of its jurisdiction.
ORGANI ZATI ONAL AND PERSONAL DEVELOPMENT
Employee development should be an ongoing process of acquiring and
developing formal and non-formal education (courses, seminars, etc.), work
experience and interpersonal relationships. It also includes an assessment of
personality, skills and work performance. The basic objective of development is to
enable the employee to acquire specific skills which are required for high-quality
performance in the near future, whether it is horizontal or vertical career
advancement. The development within the Ministry of Interior of Republic of
Serbia is not based on a systematic approach. In fact, there is no planning for the
development of employees as individuals. Moreover, some police executives are
reluctant to further develop employees because they fear this way they will become
competent (Iannone, 2001, p. 25).
Faculty of Business Economics and Entrepreneurship 395
Employee development system includes the career system. Career is a set of
positions that an individual holds during work in a particular profession, from the
date of his employment until retirement. A new employee of the MoI today has no
clear picture of the possibilities of his/her career development, with no one to
inform and guide him/her. The career system is not transparent, it is politicized,
and many managers are not allowed to get the best candidates, because in fact there
are no candidates. Usually there is only "one candidate".
Law on Police defines a dual career system for employees in the Ministry of
Interior - for police officers with the status of authorized police officials to firefighters
and other employees. Law on Police should define a career system for police officers
only. Other employees should be included in the system of promotion of civil servants
in the Republic of Serbia. Career advancement of police officers is solely based on the
acquired level of formal education and years of service. The system of career
advancement of police officers should, in addition to the above, also include the
necessary training and development programs for the acquisition of higher-level ranks,
as well as annual performance assessment. By implementing internal open
competitions for advancement to higher ranks, competition would be introduced and
the quality of candidates who advance to higher positions would be improved.
THE CHALLENGES OF THE REFORM OF HRM FUNCTI ON I N
THE SERBI AN POLI CE
The strategic challenges of HRM in Serbian police are the result of many piled
problems in this function, and the need for the establishment of a modern HRM
model in the economic, political, technological and legal context of the national
and international level. The basic characteristics of Serbian society are:
underdeveloped economy, high unemployment rate, large brain drain of the young
and talented people, underdeveloped private sector, too large and bureaucratic and
politicized public sector, etc. The request of the public sector is to modernize of the
public sector in Serbia, within which a very important place has the modernization
of the HRM function. Reducing employees’ costs and improvement of
performance (Dessler, 2007, p. 8) will be one of the most important and difficult
challenges of reform of the HRM function in the police of Republic of Serbia. The
strategic management of MoI of Serbia has decided that within the reform of the
HRM function, the process of introducing Investors in People (IIP) standards
should be started, which once is established, will solve numerous challenges and
problems in this function.
Investors In People - the international standard, originally from the UK, is the
first and the only framework for business improvement that focuses on people. IIP
standard can be further defined as a quality system for HR development that shows
commitment to excellence through employees; a tool that connects the goals and
aspirations of the organization for individual performance and development;
framework for the change management, defining the role of HR management,
396 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
performance improvement and organizational development; the international
symbol of quality in the development of human resources, etc. (Oakley, H 2012, pp
presentation). No other quality framework (Six Sigma, ISO 9001: 2000, EFQM,
Kaizen Blitz, etc.) has such a long tradition (21 years), the trust gained worldwide,
and the effect achieved (it is used in over 20,000 organizations in the GB). In
addition to Great Britain, with a license, IIP standard has been applied in 10 other
countries of the European Union (The Netherlands, Sweden, Austria, Belgium,
Bulgaria, Cyprus, Finland, Greece, Hungary and Romania), and in twenty countries
in Europe, Africa, Asia and America. Some recent research (CBI survey of
education and training, 2008, Cranfield School of Management, 2010) show that
IIP standard improves managerial skills - knowledge, experience and skills;
supports the development of organizational learning culture, improves the
effectiveness of management development, encouraging the creation of high-
performance environment and increases manager performance. Also, research
shows that the IIP standard is particularly useful framework for business
environments facing with significant or rapid changes.
The basic idea of the IIP standard is to improve work performance by inciting
all employees, which are characterized by effort without direction, to work together
to achieve better results faster. IIP standard is based on three basic principles
(analogous to the Deming cycle): planning, which includes the development of
strategies to improve the organization's performance; application, which involves
taking actions aimed at improving the organization's performance, and auditing,
which involves the evaluation of the impact of the organization's performance. IIP
standard has ten thematic sections or criteria (indicators) of the HRM quality and
performance, based on the IIP standard and 39 evidentiary requirements. The
criteria are: business strategy, learning and development strategy, people
management strategy, leadership and management strategy, management
effectiveness, recognition and rewards, involvement and empowerment, learning
and development, performance measurement and continuous improvement. IIP
standard criteria have been defined on the basis of best practice of the most
effective companies and government bodies in Europe.
Some studies that have investigated the relationship between work
performance, on the one hand, and the policies and HR practices on the other hand,
show that certain policies and HR practices can have a positive impact on business
performance (Management Journal, June 1995, str.635-672 according to Coulter,
2010, p. 179). The introduction of IIP standard in the HRM practice in the Serbian
police will bring many benefits, especially showing the quality management
system and public system to taxpayers and beneficiaries, as well as to the
Government, donors and partners. The principal risks of introducing IIP standard in
the Serbian police will be the opposing of the underdeveloped HRM systems,
performance and processes accentuated by political influence, and organizational
culture characterized by the lack of readiness for large and serious developmental
changes. Therefore, it can be expected that the introduction of the IIP standard in
police of the Republic of Serbia will be a very long and functionally non-linear
process.
Faculty of Business Economics and Entrepreneurship 397
CONCLUSI ON
The initiated reform of HRM function in the Ministry of Interior of the
Republic of Serbia is linked to a number of factors that influence its success. The
most influential among them is the political factor, i.e. the will of the Government
of Serbia and the key people in the MoI, who are now taking the test of democratic
maturity. It is clear that without their support the real reform is not possible. Also, a
very influential factor is the management of the Ministry of Interior of all levels,
that are responsible to transfer the strategic vision of the development of the HRM
function throughout the organization. A very important factor for the reform is the
organizational culture, i.e. the awareness and attitudes of all employees of the
necessity of development changes in the field of human resources. It is quite
certain that a number of employees does not agree to the changes and seek to retain
the existing system that promotes political suitability and other non-professional
connections when it comes to employment and career advancement in the police.
In the process of the reform of the HR management in the police of the
Republic of Serbia, it is necessary to use the positive experiences and models of
HRM in developed countries of the European Union. In this regard, the reform
projects in HR that are supported by the European Commission, financially and
professionally, should assist the HRM function in the Ministry of Interior of
Republic of Serbia to develop implementing the activities which now do not exist
at all or are poorly developed. It is realistic to expect that the establishment of all
HRM activities will contribute to achieving the key objectives of the reform of
public administration in the Ministry of Internal Affairs, as follows:
professionalization, decriminalization, depoliticizing, decentralization and
rationalization, which are the key dimensions of contemporary public sector
organization and the quality of its management.
To reform the functions of HRM as planned and with the anticipated activities
and results, the Ministry of Interior of Republic of Serbia must seriously and
systemically approach to change management, using the ‘step by step’ principle, or
‘the switch’ principle in situations where it is necessary.
398 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Aher, G.M. (2007) PP presentation Professor of Strategic Human Resource
Management at Ashridge Management College, Webster University, OU &
PEF University.
[2] Announcement No 11 by the Statistical Office of the Republic of Serbia dating
from July 15, 2013, on "Juvenile offenders in the Republic of Serbia, 2012".
[3] Announcement No 12 by the Statistical Office of the Republic of Serbia dating
from July 15, 2013, on "Adult offenders in the Republic of Serbia, 2012".
[4] "A Practical Guide to Strategy and HR policy", DCAF, 2014
[5] Bogi?evi? Mileki?, B. (2011), Menadžment ljudskih resursa, Centar za
izdava?ku delatnost Ekonomskog fakulteta u Beogradu, Beograd.
[6] Bulletin No 558 of the Statistical Office of the Republic of Serbia, entitled
"Adult offenders in the Republic of Serbia 2011 - Reports, prosecutions and
convictions," gives comparative overview of the reported, accused and
convicted persons in the territory of the Republic of Serbia for the period 2002-
2011 (ten years)
[7] Bulletin No 559 of the Statistical Office of the Republic of Serbia "Juvenile
offenders in the Republic of Serbia 2011 - Reports, prosecutions and
convictions."
[8] CESID agency reports and the OSCE Mission in the Republic of Serbia: "The
attitude of the citizens of Serbia towards the police" 2011 and 2012.
[9] Coulter, M. (2010), Strategijski menadžment na delu, ?etvrto izdanje, Data
Status, Beograd
[10]Dessler, G. (2007), Osnovi menadžmenta ljudskih resursa – ?etvro izdanje,
Data status, Novi Sad. Prevod sa engleskog; naslov originala: A Framework for
Human Resource Management, 2006, Pearson Education, New Jersey.
[11]Development Strategy of the Ministry of Interior 2011 - 2016
[12]Filipovi?, J., ?uri?, M. (2009), Osnove kvaliteta, Fakultet organizacionih
nauka, Beograd.
[13]Grinberg J, Baron, R. (1998): Behavior in Organization, Understanding and
Managing the Human Side Of Work, Prentice Hall Inc. 1995.
[14]Ipsos agency reports - Strategic marketing and the OSCE Mission in the
Republic of Serbia: "Public opinion about police reform" for 2008, 2009, 2010.
[15]Klisaric, M., Doctoral thesis, defended at the European Center for Peace and
Development at the University for Peace of the United Nations, on May 23,
2014, entitled "Quality function to crime - a case study of the Ministry of
Interior of the Republic of Serbia", p.300-306; 451-458.
[16]Leonard, V.A., Harry, W.M. (1974): Police Organization and Management,
University Casebook series, Mineola NY: Foundation Press.
[17]Porter K., Smith, P., Fagg, R. (2006), Leadership and Management for HR
Professionals, Elsevier Ltd. Oxford.
Faculty of Business Economics and Entrepreneurship 399
[18]Promotional material of the DCAF project "The introduction of modern HR
management concept in the MoI", under the title: "Reforms."
[19]PP presentation by the international expert, licensed for the quality control of
the application of this standard, held at a seminar for police officers of the
Republic of Serbia on June 11, 2013
[20]PP presentation by Hilary Oakley, International Director from Sweden, who
was a guest speaker on March 6, 2012, at a seminar for police officers of the
Republic of Serbia, dedicated to the development of human resources.
[21]Reports by Professor Dr Biljana Bogi?evi? Miliki?, and Marijka Cazemier,
entitled "Starting analysis of the human resource management function in the
Ministry of Interior of the Republic of Serbia", September 2012
[22]Study of the OSCE Mission (2004) "Police Reform in Serbia - Towards a
Modern and Accountable Police Service,"
[23]Swanson Ch., Territo, L., Taylor, R. (2008), Police Administration: Structures,
Processes and Behaviour, seventh edition, Pearson Education, New Jersey.
[24]Tony, B., Löffler, E. (2009), Public Management and Governance, second
edition, Routledge, Abingdon.
[25]Thibault E., Lynch, L., McBride, B. (2007), Proactive Police Management,
seventh edition, Pearson Prentice, New Yersey.
[26]The Statistical Office of the Republic of Serbia, published works, “Population,
age and gender - the census of 2011 in the Republic of Serbia”, Belgrade 2012
[27]Vuji?, D. (2008): Menadžment ljudskih resursa i kvalitet – ljudi – klju?
kvaliteta i uspeha, tre?e izmenjeno i dopunjeno izdanje, Centar za primenjenu
psihologiju, Beograd.
[28]http://www.mup.gov.rs/cms_cir/sadrzaj.nsf/Strategija%20razvoja%20MUP-
a%202011-2016.pdf.
[29]http://en.wikipedia.org/wiki/Swedish_Police_Service.
[30]http://en.wikipedia.org/wiki/In-basket_test.
Faculty of Business Economics and Entrepreneurship 401
III PART.
CASE STUDIES
Faculty of Business Economics and Entrepreneurship 403
INNOVATIVE GLOBAL COMPANIES – SOME CASE
STUDIES
Mirjana Radovic Markovic, PhD
41
Sladjana Vujicic, MA
42
ABSTRACT
The world economy is becoming increasingly global and the magnitude of the
globalization trend is so large that it is creating complexities for the managers and
leaders of the organizations. Globalization brings both benefits and challenges for
the organizations and striking a right balance between the two is critical for the
organizations to succeed in the global marketplace. This paper aims to study and
discuss the significance of globalization for organizations. The study is aimed at
the complexities of the global environment and the competitiveness of the
organizations. The paper elaborates the types of global organizations, followed by
the role of managers and leaders in managing global organizations. The study also
includes the role of the international business environment in the context of the
global strategy of companies. Finally, an attempt has been made to study the
importance of managing a culturally diverse workforce in a global organization.
The method of study is primarily a literature survey and the websites of some of the
organizations. The study proves the point that globalization is inevitable in the
present economic scenario. Hence, companies that can adapt faster to this trend of
globalization by adopting suitable management techniques will have a competitive
advantage. The organizations need to strike a right balance between the challenges
and the benefits of globalization and the four basic areas for striking the right
balance are cost, strategy, people and risk.
Key words: Globalization, Global Strategy, Cultural Diversity, International
Business Environment.
J EL Classification: F60, F23
UDK: 005.44 334.726
41
Mirjana Radovic Markovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
42
Sladjana Vujicic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
404 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
The globalization process involves the establishing of social, technological and
political links among countries all over the world (E-commerce corporate infrastructure
program, 2002). As a result of the integration of international economies, the last two
decades have seen an unprecedented surge in globalization trends across industries and
nations. And along with globalization, come significant opportunities and threats in the
external environment to which the organizations have to respond. Globalization can be
understood as a process which removes physical, political, economic and cultural
barriers between different regions in the world, thus encouraging an exchange of
goods, services, money and professionals between nations. As these exchanges grow,
businesses become more and more integrated and interdependent (E-commerce
corporate infrastructure program, 2002). Global companies can be defined as those that
have a significant proportion of their sales, assets or employees outside their home
markets although they are definitely not homogeneous. Globalization offers both
benefits and challenges for the organizations (The Yearbook of International
Organizations, (1978). Advancements in communications, technology and
transportation have truly made the world a unified global field and have contributed
significantly to the globalization process. The product development life cycles are
growing shorter and communications are becoming instantaneous and thus, products
can be manufactured and sold anywhere in the world (Fenton, Pettigrew, 2000). The
employees within the organizations can be from anywhere in the world, since global
organizations have offices in different locations and regions. Managing global
companies poses many opportunities and challenges for the managers and the
leadership of the company. For example, at the macro level, it could be property
ownership arrangements, availability of resources and components, the role of
government in business, as well as behavioral and cultural differences among nations
and differences within the nations. Values, symbols, beliefs, and work cultures vary
sharply between countries (Robbins, Coulter, 2012).
Managing these global organizations requires a fine balance of costs, strategy,
people and risks. Globalization has become such an important factor in the survival
and competitiveness of the organizations that those who do not think globally could
get left behind.
TYPES OF GLOBAL ORGANI ZATI ONS
Companies conducting their business at international locations have been there for
a while. For example, DuPont conducted business in China as far back as 1863 and the
Ford Motor Company established its first overseas sales office in France in 1908.
However, the concept and popularity of multinational corporations grew only after the
mid-1960s (Griffin, Moorhead, 2011). Global organizations are conventionally
Faculty of Business Economics and Entrepreneurship 405
classified into three broad categories: inter-governmental organizations, international
non-governmental organizations and multinational organizations.
1. The Inter-Governmental Organizations (IGOs) are based on formal
agreements between the governments of nation states and consist of a permanent
secretariat to perform their tasks (the Yearbook of International Organizations (1978)).
2. An International Non-Governmental Organization (INGO) is any
international organization which is not established by inter-governmental
agreement. These organizations may accept members designated by government
authorities, provided that their membership does not interfere with the free
expression of views of the organization (the Yearbook of International
Organizations (1978)).
3. A Multi National Corporation (MNC) is a broad term used to identify any
international company which has operations in multiple countries. Multinational
companies have extensive experience in a number of international markets and
have established marketing, manufacturing, and research and development
facilities in many countries. A substantial portion of their revenues come from
sales outside their home country.
4. Global Companies such as Royal Dutch/Shell, Unilever, Proctor and
Gamble and Philips operate in a truly global manner and the entire world is their
marketplace. These are also called Transnational Corporations and they maintain
operations in several countries, while their management is decentralized into local
countries. The management of such companies is based on interdependence rather
than either full divisional independence or total dependence of their units in several
countries on headquarters for decision-making and control.
5. Borderless Organizations are firms that have eliminated structural divisions
that impose artificial geographic barriers and are organized along business lines
(Robbins, Coulter, 2012).
I NNOVATI VE STRATEGY OF GLOBAL FI RMS BASED ON
PROJ ECT MANAGEMENT
“Changes in today’s business environment have been caused by globalization,
increasingly stricter demands of the end buyers, tendencies towards reducing the
shelf life of a product, the dependence of a company on business partners, as well
as the focus of companies on key components” (Jovanovi?, Vasiljevi?, 2008).
Small and medium sized companies in the USA and Europe have spread their
global holdings and restructured themselves in the aim of increasing their
competitiveness on global markets. The globalization of the world market, rapid
technological progress and the application of developed technology have led to the
fact that many companies understood that the conditions for surviving on the
market are contained within the ability of a quick adapting to variable conditions in
the environment. Competitive advantage is the aim of every company and the
406 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
majority of them have become aware of the fact that today the mere satisfying of
buyers’ needs is not enough to be competitive, but rather along with this they have
to exceed the expectations of the buyers, as this is the only way to persuade the
buyers that the company is the best of all (Vuji?i?, Vukadinovi?, 2011). The
majority of companies mostly use the innovative project management strategy,
which via efficient planning and coordination can help a firm use its resources and
the available time in a much more productive way.
Namely, in today’s highly competitive environment, project management is
used with all types of professional service organizations. Namely, a sure way to
achieve success, whether this involves legal and lawyer services, consulting,
accounting services, civil or other services, is to think and act outside the
traditional framework. This implies using new knowledge in the application of the
best practical experience, as well as the experience of other organizations which
are involved with the same or similar services. The development of contemporary
technologies, especially the Internet on one side, and changes in management
practice, communication and the organization of work in companies on the other
side, have led in the last years to changes in regards to knowledge type and
acquiring method (Radovic et al., 2012). The new way of acquiring knowledge
combines formal and informal learning with practical experience. Raising
awareness, training and qualifying employees is a key factor in market
competitiveness (Radovic et al., 2012).
In this way, managers can more efficiently manage projects, respond more
quickly to the pressure of clients to implement new technologies, etc. The ability to
learn more quickly than the competition can be the only sustainable competitive
advantage in today’s business environment. Individuals must constantly improve
their knowledge and build themselves up as individuals who are bearers of the
organization’s abilities – after all, a successful organization is a group of successful
individuals (Stanisavljev et al., 2011).
Except for this, there have been several suggestions to engage project
managers on the side, that is, from other firms which are involved with other
activities. In other words, it is considered that someone working in an accounting
firm can better view the work in a lawyer’s office, and launch the necessary
innovations in its work. Also, it is recommended that firms overcome and gradually
leave the traditional organizational methodology. Many firms have thus turned to
project management and have realized admirable results. It should be stressed that
project management is not only used in service activities, but also in many
industries.
One of the managers of the famous consulting firm Bearing Point considers
that he has found the formula of success of project management. It is made up of
the following:
? An adequate business strategy
? Coordination between resources, teams, activities and stages
? Good communication between team members, as well as the consumers
? Careful planning and control via detailed planning
Faculty of Business Economics and Entrepreneurship 407
? A set structure for each project, including the description of their
management and decision-making method
? A constant educating of project team members
? Ensuring that all team members understand the project aims, their tasks and
way of realization.
Along with the mentioned conditions which are to be met by the project
founded firm in order for it to succeed, it should be stressed that there is a degree of
risk of possible failure. Primarily, considering the fact that project organized firms
function in very uncertain environments, they need to be constantly formed, with
the teams changing as well as the members working on the project.
Most of these project teams work virtually, considering they are not in the same
place nor do they meet at the same time in order to deliver the project, but they work
constantly networked and linked with different types of IT (Radovic Markovic, 2007a).
In order for the virtual organization to succeed, it must meet conditions such as high
technology, mutual trust, an endeavor to satisfy the buyers as much as possible as well
as a striving for excellence. The most important feature of a virtual organization is its
interdependence by certain members (persons or organizations) from the network,
although they mostly cooperate between themselves.
The links between individuals in national firms are very close but they are also
linked with international global services. In their research for innovation projects,
Filippov and Mooi (2010) stress the significance of exploring the relations between
innovativeness and project management. In that sense, very often an innovation
project is equated with the development of a new product.
GLOBALI ZATI ON AND ORGANI ZATI ONAL CULTURE
DI VERSI TY
Globalization has transformed organizations, societies, economics and politics
all over the world. For global organizations, the definition of global diversity has
become broader. Global diversity must encompass not only an understanding of the
differences between different countries, but also the internal diversity of each
country. The scope of diversity has become truly global and knowledge about each
country’s customers, employees and suppliers has become essential. Thus, global
organizations need to move quickly towards the better management of a culturally
diverse workforce. This movement towards better management has to be adopted
by organizations due to three main reasons, as illustrated with some real examples.
Some companies like Xerox were obliged to develop better management of a work
force made more diverse by affirmative action. Other companies like Hewlett-
Packard grew very rapidly and then they realized that they had to work with
multicultural constituencies. A third type of company like Avon Products needed to
have a diverse workforce in order to match the diversity in the marketplace
(Robbins, Coulter, 2012).
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All these three kinds of companies had to work towards managing their
diverse multicultural workforce better in order to gain a competitive advantage in
the six dimensions of cost, resource acquisition, creativity, marketing and problem
solving and system flexibility (Griffin, Moorhead, 2011). Thus, a culturally diverse
workforce must be valued and managed well by all organizations in order to
remain competitive in the present global scenario.
The workforce is becoming more diverse; hence, the companies that value and
integrate diversity among employees will reap the benefits of globalization. Lower
personnel costs and improved quality of the workforce are two obvious benefits for
these organizations. In addition, a diverse workforce leads to diverse perspectives
in problem solving, decision making, creativity, product development and
marketing activities which are essential for creating a competitive advantage in an
increasingly global marketplace.
Globalization has led to a growth of multicultural organizations which are
characterized by six features, namely, pluralism, full structured integration,
integration of informal networks, absence of prejudice, equal identification with
goals and minimal intergroup conflict (Griffin, Moorhead, 2011).The table below
depicts the characteristics and tools for creating a multicultural organization:
Table 1: Creating a Culturally Diverse Organization
Characteristics Tools
Pluralism Training and orientation programs
Full Structural Integration Education, training, affirmative action,
performance appraisal and rewards systems,
benefits, work schedules
Integration of Informal Networks Mentoring, social events, support groups
Absence of Prejudice Bias-reduction training, focus, task forces
Equal Identification with Goals Encourage participation of all employees from
the diverse workforce in formulating goals,
strategies and mission
Minimal Intergroup Conflict Conflict reduction training, survey feedback
Source: Adapted from Taylor H. Cox Jr. “The Multicultural Organization”,
Academy of Management Executive, August 1991.
Global organizations are essentially multicultural organizations in which
employees from different backgrounds, ethnicities, experiences and cultures can
contribute and achieve their fullest potential, benefitting themselves as well as the
organization. Developing a multicultural organization is a very important step in
managing a diverse workforce in a global organization, and it is crucial for
sustaining a competitive advantage in the global marketplace.
Faculty of Business Economics and Entrepreneurship 409
EXAMPLES OF GOOD PRACTI CES
NORTEL NETWORKS
Nortel Networks is a global firm founded as far back as 1973, and today it is one
of the largest world telecommunication providers, employing nine hundred people, 200
of which are engineers (E-commerce corporate infrastructure program, 2002).
When Nortel Networks started its work, the CEO came to the idea of introducing
new standards into the company, managing projects which are orientated towards
consumers. Considering this firm has a wide range of products, each project is
independent and relates to a special product which is offered to the market. However,
with time, consumers started to take an interest not only in certain products, but in the
complete production range offered by the firm. In such circumstances, the general
manager made the decision to establish consistent standards of project management for
the organization. Thus, project management included all processes-deliveries, product
installment, product testing, consumer training, etc. From 1999, this firm also started to
carry out restructuring, that is, from an organization which is based on products it grew
into an organization geographically based in six regions - America, Canada, Latin
America, Brazil, Asia-Pacific and EMEA (Europe, the Middle East and Africa). In
each region, the firm founded its representing offices and appointed directors, defining
their responsibility for project management marketing. In fact, management teams
worked with regional representatives according to standard management projects from
all over the world. Regional managers formed the managing body, which voted on
bringing all standard decisions. In the majority of cases, voting was carried out in
secrecy and it was anonymous. Thereby, the managing body was the key for the firm to
become a global company.
Figure 1: Nortel Adaptive All Optical Intelligent Network
Source:http://www.networkworld.com/community/node/44588
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With global logistics, Nortel Networks has installed standardized automatic
project management tools, integrated with Oracle database. Along with securing
the standard tools, the global team also standardizes practice, combining it with the
best regional experiences. The website of the firm lists the best experiences,
divided into two categories:
1. A list with the tested experiences of the firm
2. A list with suggestions made by employees and associates
Considering that the list with suggestions is made public, the members of the
management body vote for proposals. The best proposals are on the first list, while
the others are erased or eliminated. In this way, the best ideas and experiences are
stimulated, and individuals working on their own are not encouraged. Namely, only
those ideas and practices which have the support of the majority are accepted.
Twice a year, the firm presents awards, one for progress in implementing the
global process, and the other for the best results in practice.
The firm also carries out training of project managers all over the world, while
Nortel Networks organizes three types of training (Radovic Markovic, 2007):
? First the managing body members visit the region and carry out training,
organizing most often Walk-the-Wall classes. They create a network diagram or
Gantt chart and set it up on the wall, in order to show to all those present the
differences between planned and current processes, and then they determine what
should be done to eliminate the differences (Radovic Markovic, 2007a).
? Second, the firm makes contracts with external associates for securing
training and a large number of classes, which offers them enough knowledge
about project management.
? The managing body provides the CDs which contain information which
pertain to the new process, procedures, and tools.
This is just one aspect of the global dimension of project management from the
organizational perspective. The experiences of Nortel Networks can serve as a
guide on how to carry out successful implementing of global project management.
COOPERS & LYBRAND
Along with the mentioned example, we will also use research by Fenton and
Pettigrew (2000), which tested the work of Coopers & Lybrand Consulting, which
renders services from pharmaceutics on a global level. At the time when this research
was conducted, Coopers & Lybrand employed 70,000 people from all over the world
(30,000 from Europe) in more than 140 countries (Radovic Markovic, 2007a).
At the beginning of 1989, this firm integrated with partner firms and this is
how Cooper & Lybrand Europe came about, joined by AbacusConsulting in 1992.
From its founding, this consulting firm increased the number of employees from 4
in 1987 to more than 2,000 in 2013 (Figure 2).
Faculty of Business Economics and Entrepreneurship 411
Figure 2: Development consulting firm - AbacusConsulting, 1987-2013.
Source:http://www.abacus-global.com/?q=about/abacusconsulting
The merging of these two consulting firms was carried out primarily in the
purpose of rendering consulting services in Pakistan.
Along with merging and linking with AbacusConsulting, Coopers & Lybrand
integrated the network of partner firms in 16 European countries. In this way, it
created a virtual company without a center which would exert control, with two
representing offices in London and Brussels. Also, some 74,000 people provide
consulting services in 142 countries all over the world (PR Newswire, 1997).
Strategic decisions are brought globally, and it is significant to say that each
network member can from time to time be included in one or more project teams.
Thus, Richmond Groups is a perfect example of cooperation with individuals,
whose expert services are used by this company. This cooperation is carried out on
a global level through a great degree of integration of all the associates, during
which they do not lose their independence and identity. This firm, with its
cooperation with individuals and small firms endeavors to support and upgrade the
interests of all the team members and function according to the principle of linking
all the members regardless of their activity.
However, there is another side of the story, when individuals join the
multinational project team and leave the country in order to manage the project in
412 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
another part of the world. On that occasion, they face certain difficulties,
considering that it is not easy to build up relations, understand others and be
understood by others properly in an unknown culture and environment. It is equally
difficult when project team members speak different languages, when there are
ethnic, national and regional differences.
BENETTON
The case of Benetton is a good example of the application of an innovative
strategy and an innovative global company in the traditional sector.
Benetton was founded in 1965 in Ponzano, Italy, as a small company with 60
employees. Five years after its founding, intense development and the expansion of
the firm started. In 1970 the firm employed 912 employees, and in 1985 some
1,446 employees. From 1970, Benetton was orientated towards exporting, a
company which in the 1970-1985 period increased its placement on foreign
markets from 5.3% in 1970 to 59.9% in 1985.
Today, Benetton products can be found in 124 countries and in around 6,300
stores all over the world, of which 95% are franchises.
The beginning of the rise of Benetton is linked with a specific franchising
system which this firm applies in the textile industry. Through franchising
Benetton imposed solid conditions of control, as salesmen of Benetton products
cannot sell any products but those of Benetton in the stores. In this way, along with
its products, Benetton has also exported its organization and marketing strategy.
The access to foreign markets and an export orientation put this firm in the
situation to compete with other global competitors such as Gap and Zara for
survival and further development.
The success of Benetton was enabled by numerous innovations which were
realized in the following areas: products, processes and organization. In the 70s,
Benetton based its competitive advantage on using light colors and conforming to
the taste of young people. Furthermore, Benetton’s strategy is global and famous
all over the world for its brands:
1. United Colors of Benetton - UCB is the brand name which Benetton used at
its beginning.
2. Sisley – this company participates in the total Benetton sale with 19%.
Sisley is promoted as a high quality, high-priced product.
3. Playlife – Playlife was created to produce sportswear for the age group 20 to
40 years of age.
4. Killer Loop – a brand aimed at young buyers aged 14 to 27 and consists of
urban clothing and sportswear.
In 1964, Benetton, in order to satisfy the taste of buyers, transferred from
traditional to new processes, so instead of producing clothes in colors it started to
Faculty of Business Economics and Entrepreneurship 413
make clothes in natural fabrics and then, based on market information, marketed
the trend. This was contrary to traditional production but this is how Benetton used
the Just in Time (hereinafter: JIT) production strategy and in this way reduced the
production time, increased efficiency and led to technological improvement. The
most important innovations in the clothing industry relate to production flexibility,
an accelerated goods turnover and the invested capital. A direct link from
Benetton’s headquarters in northern Italy with other Benetton branches all over the
world was enabled by computer. The EPOS system (the electronic point-of-sale
system) helped follow the trends of demand and realize the supply according to the
JIT system. The profit was thus quite large and represented a unique marker of
process management in the conditions of the globalization and internationalization
of business.
Figure 3: Postponement application in Benetton
Source: Yang, Burns, 2003
It can be said for Benetton that it grew through strategies of vertical and
horizontal integration. At the end of the 70s, Benetton’s organization could be
defined as “quasi-vertical integration” (Blois 1972) as the company controlled the
entire value chain, even if various activities were not organized through an
exclusive hierarchical control. The main advantages of a vertical integration from
414 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
the aspect of the company are mostly better control and an optimizing of
operational costs. If the company wishes to stay in step with the times, it must
continuously invest into new technologies and system development. A common
feature of all fashion companies is their vertical integration. They differ according
to degree and integration direction (Figure 4).
Figure 4:A presentation of different degrees of the vertical integration of fashion
companies
Source: F. Caro, The Fast-Fashion Business Model, 2008.
Benetton also established a process of horizontal integration. The strategy of
the total look was completed with the introduction of products such as shoes,
spectacles, perfumes, watches and, most recently, jewelry. The Benetton strategy is
global and communication and advertising are a significant area for innovations in
the Benetton system. In its advertising strategy in the aim of stimulating consumers
to think they will be happy by buying company products, Benetton managed to
attract the attention of the public and single itself out among the other fashion
companies. In 2012, with the UNHATE campaign, Benetton invited the
unemployed aged from 18 to 30 to send their projects and participate in the
innovations competition. The best 100 projects were awarded with 5,000 Euros
which shows the interest of this company for innovativeness and creativity.
It can be said for Benetton that it is one of the most successful companies in
the world, to a large extent thanks to a sophisticated IT system which it innovates
every 10 years.
ZARA
Zara is the leading store chain in Inditex, owned by Spaniard Amancio Ortega.
The first Zara shop was opened in 1975 so that today Inditex is one of the fastest
growing retail world companies. This company with the Zara brand has managed
to enter the market with quality brands and very reasonable prices.
Faculty of Business Economics and Entrepreneurship 415
The strategy applied by Zara on the international market is a combination
between a generic strategy of cost leadership and a strategy of differentiation. From
the very beginning, Zara has invested in opening new stores all over the world, and
Zara’s business model has the features of vertical integration which is very high in
comparison with the models developed by other international companies. Zara’s
business model enables the satisfying of the needs of the buyers as the key of this
model is in adapting to the wishes of the buyers in as short a time as possible.
Vertical integration enables shortening processing time and achieving high
flexibility, reducing supplies to a minimum and reducing risks.
The figure shows Zara’s business model which it uses to adapt to changes
which occur during the season, reacting to them by sending the products to the
stores as quickly as possible and in this way managing to retain its position on the
market.
Figure 5: Zara’s business model
Source:http://cmuscm.blogspot.com/2013/02/design-and-forecasting-case-of-
zara.html
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CONCLUSI ON
The concept of global organization is definitely not new; it has a long history
dating back to the 10
th
century Venetian trading empire. But in recent years, the
importance of being global has increased tremendously. It is largely driven by the
emerging markets and facilitated by the advancements in communication
technology.
The increasing trend of globalization is evident by the fact that companies are
becoming global earlier in their lifecycles. In line with this, while organizations
like Sony and Honda took more than 15 years to become global organizations,
AbacusConsulting became a global company in only 5 years. The global
companies are no way homogeneous; rather they belong to one of the five
archetypes, namely, resource seekers like the mining and oil & gas companies,
researchers like pharmaceuticals or some high tech companies, the global offers
like the luxury goods manufacturers that offer the same product worldwide, the
customizers that make customized products for the local markets and the
networkers such as airlines or logistics companies. Essentially, the true value of
being global lies in the fact that global organizations are able to strike the right
balance between the challenges and the benefits of globalization and the four basic
areas for striking the right balance are cost, strategy, people and risk. Striking the
right balance can be difficult, but there lies the importance of management and the
role of managers and leaders in the organization.
Benetton and Zara are the best examples of global firms which have in an
efficient and effective way combined a production and commercial strategy with
technological innovations. Such an approach has enabled them a high
competitiveness and a strong position on the global market.
REFERENCES
[1] Blois, K.J. (1972), “Vertical Quasi Integration”, Journal of Industrial
Economics, 20.
[2] Caro, F. (2008). The Fast-Fashion Business Model. UCLA Anderson School of
Management & Depto. de Ingenieriahttp://www.tis.cl/2008//futurosTalleres/2008/Taller_2/
Ver_Presentaciones/FelipeCaro.pdf.
[3] E-commerce corporate infrastructure program, (2002. E-business Case Studies.
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ip/nortel.html.
[4] Fenton, E., Pettigrew, A. (2000). The Innovating Organization, SAGE
Publications.
[5] Griffin, M.(2011). Organizational behavior, Cengage Learning.
Faculty of Business Economics and Entrepreneurship 417
[6] Jovanovi?, B., Vasiljevi?, D., (2008) Kolaboracija u lancu snabdevanja
(Collaboration in the supply chain), Zbornik radova, VI Skup privrednika i
nau?nika SPIN ’08, Beograd, Centar za operacioni menadžment Fakulteta
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[7] Mooi, H.,Filippov, S. (2010). Innovation project management: A research,
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s+Global+Consulting+Alliance...-a019531881.
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[11]Radovic Markovi?, M., Grozdani?, R., Kvgi?, G., Markovi?, D., Vuji?i?,
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[12]Robbins, S., Coulter, M. (2012). Management, Pearson.
[13]Stanisavljev S., Miladinovi? Ž., Joki? S., Markoski B.(2011) Znanje i
inovativnost-faktori opstanka nove organizacije (Knowledge and
innovativeness – the factors of surviving a new organization), 6. Me?unarodni
Simpozijum, Tehnologija, informatika i obrazovanje za društvo u?enja i znanja,
Tehni?ki fakultet ?a?ak.
[14]Taylor. H. Cox Jr. (1991). “The Multicultural Organization”, Academy of
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[15]The Yearbook of International Organizations (1978), Union of International
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[16]Vuji?i?, S., Vukadinovi?, S. (2011), Kvalitet kao faktor konkurentske prednosti
(Quality as a factor of competitive advantage), Me?unarodna
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[18]http://www.networkworld.com/community/node/44588
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PROFESSIONAL EDUCATION AND YOUTH
EMPOWERMENT THROUGH ENTREPRENEURSHIP
FOR SOCIO-ECONOMIC DEVELOPMENT IN NIGERIA
Isaac Elijah Esema, PhD
43
Sasa Stefanovic
44
ABSTRACT
Nigeria as a nation is a potentially great economy, which has always lingered on
the fringes of economic prosperity. However, swift steps need to be taken to save the
ship of state from hitting the rocks due to widespread corruption, insincere leadership
and an industrious people disillusioned by abject poverty; occasioned by clueless
managers of the polity and the economy. Something positive needs to happen to
alleviate the worrisome trend of economic depression pervading the land and
retarding the well-being and progress of the people - or the gaseous atmosphere of
unease, which is a direct consequence of the people’s economic hardship explodes into
a conflagration worse than the inferno of terror and crime plaguing many parts of the
country today! Without doubt, it is the obligation of any responsible and responsive
government to devise practicable ways of providing the basic infrastructures necessary
to ease the suffering of its much beleaguered people; especially uninterrupted power
supply, potable water, motor able roads, a seamless telecommunications service, etc.
Governments at all levels must dynamically and sincerely formulate policies which
would engender economic development amongst grassroots people. This paper
discusses the urgent need to empower the de facto leaders and futures of Nigeria - the
youths – to become seasoned entrepreneurs, who would then develop Nigeria’s socio-
economic terrain. Entrepreneurship is a crucial force necessary for socio-economic
growth in a developing country like Nigeria, which urgently needs to live up to her
positive reputation as the Giant of Africa. Nigeria is unarguably the largest economy
on the African continent as well as the most populous black nation in the world. The
education of the nation’s youths has to be purposely tailored towards professionalism
in entrepreneurship in order to stimulate the social development process, and to ensure
that Nigeria takes her rightful place in the comity of developed nations.
Key words: Entrepreneurship, Entrepreneur, Professional, Education, SME,
Innovation, Socio-economic, Economy, Development, Youth, Empowerment, TVET
J EL Classification: I25, L26, O10
UDK: 005.961:005.914.3-053.81(669) 374.3(669)
43
Isaac Elijah Esema, Prentice Nigeria Ltd, Lagos, Nigeria, [email protected]
44
Sasa Stefanovic, GMS International,Belgrade, Serbia
Faculty of Business Economics and Entrepreneurship 419
I NTRODUCTI ON
Entrepreneurship is the lifeblood of any nation’s economy – whether
developed or developing. This statement could be taken literally, as the people of
any nation must be fecund in profitable enterprise in order to overcome the demons
called deprivation, desperation and despair. Desperation and despair often given
rise to social malaise such as armed robbery, hooliganism, cult-related activities,
terror acts, kidnapping, ritual murder, arson, drug abuse, insanity, homicide,
suicide, etc. Entrepreneurship starts with innovation – the birthing of new ideas
which could result in the manufacturing of products or provision of services to
meet existing market demands. When the social milieu is conducive, ordinary
private citizens would be inspired to set up enterprises which would meet certain
societal needs, while simultaneously putting money in their pockets. In this
process, more job opportunities, dependable income and enduring wealth are
generated. Consequently, unemployment and its resultant evil effects are
significantly reduced.
Without entrepreneurship, economic growth and social development would be
seriously retarded. Human capital is of utmost relevance in the production process
in entrepreneurship. Nigeria is rich in human resources, who can be trained in areas
pertaining to entrepreneurship and science/technology to wholly imbibe the
entrepreneurial spirit.
Nigeria's educational system should be redesigned and reprogrammed to
produce generations of young entrepreneurs who can positively change the
economic landscape of Nigeria. Today, the world makes reference, with awe, to the
Asian Tigers. Such nations like Malaysia, South Korea, Singapore, Hong Kong and
other such swiftly developing nations in Asia have determinedly invested in their
human capital over the decades. They have consistently and determinedly
empowered their people, especially their youths through structured technical,
vocational and entrepreneurial training for the sustainable development of their
Fatherlands. Their level of development today is an incontrovertible proof that their
investment in human capital is a right and commendable one. It is highly
recommended that Nigeria should implement favourable policies, build
infrastructures and encourage her people to acquire relevant entrepreneurial skills
in order to achieve socio-economic development geared towards improving the
people’s standard of living.
420 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DEFI NI TI ON OF TERMS
1. Professional Education: According to Wikipedia, in workplaces,
Professional Development or education refers to the acquisition of skills and
knowledge both for personal development and for career advancement. It is the
knowledge that one needs to get ahead in one’s career or business, improve one’s
management skills or simply pursue learning for its own sake.
2.Youth Empowerment: Wikipedia further defines Youth Empowerment as an
attitudinal, structural, and cultural process whereby young people gain the ability,
authority, and agency to make decisions and implement change in their own lives
and the lives of other people, including youths and adults. The United Nations
identifies youths as individuals between the ages of 15 and 24, while the Federal
Government of Nigeria defines them as all young persons of the ages 18-35 years.
By this definition, the youths constitute some two-thirds of the country’s
population; making them the critical mass of the instruments of national
development. As at 2011, the average youth unemployment rate was an appalling
46.5%. (Tunde Lemo, This Day Live, 2013).
3.Entrepreneurship: Whenever the concept of the “Entrepreneur” is mentioned,
some clear images immediately come to mind: “someone with the Midas touch”,
“business czar”, “business tycoon”, “business mogul”, “captain of industry”, etc.
Hence, some of the keywords that readily pertain to entrepreneurship are:
Innovation, Creativity, New Ideas, Risk-taker, Enterprise, Doggedness,
Disciplined, Inventor, Leader, Pioneer, Shrewd, Product, Service, Hands-on,
Feasible, Calculated Risk, Can-do Attitude, Wealth Creation, etc. An entrepreneur
is therefore a person who organizes and manages a business undertaking, assuming
the risk for the sake of profit. An entrepreneur: Sees an opportunity. Makes a plan.
Starts the business. Manages the business. Receives the profits. (U.S. Small
Business Administration)
4. Small Scale Business: This is a business enterprise that requires relatively
little capital investment, producing in small quantities and consequently controlling
a small segment of the market share, employing not more than fifty workers – with
management, marketing and other entrepreneurship functions vested in the
proprietor.
Although in Nigeria, there is no clear cut definition of who an SME is, but
according to the CBN, a Small and Medium Scale Enterprise is an enterprise that
has an asset base (excluding land) of between N5 million –N500 million and labour
force of between 11 and 300.
Another broader definition that can be found in the archives of the CBN
(2005) defines industry in the following way:
? Micro/Cottage Industry
An industry with a labour size of not more than 10 workers, or total cost of
not more than N1.50 million, including working capital but excluding cost of
land.
Faculty of Business Economics and Entrepreneurship 421
? Small-Scale Industry
An industry with a labour size of 11-100 workers or a total cost of not more
thanN50 million, including working capital but excluding cost of land.
? Medium Scale Industry:
An industry with a labour size of between 101-300 workers or a total cost of
over N50 million but not more than N200 million, including working capital
but excluding cost of land.
? Large Scale
An industry with a labour size of over 300 workers or a total cost of over
N200 million, including working capital but excluding cost of land.
5. Socio-economic Development: Wikipedia defines Socio-economic
development as the process of social and economic development in a society. It
further explains that socio-economic development can be measured with indicators,
such as Gross Domestic Product (GDP), life expectancy, literacy and levels of
employment. Changes in less-tangible factors are also considered, such as personal
dignity, freedom of association, personal safety and freedom from fear of physical
harm, and the extent of participation in civil society. Causes of socio-economic
impacts are, for example, new technologies, changes in laws, changes in the
physical environment and ecological changes.
LI TERATURE REVI EW
According to Peter Drucker (1984), a world-renowned management expert, as
cited by Alawiye, (2004), the entrepreneur is the innovator who searches for
change, responds to it and exploits it as an opportunity. It means creating
something new, doing something different, rather than doing better what is already
being done. An entrepreneur shifts resources from areas of low productivity and
yield to areas of higher productivity and yield by creating a new
market and a new
customer.
Tijani-Alawiye, (2004) cited by P.U Akanwa et al defines entrepreneurship as
the process of increasing the supply of entrepreneurs or adding to the stock of
existing small, medium and big enterprises available to a country by creating and
promoting many capable entrepreneurs who can successfully run innovative
enterprises, nurture them to grow and sustain them, with a view to achieving broad
socio-economic development goals. Binks and Vale, (1990) also cited by P.U.
Akanwa et al, defines entrepreneurship as an unrehearsed combination of economic
resources instigated by the uncertain prospect of temporary monopoly profit.
Entrepreneur is also defined as the instigator of entrepreneurial events for so long
as they occur.
Pinchot, a university based in Seattle explains in its website
(http://pinchot.edu/what-is-entrepreneurship), that entrepreneurship is the
willingness to take risks and develop, organize and manage a business venture in a
422 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
competitive global marketplace that is constantly evolving. Entrepreneurs are
pioneers, innovators, leaders and inventors. They are at the forefront of
technological and social movements – in their fields, in their forward thinking, in
their desire to push the envelope. They are dreamers and most importantly – doers.
Furthermore, the Microsoft Encarta defines an entrepreneur as one who
assumes the responsibility and the risk for a business operation with the
expectation of making a profit. The entrepreneur generally decides on the product,
acquires the facilities, and brings together the labour force, capital, and production
materials. If the business succeeds, the entrepreneur reaps the reward of profits; if
it fails, he or she takes the loss.
Again, www.quickMBA.com posits that the concept of entrepreneurship has a
wide range of meanings. On the one extreme, an entrepreneur is a person of very
high aptitude who pioneers change, possessing characteristics found in only a very
small fraction of the population. On the other extreme of definitions, anyone who
wants to work for him self or herself is considered to be an entrepreneur.
Therefore, one could safely put it across that entrepreneurship is a person’s
readiness to take calculated risks which propels him or her to develop, organise and
manage and improve on a business enterprise within a competitive marketplace
that is constantly evolving.
THE I MPORTANCE OF ENTREPRENEURI ALLY-I NCLI NED
YOUTHS IN NIGERIA’S SOCI O-ECONOMI C DEVELOPMENT
Entrepreneurship is the bedrock of economic growth. No economy can truly
grow and impact the people’s lives without the input of the myriads of Small and
Medium-scale Enterprises necessary to drive a healthy economy. Entrepreneurship
does not only bring about economic growth, it also brings about social changes in
the environment which make life better for the citizens. It is necessary for
entrepreneurs to be focused, disciplined and highly professional in their activities
in order to generate wealth and build sustainable organisations, thereby increasing
the size and the reach of the market.
To be a professional entrepreneur means to be highly-skilled and disciplined in
all the day-to-day activities which one does in driving one’s enterprise towards
profitability and continuous sustainable growth. It entails proficiency, efficiency
and effectiveness; purposely geared towards the production of quality goods and
delivery of impeccable services, while one continues to seek better ways of
improving on whatever one does. Professionalism, like excellence is not a
destination, but a journey.
Holcombe (1998) cites Kirzner (1973) who describes entrepreneurship as the
process of acting upon a previously unnoticed profit opportunity. The connection
between entrepreneurship and economic growth is that these previously unnoticed
profit opportunities must come from somewhere, and the most common source of
Faculty of Business Economics and Entrepreneurship 423
profit opportunities is the insights of other entrepreneurs. Entrepreneurial ideas
arise when an entrepreneur sees that the ideas developed by earlier entrepreneurs
can be combined to produce a new process or output (Holcombe, 1998).
Apart from stimulating economic growth, entrepreneurship also initiates social
changes in the society which make life and living more conducive for citizens.
Getting involved in entrepreneurial exploits helps in wealth creation. It increases
the size and the reach of the market. It also allows for specialization as
entrepreneurs see and create niches through innovation. The increased
entrepreneurship also creates jobs, infrastructures necessary for business
development such as roads, transport, communication, power supply, education,
health services and supply of various goods demanded in the market. All these
enhance social development.
Tunde Lemo, the former Deputy Governor (Operations) of the Central Bank of
Nigeria in his article titled Policy & Execution published in This Day Live online
column, Development and the Entrepreneurial Challenge on January 11, 2013
argues that development has many dimensions. He posits that on balance, it is
connected to improvements in human capacity, living standards and overall
societal well-being. For a nation to attain development, its social, economic &
political institutions must be in tandem with the Millennium Development Goals
(MDGs). Within this framework, Nigeria is rated one of the developing countries
with slow progress in education, gender equality, income equality, employment
generation, wealth creation and poverty.
He further explains that the economic benefits of youth participation in
development process are varied. Youth empowerment has multiplier effects on the
national economy, including boosting productivity, wealth creation, consumption
and tax revenue. The rate of development of a country depends largely on how
productive and creative the youths are. Since youths constitute about 70% of
Nigeria’s population, the nation cannot achieve development when they are mostly
idle and unproductive. This is the basis for their productive engagement in
entrepreneurship.
PROBLEMS OF YOUTH ENTREPRENEURSHI P I N NI GERI A
As it is with most developing nations of the world, Nigeria is faced with so
many challenges, capable of retarding the economic growth and prosperity of her
people. Chief amongst these are: Poverty, Unemployment, Corruption, Visionless
Leadership, Conflicts and Diseases.
The falling standard of education and persistent illiteracy is another problem
limiting youth entrepreneurship. In Western Nigeria, about 90 percent of rural
small-scale entrepreneurs had less than Primary VI education and 44 percent were
virtually illiterate (Aluko, 1973 cited in Chuta 2012). Increasing the number of
literate small entrepreneurs could facilitate the upgrading of their managerial
424 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
processes in general and could obviously facilitate improved record keeping
(Chuta, 2012). Decision-making, sound management and accounting practices are
very low among Nigerian SMEs operators (Aremu, Adeyemi, 2011).
Moreover, Okello-Obura and Matovu (2011) argue that the growth of an
enterprise may depend - among other things - on the entrepreneurial spirit and
qualifications of its owner and on the quality of Business Development Services
(BDSs) it can access within the designed system. The term, Business Development
Services (BDSs) refers to the provision of information, knowledge and skills - as
well as advice on the various aspects of a business (Finnegan, 2000 cited in Okello-
Obura, Matovu, 2011).
It is obvious from the foregoing that with the proper professional education,
Nigerian potential and existing entrepreneurs would imbibe the right attitude and
entrepreneurial spirit necessary to drive their business idea towards the creation of
lasting wealth made possible by well-grounded business enterprises.
El Brown, an online blogger also gave further insight into some of the
constraints of Entrepreneurship Education in Nigeria:
1. Poor knowledge-based economy and low spirit of competition;
2. Poor enterprising culture;
3. Lack of entrepreneurship teachers, materials and equipment;
4. Unavailability of funds;
5. Non-inclusion of entrepreneurship programme in the school curricula;
6. Poor societal attitude to Technical and Vocational Education development;
7. Inadequate facilities and equipment for teaching and learning;
8. Insensitivity of government to enterprise creation and expansion strategy;
9. Poor plan and execution of processes of action.
One major flaw of the Nigerian educational system, with special emphasis on
university education, is that it is too theoretically-inclined. Nigerian universities
produce people who are only suited for white-collar jobs and have little or no basic
skills of any other vocational relevance. This has led to high rise in unemployment
especially among university graduates (Ejere, Tende, 2012).
The BUSINESS DAY (Monday, 3 September, 2012) editorial column
corroborates this by stating that:
The manufacturing sector is increasingly technology dependent, especially the
multinationals. Unfortunately our training institutions have not revised their
curricula to meet the rising demand for highly-skilled technical manpower to
install, operate and maintain these new machines. There is a dearth of talent in the
sector. This lack of technical talent mars Nigeria's economic growth story.
Faculty of Business Economics and Entrepreneurship 425
HOW ENTREPRENEURSHI P CAN BE PROMOTED AMONG
NI GERI AN YOUTHS
The Organisation for Economic Cooperation & Development (OECD), cited
by Tunde Lemo (2013) characterizes entrepreneurship as a motivating force for
initiating business ideas, mobilising human, financial and physical resources for
establishing and expanding enterprises and creating jobs. The organisation argues
that given the Nigerian youth unemployment situation, entrepreneurship remains
the viable option to create jobs and reduce poverty. Entrepreneurship empowers
them to develop their businesses, pursue their dreams and contribute to overall
productive capacity and national development.
Highlighted below are some of the ways in which entrepreneurship can be
promoted amongst Nigerian youths:
1.Ensure that schools deliberately provide sector specific skills needed for the
development of human capital, use professional and entrepreneurs as instructors
and mentors.
2.Operation Catch Them Young. That is, the government should make it
mandatory for schools to teach entrepreneurship and creativity at an early age.
3.Organize for curricular integration of education, entrepreneurship and
community development.
4. Plan practical programmes to reorient and transform Nigerians.
Nigerian youths need to be transformed from laid-back, employment seeking
graduates into confident, positively-aggressive, innovative, dogged and purposeful
individuals. The ideal profile for emerging professionals (products of our ivory
towers) with respect to entrepreneurial education, this would include a strong
scientific, technical and factual base with good background information and
research skills.
EFFORTS BY GOVERNMENTS AND NGOS TO PROMOTE
ECONOMI C GROWTH THROUGH ENTREPRENEURSHI P
DEVELOPMENT
Over the years, governments at every level in Nigeria and some local and
international non- governmental organisations have made efforts to initiate
programmes which would empower the people for entrepreneurial success, at the
same time reducing the alarming increase in unemployment rate in the nation.
Unfortunately, in Nigeria, such Government policies are often seen as being
insincere in many instances or self-centred by the masses due to past experience
with visionless leadership and pervasive corruption.
426 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE NI GERI A VI SI ON 20:2020 POLI CY
The Nigeria Vision 20:2020 policy was a goal set by the Nigerian Government
during the Olusegun Obasanjo Administration (1999 – 2007) to place the country
among the top 20 most developed economies in the world by the year 2020.
While the goal is commendable, the fact remains that basic infrastructure
necessary for development must be put in place. Paramount amongst these are
uninterrupted power supply, motorable roads, potable water, an efficient
telecommunications network and a dependable security system to protect the lives,
properties and investments of the people. Historically, Nigeria used to be a
predominantly agrarian economy during the postcolonial times. However, she is
now heavily dependent on the oil and gas industry as the mainstay of her economy.
Efforts are now being made to diversify the economy by investing, for example, in
agriculture and also creating a conducive environment for the manufacturing sector
to thrive. The Government and people of Nigeria are gradually becoming aware
that proceeds from the export of agricultural products could help increase the
country’s revenue.
However, in making these efforts, development strategies which are
entrepreneurship-focused should be emphasised as these have proven successful in
several developing countries. South Korea, Malaysia, Singapore, Hong Kong,
Taiwan, China and India have taken entrepreneurship related strategies (SMEs) to
fast-track their economic growth. Entrepreneurship is being seen as the key driver
of not just economic development but also social advancement. Small and
Medium-scale Enterprises (SMEs) in developed countries - especially USA,
Canada and Europe are still being used successfully for economic growth.
SMEDAN
The Small and Medium Enterprises Development Agency of Nigeria
(SMEDAN) was established by the SMEDAN Act of 2003 to promote the
development of micro, small and medium enterprises [MSME] sector of the
Nigeria Economy. The Agency positions itself as a One-Stop Shop for MSME
Development. Micro Enterprises are included in the clientele of the Agency since
they form the bedrock for SME's.
Faculty of Business Economics and Entrepreneurship 427
THE I LO-SI YB PROGRAMME
About 24 years ago, an International Labour Organisation technical
cooperation project in Fiji embarked on the development of a specially-designed
and packaged programme for the training of potential and existing entrepreneurs
(TOPEE) which is called the Start and Improve Your Business Programme (SIYB).
This programme has three modules: Generate Your Business Idea (GYBI), Start
Your Business (SYB) and Improve Your Business (IYB). Today, the SIYB
Programme is recognized in more than 100 countries in Africa, Asia, Europe and
South America as a successful ILO trademark. Many young potential and existing
entrepreneurs who have participated in the programme have commended it for the
simplicity of its language and the practicality of the programme, as evidenced by
the entrepreneurial success recorded by participants in the training programme.
According to the International Labour Organisation website,http://ilo.org/empent/areas/start-and-improve-your-business/, the Start & Improve
Your Business (SIYB) programme is a management-training programme with a
focus on starting and improving small businesses as a strategy for creating more
and better employment in developing economies and economies in transition.
With an estimated outreach of 4.5 million trainees, continuously growing
network of more than 17000 trainers and 200 Master Trainers in 2500 partner
institutions SIYB is one of the biggest global management training systems used
for the support of micro and small enterprises (MSEs) currently on the
market. Initially developed in the 1980s, it has now been translated into more than
40 languages and introduced in more than 100 countries.
With a consolidated step by step approach, the organisation’s immediate
objectives are:
? To enable local Business Development Service (BDS) providers to
effectively and independently implement business start up and improvement
training and related activities
? To enable potential and existing small entrepreneurs, both women and men,
through these BDS organizations to start viable businesses, to increase the
viability of existing enterprises, and to create quality employment for others
in the process.
Potential and existing entrepreneurs who participate in such hands-on trainings
provided for entrepreneurial development such as the ILO-SIYB Programme, Fate
Foundation, etc can be certain of picking up practical skills needed to succeed in
their business enterprise.
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CONCLUSI ON AND RECOMMENDATI ONS
As a nation, Nigeria is blessed with abundance of both natural and human
resources. Nigeria has the potential to be great and indeed attain the Vision
20:2020. This would be possible if steps are taken to put the basic infrastructure
necessary for economic development and social advancement to take place. As
SMEs and entrepreneurship are seen to be the driving force behind growth and
transformation, these should be encouraged through favourable investment
environment and supportive government policies. Nigeria should also take
deliberate steps to invest heavily in development of her human capital by
increasing funding for education, Technical Vocational Education and Training
(TVET) programmes, entrepreneurial training, and development in technological
knowledge and skills in order for human capital to become an advantage for
development as it has turned out to be for China and India.
In Nigeria, TVET should be encouraged and given due recognition because it
is crucial to technological and sustainable development. It is an avenue to equip the
youth with knowledge and skills for employability and productivity. TVET
graduates should not be looked down upon. They should be remunerated
appropriately.
There is need also to upgrade the programme to use modern equipment and
ICT to meet the global modern practices in industry. Nigeria needs to take a cue
from the Asian Tigers countries which invested heavily in TVET for human capital
development between 1960 and 1990s. Taiwan built 80 vocational schools in 2
years and set a ratio of 1:1 vocational enrolment with secondary school enrolment.
This ratio was later increased to 7:3 in favour of the vocational enrolment. In China
where skilled labourers represent the backbone of her economic expansion, one
third of all secondary students are enrolled in vocational schools (Adenipekun,
2007, Diallo, 2005 cited in Erwat, 2010). The Asian Tigers countries are also
committed to fund and pay important attention to basic education. The school
enrolment in 2007 in these countries was 86% and above while that of Nigeria was
63.4%; their gender parity index was 1.0 for all the countries while that of Nigeria
was 0.82 (World Development Indicators, 2007, cited in Erwat, Fabunmi and Isah,
2009). The benefits of these investments in their human capital are now being seen
in the rapid socio-economic development experienced in these countries.
Furthermore, to equip Nigerian youths, entrepreneurship courses should be
included in the curricula of secondary schools, colleges of education, polytechnics
and universities, not theoretical, but in a more practical way incorporating issues
young entrepreneurs would encounter in business. Study modules could cover
various aspects of business from opportunity identification, idea/plan development;
fund sourcing, start-up and running/managing a business, record keeping, customer
relations, marketing and so forth. For example, the Indian state of Gujarat
established a Centre for Entrepreneurship Development (CED) 1979 and the
programme consists of the following components: motivation development, project
counselling and management orientation, project planning and confidence
Faculty of Business Economics and Entrepreneurship 429
development. In over 14 years of existence, the Gujarat CED has created over
8,000 new entrepreneurs (El-Namaki et al, 1987 cited in Ejere and Tende, 2012).
Tertiary institutions as well as secondary schools should teach entrepreneurship
skills as well as encourage entrepreneurship spirit among the students. Nigeria
should harness her large population to human capital advantage for development
just as Singapore, India and China have done.
Entrepreneurship development and encouragement of SMEs would see the
country enjoy many benefits such as job creation, self-employment, skills and
talents development, innovation, wealth creation, economic growth, economic
stability and social advancement.
430 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Aremu, M.A. and Adeyemi, S.L. (2011). Small and Medium-scale Enterprises
as a Survival Strategy for Employment Generation in Nigeria. Journal of
Sustainable Development. Vol. 4 No. 1, February.
[2] Binks, M. and Vale P. (1990). Entrepreneurship and Economic Change.
London. McGraw Hill.
[3] BUSINESS DAY (Monday, 3 September, 2012). Technical Talent and Nigeria's
Economic Growth. Vol. 10, No. 174 pp. 12.
[4] Chuta, E. (2012). Small Enterprises and Entrepreneurship Development.
Amalion Publishing, Dakar, Senegal, pp 3
[5] Ejere, E.S.I,Tende, S.B.A.(2012).Entrepreneurship and New Venture
Creation.In Chuta, E. (2012). Small Enterprises and Entrepreneurship
Development. Amalion Publishing, Dakar, Senegal, pp 45-56.
[6] Erwat, E.A. (2010). Youth Empowerment for Labour Market: a Cause to
Revive TVET. African Journal of Technology Policy, Vol. 6, No. 1. October,
pp. 303-312.
[7] "Entrepreneur." Microsoft® Encarta® 2009 [DVD]. Redmond, WA: Microsoft
Corporation, 2008.
[8] Fajana, S. (2000). Functioning of the Nigeria Labour Market, Lagos Labonfin
and Company.
[9] Holcombe, R. G. (1998). Entrepreneurship and economic growth. The
Quarterly Journal of Austrian Economics 1, No. 2, Summer, pg 45-62.
[10]Okello-Obura, C. and Matovu, J. (2011). SMEs and business information
provision strategies: analytical perspective. Library Philosophy and Practice
2011. ISSN 1522-0222.
[11]P.U. Akanwa et al (2013) Entrepreneurship Development as Panacea for
Unemployment
[12]Rijser Special Edition Vol.6 No.2. ©2014 reikojournals.org
[13]Tijani-Alawe, B. A. (2004). Entrepreneurship Process and Small Business
Management. Industrial Science Centre, Sango-Otta, Nigeria, pp 2-3.
[14]http://ilo.org/empent/areas/start-and-improve-your-business/lang--en/index.htm
[15]http://myschool.com.ng/cu/connect2me/46432/blog/1735.html
[16]http://pinchot.edu/what-is-entrepreneurship/
[17]http://www.quickmba.com/entre/definition/
[18]http://resourcedat.com/who-is-an-sme-small-and-medium-scale-enterprise-in-
nigeria/
[19]http://www.sba.gov/content/what-entrepreneur
[20]http://www.thisdaylive.com/articles/development-and-the-entrepreneurial-
challenge/
[21]http://en.wikipedia.org/wiki/Professional_education
[22]http://en.wikipedia.org/wiki/Socioeconomic_development
[23]http://en.wikipedia.org/wiki/Youth_empowerment
Faculty of Business Economics and Entrepreneurship 431
FEMALE ENTREPRENEURSHIP AND THE WOMEN
CHAMBER OF COMMERCE AND INDUSTRY:
ECONOMIC EMANCIPATION AND CLOUT FOR
PAKISTANI WOMEN
Iqbal Khan
45
ABSTRACT
Socio-economics, culture, religious entrepreneurism and taboos have massive
impact on societies in South Asia. Pakistan is a Muslim society that has lived aside
other cultures also driven by religion. Muslim characteristic is an identity and
practical way of life. In defining the entrepreneurial portrait of Muslim female
entrepreneur in Pakistan, it has to be borne in mind that culture plays the dominant
role. There is so much of complexity in the culture of South Asia that Amartiya Sen
raises the question “How much of this can a foreigner with no more them a cursory
knowledge of the factors involved – feel and respond to”? And furthermore Roomi
(2005) contends women face deep rooted discriminating cultural and social factors
that hamper their growth. Yet the empowerment of women entrepreneurs in Pakistan
has come about following the example of Prophet Muhammad’s (SAW) wife Khadija
(RA). This contradiction in terms and this evolution among Muslim women is a subject
of interest to researcher, such as what inhibits the growth of female entrepreneurs in a
Muslim society like Pakistan?
There is constraint owing to limited literature on Muslim female entrepreneurs
of South Asia. Qualitative methodology, in-depth interviews and case studies were
adopted. The findings indicate that under the garb of religion, false philosophy is
practiced. Women have discovered clout comes from having platform and hence
the long down struggle to setup the Women Chamber of Commerce & Industry;
this is the contribution of the paper.
Key words: South Asia Culture, Clout for Women, Women Chamber of Commerce
& Industry, Cultural Influence on Muslim Female Entrepreneurs, Women Leadership
Styles and Practices, Psychological Advocacy, Forum for Women
J EL Classification: L26, J15, J16
UDK: 005.961:005.914.3-055.2(549.1)
45
Iqbal Khan, Lahore School of Economics, Pakistan, [email protected]
432 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
The research paper aims to explore what environment prevails to prevent or
foster female entrepreneurship in Pakistan. It explores the role played by some
prominent female entrepreneurs that resulted in creation of a forum in the
economic environment of Pakistan. The selected entrepreneurs all belong to a
similar status except their leaders. It discusses some entrepreneurial leadership
characteristics of the Pakistani female entrepreneurs. This paper attempts to
analyze women’s emancipation and ‘economic emancipation’ of women. The
question arises how can you define the characteristic of a female entrepreneur and
leadership characteristics without understanding the culture and the impact of
culture on a society. In South Asia, culture is all pervasive. Therefore does this
aspect of culture, impacts entrepreneurial characteristics and entrepreneurial
leadership aspects.
Culture is the most dominant influence in this region. So strong is the impact
of culture that any minor deviation from the set pattern of life can spell disaster. A
lot of culture revolves around women in South Asia. The culture in this region may
be said to be female driven. Cultural practices lay barriers on a woman's marriage,
her inheritance, her education, her independence, her emancipation, and her
entrepreneurial inclinations. The classical ‘caste system’ practiced by the Hindus of
South Asia is an extended form of culture. In the wake of the dominance of culture
and ‘caste system’, among the Hindus we have seen ‘sati’ An Indian woman who
burned herself on her husband’s pyre: the custom of so doing is SATI Chamber’s
Twenty Century Dictionary, 1968, W & R Chambers Ltd. Edinburgh, we have seen
women married to the Holy Book among the Muslim a practice whereby Muslim
women are made to swear by the Holy Book that they forsake marriage. In this way
men are able to hold their sisters, women’s share of inheritance. This is a custom
among some societies not to share inheritance of their sisters with anyone and
keeping it within in the hold of men, circumventing their religious requirement and
we have seen ‘Karo Kari’ (honor killing) prevailing in all the societies of this
region. All these cultural practices show a complete hold on women by men,
restricting their mobility inheritance, marriage and contact with males outside the
families. These are customs that have come down for ages. Breaking these shackles
would mean a heavy price to pay. Hence the paper lays the case of culture which is
a barrier for the Muslims or other societies or the religions existing in the South
Asian region. It has to be seen if some women have penetrated the culture barrier,
if yes, then they are the proverbial ‘Trojan Horse’. It should be understood that a
significant influence of Hindu culture exists on the Muslims of this region and
these practices hence are motivated culturally rather than religiously.
Cultural divide between the East and West is not easily understood. In this
region under the garb of religion ill-fated customs are practiced and sometimes it
becomes difficult to separate religious from cultural practices. Hence this paper has
Faculty of Business Economics and Entrepreneurship 433
presented the events in a cultural format showing where these are different from
religious facts. Therefore the paper begins with the assumption that not enough
research exist on the cultural and religious dimensions of female entrepreneurship
among Muslim countries. It is planned to review literature pertaining to female
entrepreneurs of South Asia. Their activities as entrepreneur are bound by cultural
factors and the struggle is being analyzed, to see what they may have achieved.
The cultural status of women in Pakistan has been summed up by Roomi thus:
“The status of women in Pakistan is not homogenous because of the
interconnection of gender with other forms of exclusion in the society. There is
considerable diversity in the status of women across classes (the socio-economic
status of a woman’s family), geographical regions, ethnic origin and the rural/urban
divide due to uneven socioeconomic development and the impact of tribal, feudal,
and capitalist social formations on women’s lives….”
This observation touches almost all those multifarious aspect that have stood
as barriers and shackles for women in this region. A close examination of the
culture of this region gives the realization that the entire culture revolves around
the women of this region and these are almost 1.5 billion people. And among them
Muslim community is bigger than the entire population of USA. The size alone
commands the need for research of the women’s claim to entrepreneurship.
RESEARCH QUESTI ONS AND PROBLEM STATEMENT:
The objective of this paper is to bring out the nature of the environment and
the impact of customs, tradition, culture and religious entrepreneurship on the
female entrepreneurs in Pakistan. And the study is driven by the research question.
? Given the cultural overcast, what entrepreneurial traits or characteristics or
competencies can be indentified among the Pakistani female entrepreneurs,
causes for gaining recognition and clout?
? Especially what entrepreneurial leadership characteristics are depicted
through the case studies?
? What brought about the Women Chamber of Commerce and Industry in
Pakistan, and did it create a platform and forum for the women?
Hence we will be looking into the cultural context, the religious context, the
characteristics of the female entrepreneurs in Pakistan and through in-depth
interviews and case studies of the main players building momentum through their
leadership of the women in Pakistan.
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LI TERATURE REVI EW
For the purpose of this paper we will study literature that have bearing upon
the objectives to look at culture, religion, female entrepreneurs and clout for
women. Culture and environment, massively influence entrepreneurship
phenomenon, though there are many dimensions of influences on women
entrepreneurs. As reported by Global Entrepreneurship Monitor (GEM 2007) that
even the most enabling environment for entrepreneurship, USA, indicates that the
male entrepreneurial activities surpasses female entrepreneurial activity almost two
to one. Kauffman Centre for Entrepreneurial Leadership compiled a report on
obstacles facing women entrepreneurs and identified human, social and financial
capital as major constraints (Guerrero, 2008). The Diana Project was and is the
major push for research on female entrepreneurship. It brings in the Western
societies female entrepreneurship out of the domain, of minority or marginalized
society’s entrepreneurship. It is considered an extra ordinary and high impact
research. Prior to this female entrepreneurship was an under-researched field
(Holmquist & Carter 2008). However irrespective of culture & environment,
women are found to be less active as entrepreneurs then men (Minitti 2005)
Female Entrepreneurship Development Theories have therefore emerged
primarily from research carried out in developed countries with specific social
norms and values regarding women’s participation in economic activities. The
initiative to setup the Diana Project itself is an example of the way women in the
West think and act to create an enabling environment for themselves. There is a
dearth of studies conducted in different social contexts especially in Islamic
societies. But what compound the issue is the cultural aspects of some societies.
Women have not been seen to-gather together a rally for a cause as has been done
in the West. It is unheard of as no literature exists.
Female entrepreneurship research domain grew in phases though a pioneering
study as early as 1976. Schwartz notes that women were motivated by need to
achieve or having economic necessity and desire to be independent. These
motivating factors have prevailed in the West. But it was in the real sense in 1990s
that female entrepreneurship became well established. The development in this
domain is literature driven and a constant search for novel topics. But all of this does
not apply to the South Asian women development (Holmquist & Carter 2008). These
researchers have also stated that women generally are found to run smaller business
compared to men as entrepreneurs. This disparity and imbalance is generally an
accepted norm. Contemporary existing disparities that are universal on a global
perspective are that a typical female entrepreneur is more educated than her male
counterpart, but her professional experience often falls short and is usually outside
the traditional business sector (Gurrero, 2008). It was also found that they seldom
founded their business in sectors that had to do with their educational qualifications
and it was observed that they had high need for achievement, were highly educated,
had someone in the family as entrepreneur, have a strong support system from her
spouse or family but having limited network of resources (Brush, Greene et al, 2001)
Faculty of Business Economics and Entrepreneurship 435
showing distinctive behavioral differences from male. “Glass ceiling” was one factor
that drove most women to entrepreneurship. They are known to be steadfast to their
business and customer satisfaction as compared to their male counterpart and these
are the general characteristics of female entrepreneurs universally. This paradox is
universal across all societies.
Iiris Aaltio, Paula Kyro, and Elisabeth Sundin (2009) make this observation
quoting Mills “The feminist researcher may be better served avoiding a search for
cues that support a notion of progress over a period of three years progress, instead
examining events to see what they tell us …” Thus change is more important than
progress. I concur with this observation because the experience of researching the
women entrepreneurs in Pakistan, this researcher, also faced similar experience.
Hence the evidence gathered was empirical and through in-depth interviews by
repeated visits. The examination of events over a sufficient length of time (5 years)
revealed the change in status rather than the progress overtime. The events
typically went back and forth but the ultimate development was the establishment
of a platform (PWCCI) Punjab Women Chamber of Commerce & Industry for the
women entrepreneurs. As to the progressivity of the women entrepreneur it was
minimal. Dr. Shehla the popularly chosen leader of these women entrepreneurs felt
that there was still very low involvement of the members and a general apathy. The
author of the paper suggests that Women Entrepreneurship be studied from
multiple angles and especially one of them could be Self-Efficacy and Leadership.
Information on the struggle for Women Chamber of Commerce & Industry is
available on www.reformsnetwork.org/women
THE FEMALE ENTREPRENEURSHI P LANDSCAPE ACROSS
SOUTH ASI A
Beginning from the perspective across the border in the neighborhood of
Pakistan in India and Bangladesh the cultural tradition and situation has a number
of similarities though there is a significant difference at the level of culture
tradition and development. In “A reflection of the Indian Women in
Entrepreneurial World” Kollen & Parikh (2005) trace the history of economic
emancipation of the Indian female entrepreneurs from the era of the fifties to the
21st century. The women of the fifties would give up their education to support
their families at the expense of their aspirations if there was no income generating
males. There were also those who were landed with the family business in their lap
in the event of loss of the male family member. The paper calls them ‘extremely
courageous women’. In the sixties the educated females had started taking small
steps to start their small enterprises. Whereas the women of the seventies were new
radical women. They were those who had completed their education and were in
the field to take professional assignments. They opened the new frontiers for
women entrepreneurs. But they showed clear cut evidence of wanting homes,
marriage and children as well as occupation, who accepted the restrictions of their
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parents and grandparents but expected their husbands to give them understanding
for their choice of occupation. By the eighties the women entrepreneurs of India
were educated in highly sophisticated technologies and professional education. So
many preferred degrees in engineering, medical field and bioengineering. But the
choices of business were typically clinics, nursing, boutiques, garments, beauty
parlors, schools and the like. Yet the society was hostile and environment was male
dominant. The Nineties was a qualitative different era for women. They had two
decades of role models and hence these become more assertive entrepreneurs. They
had now acquired economic independence, high self esteem and could deal with
situations single handedly. Whereas the 21st century’s first decade is an era of
telecom, IT and financial institutions. Many pioneered in these new ventures and
the opportunities were alike for men and women and a melting pot for
professionally trained and enterprising women.
The real change visible in the 21st century was somewhat different as the
focus shifted to the elite class of women. Women have become aware of their
existence, their rights and their work situation. However, women of the middle
class are not too eager to alter role in fear of social backlash and this was reflected
in other part of the region such as Pakistan. The progress is more visible among
upper class families in urban India. “Society designs and defines roles for women”,
where as each country has its cultural, social, religions and political back ground, it
in turn develops for the society its economic thrust trough industrialization
resulting in new occupational roles for women. A parallel change in Pakistan is
also visible as we see the emergence of the Women Chamber of Commerce lead by
a couple of elite women in the Pakistan society. One can draw a parallel with the
status of the women and in particular the female entrepreneurs in Pakistan though
at a lower degree. The authors go on to say that despite the dilemma of being an
entrepreneur the women maneuvered into this position out of a desire to be
independent and do something meaningful and to have their own identity instead of
remaining “closeted behind their husband’s name plate”. They also found that they
were less concerned with making money and often choose entrepreneurship as
result of career dissatisfaction. Indian female entrepreneurs were either house
wives or fresh graduates with no experience. Generally ran traditional business
like garments, beauty care and fashion designing which grow usually from hobby
to serious business. The famous Indian examples of a successful female’s
entrepreneur are of Herbal Queen Lady Shehnaz Hussain who began from her
kitchen and ended with an herbal empire and a chain of beauty parlors. And
Sarabai, Mrinalimi set up dancing schools and later Malika expanded the ‘Darpana
Institute’ as a household name in dancing (Kollen & Parikh 2005).
Sujal Kumar Maiti (2008) has given a profile of Bengali urban educated
women entrepreneurs in Kolkata India. The paper focused on the women who were
engaged in home delivery catering services in Salt Lake area Kolkata, West Bengal
India. The paper has concluded that educated Bengali women are not shy to engage
in the business ventures. They are ready to take risk for their economic freedom.
They are quick to adopt to this business as a source of income and source of
pleasure to utilize their leisure after having given adequate time for bringing up
Faculty of Business Economics and Entrepreneurship 437
their children and taking care of their families. The average age of these women
was above 40 years. All 40 surveyed happen to be married and were above
graduation qualification, and rarely did they have more than five years of
professional experiences. But their education and independence to pursue a
business gives them a status of being elite. This again explains the similarity of
women entrepreneurs across the border in Pakistan. Afreen Haq and Abdul
Moyeen (2008) have also drawn similar conclusion about Bangladesh women
entrepreneurs. Bangladesh has witnessed a growing group of well educated urban
based women who have shown potential for starting their own business as an
economic option. This growing phenomenon has not been noticed much in
developing countries but developed countries have witnessed a surge of literature
and research on this subject of urban educated elite business women. This
phenomenon has been referred to as “the quietest revolution of our times” by
Afreen Haq and Abdul Moyeen (2009) with respect to Bangladesh. Such women
have demonstrated that the key elementary factors that have brought about this
phenomena are good formal education, work experience, socio economic status,
networking, and type of business. In the past the main focus on research on women
entrepreneurship has been on rural poor or urban poor. However it was observed
that women have smaller network restricting their access to business support
services. They are also handicapped by being unable to access business
associations and government agencies. (Haq, Moyeen, 2008). This creates an
awareness of the need and significant importance of women chamber of commerce.
FEMALE ENTREPRENEURSHI P ENVI RONMENT I N
PAKI STAN:
To understand the Pakistani environment and to study the women
entrepreneurs and their efforts, the findings of USAID survey gives a fairly good
idea. Nabeel Goheer and Susan Penksa (2007), have made some observation about
women in the Pakistan economic context? We quote the relevant text as the
USAID report also signifies the socio-cultural context for studying female:
“It is imperative to understand the unique socio-cultural context of Pakistan
before planning to “engender” economic growth. A characteristic feature of
Pakistani society is its family orientation and an inside/outside (private/public)
dichotomy of gender relations.
As can be observed almost all research touched and felt the sensitivity of the
family orientation in the environment and the mobility aspect of the women.
Roomi (2009) has also described this phenomenon.
Even while considering ‘engendered’ economic growth report recommends to
understand socio-cultural context of Pakistan. Which varies from place to place
even within a Provence based on variation in language and ethnicity of the society?
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“The intensity of this social feature may vary from urban to rural areas and
from one province to the other but its flavor can be seen almost everywhere in
Pakistani society”.
Roomi observe: -
The male members of the family are supposed to take care of the productive or
more precisely, the remunerative aspect of public life while women work in
private, “inside” their homes. They bear and rear children, maintain social
relationships with the extended family and friends perform household work. The
gendered division of work effectively prohibits women from participating
productively (and remuneratively) in the economic growth of Pakistan”. (Roomi
2009)
The report goes on to emphasize the gendered division that prohibits women
from economic activity outside the home. The concern ranges from security to
reputation.
“Another important feature of Pakistani society is a cultural restriction on the
mobility of women. This restriction is due to concerns for the safety and security of
women who venture outside the home and fear that the family will lose
“reputation” or “honor” due to illicit relationships in which females might become
involved (either through consent or by force). Secondly, and related to the former
problem, is the social stigma attached to women working outside the home”.
(Roomi 2009)
Cultural restriction on mobility has safety, security, honor and stigma concerns
but there are indication of change.
“A number of factors are altering these social norms but the pace of change
still is incremental. Two potent forces of change are the spread of secular education
for women and men and increasing economic pressures. Pakistani women -
especially those from the middle class - are now emerging and participating in the
productive sphere of life both as employees and as entrepreneurs but their ratio of
participation, as compared to men, are still very small”. (Roomi 2009)
An incremental change is visible in the social norms but huge majority still
labors under these cultural norms. Breaking away from these traditions are
considered radical and courageous.
Another survey has brought out some converging observation examining
recent development of women entrepreneurship in Asian developing countries.
Tulus Tambunan (2008) has taken account of the entrepreneurship enabling
environment among women entrepreneurs in South Asia. Some studies have shown
that successful women entrepreneurs generally belong to rather well to-do families
and live in nuclear family rather than extended families as it gives them freedom
from social & cultural restrictions. As a part of the profile it was observed that
female entrepreneurs are generally found in sole proprietorship, they also have a
higher closure rate. But the motivation behind female entrepreneurship comes from
the desire for economic emancipation because entrepreneurship ‘implies being in
control of one’s life and activities’. The factors identified in this paper that hinder
Faculty of Business Economics and Entrepreneurship 439
& growth are psychological, social, cultural, religious, economic and educational
factors depicting lower status of women in Pakistani society. The under estimation
of women’s economic contribution is confounded by factors that emerge from
factors such as tribal, feudal culture and cultural practices in the name of religion;
inadequate public transport and the notion of ‘Pardah’ & ‘Izzat’ as also pointed out
by Roomi (2008).
CULTURE: AN ALL PERVASI VE I MPACT ON FEMALE
ENTREPRENEURS: EXPLAI NI NG THE I MPACT OF CULTURE
Generally there are two meanings of culture; in the narrow sense civilization
(Art Science and Education). In the broad anthropological sense “A collective
programming of the human mind”. The Western society lives in the individualism
mode but the Eastern society of South Asia lives the collectivism mode. People
belong to in-group are supposed to be looked after by in-group. It is dangerous to
be kicked out of your in-group. Loss of face has to be avoided. Face saving is
important.
For the purpose of this paper and its objective a deeper look at the
environment and culture of the region needs to be taken. This region has been the
cradle of a typical culture for all the nations residing herein. Opinions are pre-
determined by groups. Everyone has to fulfill obligation to and society and in-
group. Otherwise face shame and penalties are sever.
Amartya Sen (2005) explains through the works of Satyajit Ray that the
environment consists of indigenous ‘factors such as habits of speech and behavior,
deep seated social practices past traditions, present influences and “so on”. He asks
“How much of this can a foreigner with no more than a cursory knowledge of the
factors involved – feel and respond to?” and goes on further to say “which can only
puzzle and perturb – and consequently warp the judgment of – the uninitiated
foreigner”. In effect both these notable thinkers and keen participants of this
society feel that the tendency to assume that there cannot be such big difference in
the culture of the region with that of the Western society would be a fallacy.
Sen quotes a Singaporean Foreign Minister at a Human Right Conference in
Vienna 1993, which further elaborate the Asian perspective of culture as opposed
to Western perspective thus “universal recognition of the ideal of human rights can
be harmful if universalism is used to deny or mask the reality of diversity”.
In the “Argumentative Indian” Amartya Sen (2005) the winner of the Nobel
Prize in Economic defining this region says “Cultural conservatism and separatism
that has tended to grip India from time to time” has left an indelible mark and each
society is an Island on its own. He also establishes Rabindarnath Tagore’s pride in
Indian culture by saying that “India’s culture is not as fragile and in need of
‘protection’ from Western influence”. Such is the impact of culture in this region.
It is strengthened by the lack of education in this entire region, and Pakistan or
440 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Bangladesh have not escaped the strong impact of culture. Each has its own flavor
and doses of religious edicts by the ‘religious entrepreneurs’. And to use Amartya’s
quote “Important as history is, reasoning has to go beyond the past” where then do
we go from the influence of culture? Of course he is advocating opening up of
culture of South Asia to the world. How do we deal with culture with such
pervasive influence? And in speaking of Indian culture one takes it to a great extent
to include the Pakistani Culture where of course there is also the expansion of
religious sectarianism – and fueled by ‘religious entrepreneurism’ for vested
interest. Even when it is not religious motivation, the garb of religion is quick to
invoke severe punishment.
Henry Kissinger (2011) in his book “On China” explains the stark difference
in the Eastern (Asian) Cultural thinking and Western Cultural thinking by giving an
example. The Chinese philosopher Confucius was unlike Machiavelli. The
Confucian philosopher is concerned with the cultivation of social harmony not with
the accumulation of power and using power. Rather it was incumbent as a spiritual
task to recreate proper order and recovery of forgotten principles of self-revelation
(p.14). Harmony is the drawing force in the Asian culture. Furthermore Sun Tzu
(Art of War) proclaims that not every problem has a solution and too much
emphasis on total mastery over specific events upset universal harmony. Harmony
has to be maintained. In contrast the Western traditions prefer decisive clash.
THE SI GNI FI CANCE OF ASSOCI ATI ON AND CHAMBER OF
COMMERCE I N BUI LDI NG CLOUT FOR WOMEN
ENTREPRENEURS: THE NEED FOR EXTERNAL SUPPORT
SYSTEM.
In a paper “Women Entrepreneurs in the Global Economy” Susanne E. Jalbert
(2000) has examined how women entrepreneurs affect economy, why women start
businesses, how women’s business associations promote entrepreneurs, and to
what extent women contributed to international trade. She has also emphasized
economic clout that women have built up and quotes Irene Natividad, Chairperson
US National Commission on Working Women at the 15th Global Summit of
Women “Global Markets and women are not often used in the same sentence, but
increasingly statistic show that women have economic clout – most visibly as
entrepreneurs and most powerfully as consumers”. She finds that women bring
commitment and integrity because they care about economic empowerment. But
according to her finding women entrepreneurs are dependent upon professional and
personal support that is found in business associations. The paper goes on to say
that women entrepreneurs look for role models and mentors that help them to carve
out paths to follow. Citing Susan Caminiti the paper says that conventional
mentoring role of women has changed. Women by nature are given to offering
advise based upon years of experience they have gained. Mentors usually see
mentoring as a responsibility. It’s a payoff for the gains of their life. Therefore
Faculty of Business Economics and Entrepreneurship 441
members of associations, consultants, and trainers are all acting as role models.
This finding supports the findings of our paper and the role played by Dr. Shella
with the role models discussed in Jalbert’s paper and the Chamber of Commerce
has taken on the role of association. She displays leadership and vision and
mentoring ability as will be seen in the case studies. The economic empowerment
of women, the clout, comes from being together on a platform that provides the
support services discussed above. This platform is the associations or the Chamber
of Commerce. Talking of support systems from within the family and society
Rajani & Sardar (2008) state that enterprises started by women are influenced by
the interest and influence of the relatives and family. Two contrasting cases have
been analyzed in their paper. Once again the research within this region reveals that
similar problems and difficulties are faced by female which revolve around culture,
and tradition and way of life.
The external support system is of great significance in such environment. This
does therefore brings out the significance of associations. Business women’s
associations in Malawi, Nepal, Brazil, Canada, Ireland, Mexico and UK all have
provided psychological advocacy required to start small businesses. They create
growth oriented atmosphere and vision for their members through wide spectrum
of activities such as networking and political and economic empowerment of
women. In many societies women’s ability in accessing mainstream organizations
is limited. By establishing and joining a Chamber of Commerce, one can
demonstrate economic clout and force larger organizations and government to pay
attention to their cause. Associations also provide a system of bonding because
they share same problems & issues and the bond of being a business woman
overrides the cultural differences. The paper most powerfully establishes the
significance of Associations or the Chambers of Commerce as a platform. In other
words Chambers of Commerce or associations provide a formidable clout to
women and gives them economic emancipation. (Jalbert 2000)
The realization of the acquiring clout by being together in the Chamber of
Commerce has played a significant role to overcome cultural barriers. We will see
this in some of the interviews of Pakistan female entrepreneurs and in the case
studies.
The conceptual understanding of female entrepreneurs, of their role in the
family and then in the society weighs heavily on the women in Pakistan. The
number of female entrepreneurs has increased. Hence there is a need for research
that covers the area of female entrepreneurs and their efforts in a male dominant
society like Pakistan. But the phenomenon is much the same in other societies as
well as we see from the observation of Brush and Matlay
“… Despite the tremendous growth in the number of women-owned
enterprises and their increasing aggregate impact on society and the economy, there
are few studies researching women business owners in general” (Brush, 1992)
The observation made much later on by Matlay (2005) still paints a similar
tone. But also refers to the difficulty in theory building aspect in female
entrepreneurship.
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“The dramatic rise in female entrepreneurship in contemporary Europe cannot
be realistically or adequately investigated, let alone explained or theorized, as a
new and isolated phenomenon. It is our contention that theory building in this as
well as other aspects of entrepreneurship should be conceptualized in the wider
body of knowledge. ---------------------------------------”.(Matlay, 2005)
Despite a growing enthusiasm among researchers, there has been a greater
failure to build adequate theory around the concept of female entrepreneurs in
Islamic societies. This vacuum is more pronounced in a wider socio-economic
context because women business has a growing contribution to the economy. The
challenge here is to understand what motivates female entrepreneurs in society as
traditionally patriarchal and difficult for woman as Pakistan. The best we could
make of this was from the series of interviews that were conducted on the 30
female entrepreneurs and we are in the process of analyzing and discussing their
views. Not all have been reported but they all belong to a similar status in society
and similar educational background. Except for their leadership which happens to
be highly qualified and educated abroad also.
Female entrepreneurs in Pakistan are realizing their status and position in
society. They have also improved their conditions in society to some extent. Roomi
(2009) goes on to present the role of women entrepreneurs in a Muslim country
like Pakistan.
“Two factors especially influence women’s occupational roles: the cultural
norm of pardah (veil) and the notion of Izzat (honor) (Roomi and Parrott, 2008: 2).
Pardah has significance as an instrument of sexual segregation and seclusion based
on spatial boundaries, (Roomi, 2008) In the strict sense these are inclined to be
socially and culturally oriented. The definition has to be more precise to demarcate
the social & cultural from the religious requirements. ‘Izzat’ is the notion that
women are repositories of a family’s honor, and that their chastity and good
reputation, being highly valued, must be guarded.” (Shaheed, 1990) He further
goes on to state “There is considerable diversity in the status of women across
classes (the socio-economic status of a woman’s family), geographical regions,
ethnic origin and the rural/urban divide due to uneven socioeconomic development
and the impact of tribal, and feudal, social formations on women’s lives” (Roomi
and Harrison 2008: 2).
While he has also hastened to support the conditions of openness for women in
Pakistan by saying they are able to cross the barriers and participate in economic
activities. But in his conclusion he has confirmed “that socio-cultural variables play
an important role in the growth of women owned enterprises in Pakistan.” This
statement establishes once again the inter connectivity of culture and business
venturing of female entrepreneurs. In the true Islamic sense, religion has not
forbidden business to women. A lot of confusion prevails with regards to social
norms and cultural practices and religious biddings.
This doubt is put to rest as he says in his Practical Recommendations about the
role of women in the Islamic context by quoting the Quran and Sunnah/ Hadith
(sayings of the Holy Prophet Muhammad S.A.W.W.)
Faculty of Business Economics and Entrepreneurship 443
“The most important point to mention is that there is nothing in the Qur’an or
in the Hadith which prevents women from working outside the home. In fact the
Qur’an extols the leadership of Bilqis, the Queen of Sheba for her capacity to fulfill
the requirements of the office, for her political skills, the purity of her faith and her
independent judgement (Al Naml, 27:23-44). If a woman is qualified and the one
best suited to fulfill a task, there is no Qur’anic injunction that prohibits her from
any undertaking because of her sex. The hadith literature is replete with women
leaders, jurists and scholars, and women who participated fully in public life. There
is another hadith which states that 9/10 of our sustenance comes from business. For
those who are able and are competent, Islamic society should encourage them to
become entrepreneurs or get involved with other types of business activities.”
(Roomi, 2009)
He concludes by indicating that women face deep-rooted discriminating
cultural and social factors that hamper their growth. Only few receive
encouragement from family members, who have spatial mobility, private transport,
tend to grow. The paper also highlights educational qualification, good HR
policies. The paper comes up with original identification of socio-cultural variables
affecting growth of female owned enterprises in Islamic countries.
The empowerment of the women in Pakistan has been the result of the precedent
and the Role Model of Prophet Muhammad’s (SAW) wife Khadija (RA). Women in
Business are no new phenomena in the Muslim society but the traditions in Pakistan
have prevented the development. Despite its significance, recognized worldwide, not
much work has been done to study the growth of women entrepreneurs in a Muslim
society. In a more, homogenous society it becomes all the more necessary to study the
growth of females in business so as to establish closer linkages among the Western
society and the Muslim society. Dove Seidman the Author of “How” says “When the
world is bound together this tightly, everyone’s values and behavior matter more than
ever … we have gone from connected to interconnected to ethically interdependent” all
the more reason to research the female entrepreneurs of Pakistan because they are
growing into a force and are going global as well. The Muslim of India, Pakistan and
Bangladeshi are roughly estimated to be a little over 500 million and all representing
the cultural complexity of South Asia.
In Pakistan, many women are able to cross these barriers and this is the new trend
observed by Roomi, 2008 & 2009. One of the strength of Pakistan Female
Entrepreneur has been their social capital. They are able to actively participate in
economic activities. It has been found that women in Pakistan are receiving moral
support from immediate family members. A correct interpretation of the perceptions of
Islamic values have played a role in allowing spatial mobility, access to transport, and
interaction with male members at school, college, university and office level, has
helped them grow confident and to venture in business (Roomi: 2009). This correct
interpretation of Islam has come about because of wide range of translating the Islamic
literature to English and Urdu which is a Pakistani language. Previously the Quran &
Hadith was only read in Arabic without understanding what it meant. Today it is read
bilingually and not through a teacher but by most students in their language. It has
corrected many perceptions.
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RESEARCH METHODOLOGY
This study took a case study approach as a tool of gathering data & information,
and has a Qualitative methodology, and now spreads over a period of 05 years.
Outlining the preliminary results of 30 illustrative case studies from Pakistan out of
which 10 have been reported in this paper. The selected entrepreneurs have a similar
status in society and similar educational background except the few leaders such as Dr.
Shela who have been educated abroad and belongs to upper class of society. Case
study approach has been adopted as it provides in-depth knowledge regarding the
phenomenon being studied such as the understanding of the culture, the sentiments and
to understand personal self-reflection need for advocacy and mentoring captured
through the story telling. In this research paper female entrepreneurs were interviewed
repeatedly over a spread of time and reported the ‘voices’ of the female entrepreneurs.
It presents a valuable opportunity for understanding their learning experiences
(Guerrero, 2008).These case studies helped to uncover commonalities with female
entrepreneurs of this region and the learning experiences shared by female
entrepreneurs(Rae, 2005)Further this research methodology may determine the
underlying factors responsible for their progress and success in getting ‘clout’ and
recognition. Case studies are narrated incidences of life experiences. They have
focused on two variable: one the problems faced in getting started and two the building
of the platform in the shape of the Women Chamber of Commerce & Industry. The
story format has acted as historical background with a multiple of case studies to
support the understanding of the prevailing environment. The main case study is that of
Dr. Shehla the entrepreneurial leader of this movement which has been embedded with
smaller case studies. However the theoretical framework has also been embedded with
these case studies. The survey took place in the same period that the women were
struggling to establish the Chamber of Commerce hence the women were
overwhelmed by their efforts and were inclined to bring in their experiences. No doubt
it was something new happening and they knew it, considered learning experience as
central to development of entrepreneurial leadership. Further findings may contribute
to the further development of a conducive environment for women entrepreneurs. The
interviews generally took more than one hour at the premises of each entrepreneur. But
the interviews and discussion with Dr. Shela extend over months intermittently. The
case studies thereby support the theory and create evidence of sentiments, the emotions
the experiences the leadership, advocacy, clout and growth oriented atmosphere and
the behavior pattern of a whole social environment surrounding the emergence of
these entrepreneurs. Those case studies that were not included have been screened for
further research papers.
Faculty of Business Economics and Entrepreneurship 445
I NTERVI EWS AND CASE STUDY DATA
There were two parties claiming ownership for the women’s struggle and
challenge for the Women’s Chamber of Commerce and Industry (WCCI). The
platform was divided into two zones and Dr. Shehla was made PWCCI president
for Islamabad and Punjab and NWFP cities. (Northern Pakistan). The other
claimant to ownership of the women’s chamber was a Karachi-based woman
entrepreneur named Salma Ahmad, who was given responsibility for SWCCI
offices in Sindh and Balochistan (Province of Pakistan comprising Southern
Pakistan).
Dr. Shehla said, “We felt there was a need for such a chamber because the
existing institutions of this kind do not pay enough attention to women. We feel
that one of the most effective methods of promoting women entrepreneurship is to
empower them; this requires an institution solely devoted to this cause’. For many
months I have argued with government officials and private organization about the
ownership of the WCCI and finally, I have won even if its been divided into two
territories”.
This aspect of dedication and willingness to take the mantle of leadership is
the hallmark in her personality. Her leadership acumen was high and she knew
there would be a price to pay.
One of the steps taken by PWCCI which brought immediate acceptance was
the conference organized as “National Beautician Conference” in the September of
2005. This event turned out to be a resounding success and it somehow gave great
confidence to women entrepreneurs. It laid the foundation for women to recognize
their own strength that came through networking and through being united on one
platform. It propelled them into a higher economic status. As Lahore has a large
number of small and micro beauticians they took pride in their profession and felt
encouraged to carry on their business. Some found support from their family for
their business because this business pertained to women. It was a female oriented
business area. It received less hurdles from family and society though a decade ago
this profession and this business was looked down upon.
Uzma Beauty Clinic and Institute- Living with extended family & petty
bureaucrat.
Uzma belongs to a modest middle class background. Her story began when her
husband supported her dream to setup a beauty parlor; The Uzma Beauty Clinic.
Though they pioneered the venture at a time when there was an absolute vacuum in
the market, 1984, she faced numerous threats some real and some perceived. She
could not stabilize her business as she was constantly firefighting. Her relatives at
one time turned their back on her family and her children suffered humiliation
within relatives. “The family plays a very important role in a traditional Pakistani
woman’s life. Face saving is essential within the family. Your profession or your
activities can damage the reputation of the entire extended family from uncle and
aunts to in-laws of the family members. You cannot cut yourself off from your
446 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
family to do your business. Women are not generally seen as bread earners or
businesswomen in this culture” explained Uzma, as she remembered how she had
to deal diplomatically with her father-in-law to continue with her profession.
“Today I find that our society has turned more ‘grey’ and she explained this by
saying “To establish my business I have had to work 18 hours a day. Today I can
say that my networking and my membership of PWCCI has been a great support.
However, the journey was never easy. My real problem has been dealing with these
petty bureaucrats that come from various government agencies. It is not easy to
deal with these Mettlesome officers from Electricity department, or from
Municipality or from the Police, or from the Tax department. They come
threateningly and spreading fear among my girls working for me. At that moment it
appears as if someone has pulled the rug from under your feet”.
She narrated incidents of how she continuously wastes time in firefighting and
depriving herself from quality work. She feels she could do much more if the
environment was more conducive. “Our system has evolved as a culture of
unfriendly environment. Everyone perceives that women entrepreneurs can be
harassed and made to give illegal gratification to avoid further disturbance. Its this
‘grey’ culture, immature attitude, towards your own society that is depriving our
society the fruits of growth and development. I think we, the members of PWCCI
can now contribute towards improvement and empowerment of women for a better
tomorrow”.
Moral of the Case:
Uzma has identified all the areas that were mentioned in various literature
reviews. Her emphasis on face saving and her experience of the petty officers is a
reminder of the way the environment existed. But her positivity is reflected in her
statement that ‘our society has turned more grey’ meaning that there was a slight
change in the environment. This shows exceptional emotional intelligence and
resoluteness to continue. She had learnt from this experience and took care of her
staff with mentoring and comforting attitude to give them confidence. She has the
vision to set the changing environment. She reflect a women leadership
capabilities.
Another event that gave boost to the Women Entrepreneurs was the public
display by the Government that they supported the struggle of women
entrepreneurs. The then Prime Minister Mr. Shaukat Aziz awarded a shield to
Shehla, President PWCCI, on September 14, 2005, in recognition of her
accomplishment and performance of promoting the Chamber of Commerce for
Women. It was an acknowledgement for the struggle for this Forum. Until this time
it was not recognized officially or legally as the Women Chamber of Commerce
and Industry, though even this was not a legal recognition, yet it gave them enough
clout to be heard.
‘Re-Grow’: Herbal Hair Oil
Taking Care of Members: Counseling and Mentoring by the Chamber of
Commerce Leadership of the WCI was a responsible and understanding role by Dr.
Shela as an women leader.
Faculty of Business Economics and Entrepreneurship 447
The events that led Rukhsana Zafar to become an Entrepreneur is yet another
story. She had a master’s degree in zoology, and had invented herbal hair oil that
she named as ‘Re-grow’. She wanted to sell it. However, her husband was a
businessman and was doing quite well so he did not allow his wife to pursue it. So
she came to Shehla and said “I have invented this product and I want to sell it in
the market and you have to take care of my husband, I have a lot of faith in you”.
“This meant that I would schedule a counseling session with her husband and
giving him confidence and assurance of his wife’s capabilities, which he should
empower and take pride in”.
Shehla was thinking of the past on providing this account said; “She was one
of the first who came to me when my chamber was announced, she brought with
her a very old and shabby looking pamphlet which I think she might have made
when she was in school or college. She also brought with her a very old packaging.
I didn’t know how old it was, but all I can say is that it was years and years old.
One good thing by now, her children were grown up. Now she is very successful
and is traveling with us everywhere we go. It was all done with a bit of
counseling”. One of the thing she felt that this incident taught her was to become a
counselor to the families of her members. It had become essential in her capacity as
a leader of these women to give counseling. She felt she was strongly positioning
herself for counseling not just the women but also their husbands.
Moral of the Case:
Once again this depicts an educated entrepreneur having conviction in her idea
and going about it with an approach to achieve it. Dr. Shela once again displayed a
high sense of emotional intelligence and adopted the role of a mentor and leader
and not shirking any responsibility in her role as a leader of women entrepreneurs.
She knew she had to build membership o the PWCCI but also empower women to
take on role as serious entrepreneur. She successfully counseled the spouses of the
members and took her role of mentoring and counseling seriously as leadership is
more demanding today, especially for women. She was willing to go back to her
followers to support them to walk the distance.
SOCI AL, CULTURAL AND TRADI TI ONAL TABOOS: WOMEN’S
ROLE I N BUSI NESS
The social, cultural, and traditional taboos on women allow men to carve
legitimacy for themselves in public affairs, as well as in the sphere of production
and related economic activity. Women are not acceptable, seen as running
businesses. Tradition and convention and culture have never allowed it. This
culture and traditional taboo even prevented women from obtaining education.
As Shehla said “The main issues were ownership of property, lack of control
over capital land and business. That if a woman wants to do any business her
husband or her father would not give her property (to be used as collateral). They
448 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
will give it only to the son, but not to her. This puts her at a disadvantage with her
banker, who advances only against collateral”. There is also inherent lack of
encouragement from male family members. The absences of networking
mechanism and patriarchal social norms have prevented women from running
businesses. The situation was more grave, serious and to great extent dangerous for
rural women. There were no role model of rural women who rose up against the
traditions and taboos till then. It was inconceivable that a woman would have the
guts to defy the norms of society and become an entrepreneur or a social
entrepreneur.
Mukhtara Mai – the rural scenario
It was probably the worst of times or best of times for women.
One could see that an environment was developing that supported the rights
and recognition of women. It was in June 2002 that a woman, Mukhtara Mai was
raped by the landlord family of Meerwala near Jatoi in the remote corner of Rural
Punjab. She was the victim of one of Pakistan’s more ‘politics of rape’ a infamous
crime against women. She shocked the traditional mindset by approaching the
Government and the Police for help against ‘politics of rape’ in Pakistan. This
incident also received international attention. “After she was brutally assaulted the
illiterate Pakistani was supposed to restore her family honor by killing herself.
Instead, Mukhtara Mai chose to live, to fight for justice and to find a better life for
women like her. She became the symbol of women’s right”. “I want to remain a
symbol of oppressed women until someone shoot me” she says. The Government
rose to the occasion and supported her and provided her legal support. (Reader
Digest JAN 2008). Ultimately, it was the financial support from the Government of
Musharraf and donors from Canada and Norway that helped her in setting up the
Mukhtara Mai Model Girls School and Mukhtara Mai Women’s Crises Relief
Centre, home for women hit by crises. Today its educating 650 girls who would
have faced a dismal future and it employs 50 providing shelter to women exploited.
She remains today a source of inspiration, relentless to pressure to withdraw case
against the perpetrators of that horrific crime. (Express Tribune July 25, 2010)
Moral of the Case:
The case study of Mukhtara Mai depicts – the change and empowerment of
women at this period in time. What is important is that these little incidents add to
the change of the whole picture. It’s the progress which is more relevant for such a
movement and change follows. The point in this case is that women as social
entrepreneurs or as entrepreneurs are noticeable. They have learnt to stand up for
their rights. The clout in this case come from media.
The logical outcome of a gender biased environment was the low status and
weak bargaining position of women. That indicated the disadvantaged position of
women who try to start or run a business in Pakistan. However as we have seen in
Islam women in business are not frowned upon.
Faculty of Business Economics and Entrepreneurship 449
CHARACTERI STI CS OF WOMEN ENTREPRENEURS I N
PAKI STAN AND I MPACT OF PWCCI
According to a survey report, (prior to the emergence of WCCI), ‘Women
Entrepreneurs in Pakistan’ (Nabeel Goheer) ILO Islamabad 2003, eighty percent of
the women in business were between the age 20-49 years. They were generally
found to have only one or two children (65%). It was also found that a woman
entrepreneur usually belongs to family living away from extended family with
husband and unmarried children. That helped them to keep out of the social
cultural influence. Similarly their literacy rate was above national average, and had
obtained professional training. Barriers, some real, some perceived and some self-
imposed, confront women entrepreneurs. In the area of export marketing, obstacles
include limited international business experience, inadequate business education
and a lack of access to international networks. A similar observation was made by
Roomi (2008). His sample consisted of 265 and of these 54% managed micro
enterprise, 36% managed small enterprises and 10% medium enterprises. Roomi
found 82% engaged in traditional sectors of textile, apparel, education, food,
beauty, and health sector. It is here he noted deep rooted social cultural values
segregating female entrepreneurs they were serving female customers. Small
investment and they usually began with pilot project at home. Usually in their
sector male, female interaction was almost nonexistent.
Whereas Goheer also observed most women headed businesses operated from
home, and financial matters were taken care of by male family members. Women
entrepreneurs were seen in subordinate roles; with low levels of education and
technical skills; low exposure to business; lacking role models; lacking peer
support and business associations; and, low income and poor investment capacity.
About sixty percent of women entrepreneurs in Pakistan have opted for traditional
business such as parlors, bakeries, boutiques. However, the largest numbers were
in the garments and handicrafts businesses.
Other than these, societal, cultural norms and forces of patriarchy and a
systemic subordination of women by men also impeded women in business. Other
challenges faced by women in particular are; financing, globalization of social and
economic environments, marketing, and management. Economies such as
Pakistan’s economy can pose difficult hurdles such as banking, legal contracts,
political contracts, customs tariffs, and impediments by petty bureaucrats who daily
invent new mechanism for the simplest procedures. However Roomi (2008) states
that literacy rate plays important role in creating awareness of their rights. 82% of
his samples were high school graduate, 53% had bachelors and 15% post graduate.
Roomi (2008) states that women have been denied the right to education despite
Islam having made it compulsory for men & women to peruse education. He also
draws attention to the rights given to own property, inheritance, business, to keep
her madden name and to hold political office. Based on these facts verified from
Hadiths and the Quran, the dichotomy is that religious entrepreneurism is
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misleading the general public and wrongly denying the female entrepreneurs of
their position in the economy.
Yet the major problem seen was the lack of confidence of women
entrepreneurs and extreme shyness to approach organizations for support. In the
opinion of Shehla, they also did not have the capability to present their case or
proposal hence they were unconvincing to the bankers or the financers.
The below mentioned cases reflect a spectrum of experience over a long time
span. It is a fairly good description of the environment confronted by the women
entrepreneurs.
Nikki’s Beauty Saloon
Mrs. Ayesha had lost her husband at a very young age. They had four
daughters and a son and three of whom were minors and two were as yet teen-
agers. ‘Nothing is more devastating then to have your world shattered while you
are still young. In a country like Pakistan, women take the backseat and are taken
care off by their husbands. It takes time to get your bearings and I found myself
fumbling with my husband’s business - an auto car sale agency “Soon I realized I
must do some business to survive but it was not my cup of tea to run a car agency.
Therefore, I soon negotiated a sale of my husbands business and went into the
beautician business”.
What had raised her confidence in the business of beauty saloon was her
friends who admired her makeup skills. Occasionally she would do the makeup of
some brides getting married in her family and among friends. She had a natural
talent for it and now she was being appreciated by her friends and peers. It was at
that moment in time when she was convinced that beauty saloon was the kind of
business she wants to be in.
As a matter of fact the business of beauty saloons had come of age. PWCCI
had given it a big boost by organizing a conference on the subject. The concept in
Pakistan of beauty saloon was initially introduced by Chinese Parlors. All
weddings require bridal makeup and the Chinese beauty parlors performed this
service. Another source of business were the professional working women who had
no time to take care of themselves. Hence beauty saloons were becoming
responsible for grooming women. Technology too had played a vital role. (Based
on the interviews conducted by Maira Taqi and Kinza Malik)
Moral of the Case: Taking a Stand to fight for your cause:
This case depicts scenario when women inherent business when they loose the
male member of the family. But it also depicts the enterprising side of the female
entrepreneur. It’s a case when a family business is dropped in your lap by
circumstances. But it also depicts how a woman chose her path and line of
business. The confidence comes from the availability of a forum and from role
model. These women have become the pioneers Women Entrepreneurs of Pakistan
and have proved it.
Anjum Rafi the owner of ‘Qashang Boutique’ and ‘Heritage School System’ is
a Masters in Textiles. Though she successfully came out of her teething problem,
Faculty of Business Economics and Entrepreneurship 451
still faced numerous problems. She quickly learnt that to be a member of a
chamber or association was really beneficial for her in a male dominated society.
Hence, first she joined Lahore Chamber of Commerce and Industry and later the
Pakistan Association of Women Entrepreneurs. It was a great boost to her to join
the PWCCI. She felt that this had empowered her to think in terms of international
business and to participate in fashion shows abroad. But most of all, this gave her
status among the Business Community.
Moral of the Case:
Despite her experience she needed the clout and the forum of the PWCCI. It
opened other vistas such as the international market.
On the other hand, Bushra Iqbal who had been running one of the first beauty
clinics Bushra Iqbal Beauty Clinic in Lahore after qualifying from Hannereuth says
that “The worst of all was dealing with orthodox government officials”. At that
time, there was no support or sympathy for a woman entrepreneur.
Moral of the Case:
There was no growth oriented atmosphere from women until they setup their
forum the PWCCI. The petty bureaucrats stopped harassing these ladies realizing
the establishment of the platform the PWCCI.
Farah Yousaf of Comeily Collection, a garment unit, reflected questions she
confronted, “Doing business is the responsibility of men. Why are you doing it?”
For a long time the absence of a support system hampered her growth as with every
woman entrepreneur. It was essential for her to join the Women Entrepreneur
Society of Pakistan and the Lahore Chamber of Commerce in 1998 and eventually
the Punjab Women Chamber of Commerce and Industry.
Moral of the Case:
Women in Pakistan needed to be members of an association to be heard and to
carry a clout. They have setup role models for the world.
Robina Jamil not only confronted the humiliation of the male dominated
business environment but also the derogatory attitude of the relatives. On the other
hand nobody was willing to do business with her because she was a woman. All the
whole-sellers would not respond to business deals handled by her and would insist
on doing business with the male.
Moral of the Case:
It was very difficult for women to penetrate the networking platform for
business without being members of a Chamber of Commerce or an Association.
These mini cases are reference points that lay the ground to establish the theory of
female entrepreneurship in Pakistan environment. The multi-dymentional social factors
that hinder women entrepreneurship and despite the cultural taboos these women have
emerged as a force and have gained acceptance. There may be the need to study deeper
to profile the emerging picture of Pakistan female entrepreneurs.
It was Dr. Shehla’s persistence and conviction that the women need a full-
fledged chamber. She used every resource in her reach to propagate a separate
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chamber for women. But it was on ‘bridge championship’ organized by the family
in memory of her father that she had got a chance to meet the President of Pakistan
and talk about promulgating an ordinance for a women’s chamber. She finally
approached President Musharraf at the Bridge Championship and the President
eventually agreed to promulgate a new Ordinance to support the establishment of
Women Chamber of Commerce and Industry.
Eventually after long struggle by the Women in Karachi and Lahore a final
recognition of the women’s right to do business was established in the Pakistan
2006 Ordinance called the Trade Organization Ordinance (2006). It allowed more
representative associations including the women to have their own Chamber of
Commerce and Industry. The women are now able to form their own associations
without male sponsorship. Hence women such as Shehla in Lahore and Salma in
Karachi moved for achieving legal registration of their respective Chambers. But it
was not as easy as it seemed.
ANALYSI S OF FI NDI NGS
What choices did women have? They have always led a dominated life without an
outlet. The options were limited. With that kind of background, it was not possible to
conceive a Women Chamber of Commerce and Industry. As a matter of fact there are
only a handful of examples of WCCI existing in the world though progress has been
made in Asia and Africa. But Pakistan is a society of paradoxes where a women’s
exclusive bank existed (First Women’s Bank). It is a society where all over the country
there are many schools, colleges and universities segregated and exclusive only to
women, besides co-education institutions. It is a society with tradition of a woman
being its Prime Minister twice. It proves that the women have a conviction of purpose
and cause to pursue. Yet the paradox is that women are really very weak in this culture.
The other paradox is that where as women are striving for economic emancipation,
they never desired emancipation from their family. There is no place for a single
woman; she must have her family standing in the back ground. Her husband or her
children have to be in her picture. Their strength comes from the association with the
family. (And Muktara Mai is one example of a woman finding her way back in her
society among her own people). Legitimacy came from the strong association with the
immediate family so a new norm of society has emerged. PWCCI was the new
platform of culture and emancipation from dependence but not from family. Culturally
Pakistan is an emerging culture, a society which has influences of different cultures of
societies, specially those that were in the subcontinent like Hindu society, the Turkish
and Iranian culture. This brings us to the Research Questions.
1 Given the cultural overcast, what entrepreneurial traits or characteristics or
competencies can be identified among the Pakistani female entrepreneurs, for
gaining recognition and clout?
Women entrepreneurship in Pakistan is in a transitory phase. The emerging
role models in the 21
st
century have given a lot of weight to women entrepreneurs.
Faculty of Business Economics and Entrepreneurship 453
This can be seen in each entrepreneur displaying her characteristics. Each woman
is a case uniquely responsible to bring about a change. The case studies are not in
isolation from the theory but support them. They are the “voices” of the Forum the
PWCCI. They are the evidence of the sentiments, the emotions the experiences and
the behavior pattern of a whole social environment surrounding the emergence of
these female entrepreneurs. On the other hand they also reflect the grit and
perseverance of Dr. Shehla and the challenges she accepted as a leader of the
women entrepreneurs. The displays leadership by showing dedication and
willingness to take the mantle of leadership.
2. Especially what entrepreneurial leadership characteristics are depicted
through the case studies?
The leadership style of women entrepreneurs in Pakistan has been the same as
in other regions. The consultative style has been the hallmark of their leadership
traits. Shehla herself showed flexibility and accommodation to the prevailing
circumstances, yet stood her ground relentlessly to achieve her goals. Culturally
neutral concepts such as the theory of leadership have been equally applicable in
this environment. What could not be considered suitable was the entrepreneurial
intention or motivation of other regions such as European or American or Russian.
Each region has its own unique characteristics and traits. The conclusion that one
can draw from the comparison of different cultural background and different
societies is that theories developed so far in the western societies do not apply to
Pakistani environment as there is not sufficient evidence and research knowledge
of the women in business.
It was observed that the experiential learning developed the entrepreneurial
competencies of the women and in turn increased the confidence and level of
entrepreneurial leadership capabilities among all the women entrepreneurs. Yet the
most basic principal of management was the most sought after training by the
members of the newly formed PWCCI.
Some of the characteristics that emerged from the case studies have been;
mentoring, psychological advocacy, willingness to search for opportunities,
networking, using the platform for their problems, bond of being a business woman
overriding cultural differences, dedication willingness to take the mantle of
leadership, resoluteness, long hours of work, learning leadership and
entrepreneurship through experience.
It was also observed that the female entrepreneurs are more educated than her
male counterpart as seen in the western societies. But her professional experience
often falls outside of traditional business sector e.g. an engineer may set up
garment business or a boutique or bakery.
3. What brought about the Women Chamber of Commerce and Industries in
Pakistan as the forum and platform for women?
Women by nature are inclined to go for mentorship or coaching and it has been
amply demonstrated that the success of the establishing the PWCCI was because of the
coaching & mentoring role of Dr. Shehla and the team. Women entrepreneurs look for
role models and mentors that help them carve out paths to follow. However the impact
454 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
of experience and training has been observed as a factor for building leadership self-
efficacy among the female entrepreneurs similar to western societies. Such theories are
culturally neutral. Mentoring and coaching is a payoff for the gains of their life. The
Chamber of Commerce and Industry and its leadership is being looked upon for
psychological advocacy required to start small business, to create growth oriented
atmosphere, create networking and economic empowerment. The WCCI is also being
looked up for providing guidance how to approach banks and force governments to
pay attention to women entrepreneurs’ requirement. It also provides a system of
bonding because they share the some problems.
None of the barriers that stood in the way of these aspiring pioneering women
entrepreneurs were religious or Islamic ideology based. These were socially and
culturally oriented and represented the norms of the society. (A society that still
preserved certain customs and traditions and norms). Some were deeply rooted for
centuries and had taken this form and appeared to be religious edicts. It is the
realization that culture is the biggest hurdle in the economic emancipation of women
entrepreneurs, which led to a growing desire to have their own platform. Hence the
long drawn struggle by a set of women to establish and have it recognized.
It has also been established that economic emancipation was not emancipation
from men dominance or against family bond. It was economic freedom and more
an expression of capability, an expression of an art form, an expression of skill and
ability and competence to do what one had chosen to do. In fact it was an
expression of equality given by Islam as stated by Quran and Hadith. Women
entrepreneurship is not alien to Islam. The ‘Izzat’ and ‘pardah’ was the defensive
mechanism provided to women and it, protected her if she knew how to allow it to
be implemented. Religious entrepreneurship imposed its own version of Islam on
women entrepreneurs; it was under the guise of religion that this concept was being
used to prevent women from spatial mobility. But the awareness and education has
made women realize their status and position in society.
CONCLUSI ON
The social cultural and traditional taboos on women allow men to carve
legitimacy for themselves on women. It was this exploitation by men that led the
women to set up a common forum to claim equal rights that were theirs by virtue of
Islam. Once the platform was legally established and officially recognized, it
brought more opportunity and clout to assert their economic and legal rights. As
time passed these members realize their growing strength and the value of the
association or the platform of Women Chamber of Commerce and Industry. They
have opened the gateway for women in other parts of this country. Today Pakistan
has experienced growth of more Women Chamber of Commerce. Almost every
province has its own Chamber of Commerce as of 2015.
Family and spouses played a very strong supportive role as in the case of their
western female entrepreneurs, acting as advisors and legitimizing the
Faculty of Business Economics and Entrepreneurship 455
entrepreneurial ventures in the society. However successful women entrepreneurs
were found to be living outside the domain of extended family allowing the
parental controls but expecting husbands to give understanding and support.
We also conclude that the economic empowerment of women, the clout,
comes from being together on a platform that provides the support services and to
be able to raise their voice. This platform that fit the requirement of all their needs
was the Chamber of Commerce & Industry. It infact it provides a formidable clout
to women and gives their economic emancipation.
Though the serious work on female entrepreneurship has not been attempted
but is the need of the hour now. However now there is a range of it available. There
is always reference to the influences of culture on women but it has not brought out
the strong South Asian impact that exists among the female entrepreneurs of
Pakistan; Roomi has time and again emphasized the freedom to do business in
Islam and has given the role-model in Islam for the Muslim women but has not
focused on the various crucial cultural barriers which are the real hindrance and
precipitators of sufferings by the women in pursuit of economic independence. In
this respect much work remains. Researchers could well bridge this gap by
undertaking step by step cultural taboos, geographical regions, ethnic origin, rural
and urban divided, tribal & feudal bearing on culture and influence women in
Pakistan. There is vast scope for such serious research, which will evolve into a
situation of change as has the correct knowledge of Islam done to the current
leaders and female entrepreneurs in Pakistan. This would have an impact on all
other neighboring countries of South Asia.
REFERENCES
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[3] Brush, C. (1992) ‘Research of Women Business Owners: Past Trends, a new
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Investigation of Women-led Firms and Venture Capital Investment. Report
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the National Women’s Business Council Fried Mau, Thomas, L., “A Cultural
Revelation” 21-08-2011 Global Edition of the New York Times.
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[7] GEM, Global Entrepreneurship Monitoring Report 2007 (2007) Babson
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[10]Guerrero, V. (2008). ‘Women and Leadership: Examining the Impact of
Entrepreneurial Education on Leadership Self Efficacy’ (Doctoral dissertation,
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[11]Hisrich, R.D.,C.G. Brush, (1986), ‘The Woman Entrepreneur: Starting,
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[15]Kissinger, H.A. (2011) on book “On China)
[16]Kollan, B., Parikh, I., (2005), ‘A Reflection of the Indian Women in
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[17]Kyrö, P.,Aaltio, I.,Sundin E., (2009) guest editors' introduction. Journal of
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[18]Matlay, H., (2005), ‘Researching Entrepreneurship, Part 1: What Is
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pp.665-677
[19]Minitti, M. Arenius, P.Langowitz, N., (2005)“Global Entrepreneurship Monitor
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College
[20]Nabeel, A. Goheer, (2003), ‘Women Entrepreneurs in Pakistan; How to Grow
their Bargaining Power’ ILO: Islamabad Culture 17:04, 383-391.. Online
publication date: 1-Dec-2009.
[21]Rajani, N., Sarada, D., (2008)“Women Entrepreneurship & Support System”
Kamla-Raj Stud Home Comm Sci : 2(2): 107-112 (2008)
[22]Roomi, M, A., (2008) “Women Entrepreneurs in Pakistan: Profile, Challenges
and Practical Recommendation”
[23]Roomi, M, A., (2009), ‘Entrepreneurial Capital, Social Values and Islamic
Traditions: Growth of Women-Owned Enterprises in Pakistan’ ICSB World
Conference. Seoul
[24]Roomi, M. A., Harrison,P. (2008) “Impact of Women-only Entrepreneurship
Training in Islamic Society,” in the Dialogue of Woman Entrepreneurship and
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[25]Sajal K. Maiti, (2008), ‘Women Entrepreneurs and Emerging Profession: A
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in salt Lake Area, Kolkata, West Bangal’ Management and Labor Studies: Vol.
33 No 4.
[26]Sen, A.(2005) “The Argumentative Indian: Writing on Indian History, Culture
and Identity” Picador N.Y.
[27]Sun,T., “The Art of War” published by A Puppet Press Classic
[28]Tambunan, Tulus T.H. (2008), Development of SMEs in ASEAN, Read Worthy
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[29]WCCI (undated Publication), “Community of Women Entrepreneurs. Weekly,
458 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
IMPORTANCE OF OWNERSHIP TRANSFER
PLANNING FOR FAMILY BUSINESS ENTITIES
Dragan Milosevic, PhD
46
Dragica Jovancevic, PhD
47
ABSTRACT
There are a number of definitions of family enterprises in literature. Depending on
the fact which definition is used, the statistical data about their number and results will
differ. According to one short definition used by the EU, family enterprises are those
enterprises in which the company founder and his family members (including the
descendants) have, based on their participation in basic capital, a minimum of 25%
voting rights. In such a way, family members become the most significant interest
group which influences business activities of the business entity. Family business
entities on a global level take up 30% to 90% of the total number of enterprises, with
an annual profit level of over a billion dollars. It is a common expectation that family
companies can be found in the group of small and medium enterprises (hereinafter:
SME), but they are also present in the group of large corporations such are Toyota
(Japan), Hilton (USA), Walmart (USA), BMW (Germany), FIAT (Italy), IKEA
(Sweden), Lego (Denmark), Tata Group (India), etc. With the aging of one generation
of founders and their retirement, there occurs a transfer of ownership to the heirs. In
certain cases, after this type of ownership transfer, family business entities are sold to
new owners. This is the case when the heirs have chosen other business activities. Each
change in ownership structure can cause a series of other significant changes in the
way of implementing the business activities of the business entity which leads to larger
or smaller crises in business activities. In fact, ownership transfer from one generation
to another is something that is repeated in numerous cases. This is the reason why
transformation stages are recognizable, so that the entire transformation process can
be systematically influenced. Thus, the problems caused by the change of founder can
be minimized and the advantages of ownership transfer supported. The aim of this
paper is to define the key elements and effects of the long-term ownership transfer
process in family business entities. Based on research, the possibilities of increasing
efficiency through the process of long-term planning can be reviewed.
Key words: Family Business Entities (Companies), Ownership Transfer,
Planning of Organizational Development.
J EL Classification: D23, O21
UDK: 334.722.24:347.232.3
46
Dragan Milosevi?, Faculty of Business Economy and Entrepreneurship, Belgrade, Serbia,
[email protected]
47
Dragica Jovancevi?, Faculty of Business Economy and Entrepreneurship, Beograd, Serbia,
[email protected]
Faculty of Business Economics and Entrepreneurship 459
I NTRODUCTI ON
The terms family business entities or enterprises, family companies, family-
owned businesses, companies under the control of one family are the various
names which can be found in literature to describe family enterprises (IFC, 2011).
In accordance with the Charter on SMEs (European Commission, 2008) business
entities are “each entity engaged in economic activity, no matter its legal form.”
According to Serbian legislation and in accordance with the Law on Economic
Entities (National Assembly of the Republic of Serbia, 2011) economic entities are
companies and entrepreneurial businesses. The common feature is an engagement
in economic activities and these entities are taxpayers regardless of the legal form
of registration. In the further text, the term family companies (or FCs) will be used
as a synonym for family businesses due to simplification and a following of global
statistics.
Due to the way in which families and businesses are connected, FCs have a
series of specificities by which they differ from other enterprises. Namely,
problems within the family can be reflected on the business activities of the
enterprise and vice versa.
In FCs, the long-term benefit of the family and the enterprise are tightly
connected. The long-term goal of the family and the development of their business
are continuation and increase of mutual benefits. Both the material and non-
material values of the family and their business are also tightly connected and
cannot be observed separately. To manage them in the long-term, they should be
acknowledged and understood.
They are a very common phenomenon in all parts of the world, the
development levels, activities, sizes and various legal forms. The most common
form is within small and medium enterprises (hereinafter: SMEs), even though
there are large international companies which are successful family companies.
There are a large number of definitions of the term ‘family firm’ which differ
between themselves. In each definition there is a tendency to connect family,
enterprise (legal entity) and the method of managing business development.
Family business is, according to IFC (2011) a company in which most of the
votes are in the hands and under the control of one family, including the founder
(or more of them) which tend to transfer their business onto their descendants.
According to the Family Firm Insitute, Inc. (2014) family companies are
defined in various ways. In one definition, family companies are enterprises which
manage and/or lead dominant coalitions of one family or small number of families
through the multiple generations, with the intention to follow the vision of business
activities. The same source gives multiple definitions which are primarily
connected to the participation of one of more families in the ownership of the
enterprise.
460 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Family companies are those companies in which several family members are
involved in managing the structure as majority owners or managers, at the same
time or during a period of time (Miller et al., 2007).
A somewhat different definition of family enterprise is offered by Deakins &
Freel (2012) according to which the enterprises in which two or more capital
owners have more than 20% of the voting right and are mutually connected
through family relations, are called family companies. The enterprise, in order to
be called an economic entity, must have at least two family members who are
within the ownership structure.
According to the definition offered by the European Commision (2009) family
companies are enterprises of a certain size if they meet the following requirements:
1. The major managing rights are owned by one or more individuals who
have founded the enterprise and/or by spouses, parents, children or
their descendants.
2. Most of the managing rights are direct or indirect.
3. At least one representative of the family or relatives is formally
involved in the process of enterprise management.
4. The enterprises satisfy the definition of family enterprise if the criteria
of founder or family members (including the descendants) are based
on participation in the capital, with a minimum of 25% voting rights.
The noted definition is very wide and most of the private (solo) enterprises
with one owner can be classified into this category, even when there is no change
of generations of founders in the ownership structure of the enterprise. This group
also includes enterprises with only one founder who can potentially extent into the
second generation in real family enterprise, but this time in a narrow sense. This
definition of FCs will be used in this paper, as EU statistics have been compiled on
the basis of this officially adopted classification.
According to the foreword written by Boris Vuki? (Ward, 2006) it can be noted
that one company will become a family entity only after a change in the descendants of
the first generation of founders or, in short, family companies are enterprises which are
owned by more than one generation of the same family members.
All the given definitions observe three crucial elements:
1. The number of founders.
2. The minimum voting rights of the founders based on owning the basic
capital of the enterprise.
3. Ownership transfer from one generation to another one. If we apply this
criterion we have a definition of FCs in the narrow sense of the word.
Without the third criterion, a large number of private companies, including those
with one founder, fall under the category of FCs. If we include the third criterion in the
definition we will have FCs in a narrow sense as they now represent enterprises which
have already been through ownership transformation in the family and they are in the
second stage of the life cycle. Applying the third criterion, we get a significantly (around
50%) smaller number of enterprises which meet this condition.
Faculty of Business Economics and Entrepreneurship 461
These definitions do not insist on a vision of development but only on voting
rights based on participation in capital. During the founding of small and medium
enterprises (SMEs), the founder can with certainty predict that the company will
become a family enterprise. It can be a founder’s desired development policy
although this undoubtedly is not the only factor which can influence such a policy.
It is hard to speak about the vision of business activities of one family during
generations as it can be related to attitudes about the values and beliefs which in
turn are a reflection of the attitudes of the founder’s family.
The ownership transfer from one generation to another is much more than a
simple ownership transfer. Besides the inheritance of the capital share, the heirs
also receive a series of material and non-material benefits from the life experience
of the older generation. The following generation of family business heirs, along
with property, also receives the family social status, knowledge about surviving in
business, and a reputation in front of other interest groups on the market, such as
suppliers, buyers or financiers.
According to Ward (2006) almost one half of the total number of family
enterprises fail to survive to the next generation. Matters are also changing in the
USA, and thus it is predicted that in the future, 40-50% of family companies would
be led by sister and brother co-owners.
This is the reason why planning the ownership transfer of one family
generation to another is a part of a more extensive subject which is in the world of
traditionally successful enterprises called the long-term plan for developing family
businesses (FBC, the Family Business Development Center, ASEE, 2014).
The aim of this paper is to define and analyze the crucial elements and effects
of the long-term multiple process of ownership transfer on family business entities.
Based on this research, the possibilities of increasing its efficiency through the
process of long-term planning are reviewed.
THE ROLE OF FCS I N THE ECONOMI ES OF DI FFERENT
COUNTRI ES
FCs are very much appreciated as partners and loan borrowers in financial
circles, as the survival of such an enterprise is connected to the financial interests
of an entire family. This is the reason why everyone is devoted to preserving the
family business, even when the personal interests are not the same as the family
interests. There is an ingrained attitude that FCs are more reluctant to borrow
money even when there are rational reasons for it. FCs founders would rather
sacrifice a higher growth rate than increase the risk and potential higher growth
rate through engaging external financial sources. Thereby, a lower growth rate is
intentionally accepted, as well as the responsibility for business survival. FCs,
furthermore, tend to secure continuity in business activities and have a tendency
toward long-term planning.
462 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
According to the data published on the Family Firm Institute Inc. website
(2014) from the total number of registered economic entities, 70% to 90% are
family companies of various legal forms and sizes (Figure 1). There are large FCs
such as the Fiat Group (Italy), Walmart (SAD), Ford Motors (SAD), Porsche (EU),
Benetton (EU), Henkel (EU), BMW (EU), the Samsung Group (South Korea), Tata
Group (India), Foxccon (Taiwan) and numerous others.
Figure 1: Percentage of family businesses in the private sector
Source: Family Firm Institute Inc., 2014
According to data (Deakins, Freel, 2012) two thirds of private companies in
Australia are FCs, while the situation in Great Britain is even more in favor of family
companies, as almost ¾ of all enterprises are owned by families, and in Italy 90% of all
companies are FCs, while this number in the USA is 96%. If we take Italy under
consideration, it is obvious that the most developed part of Italy is Lombardy, whose
economy is characterized by a large number of successful family companies.
Most FCs, per number of employees, work volume and capital under their
disposal, belong to SMEs. It is estimated that FCs on the global level participate with
70%-90% of the world annual GDP. On the levels of national economies, FCs
participate in creating the national GDP with 50% to 90% (Figure 2). FCs are showing
a higher level of profitability related to the other enterprises if observed long-term.
According to Professor Blagoje Paunovi?, research indicates that in the future
there will be more FCs. The EU in their documents recognize the significance of
family economic entities to whose further development full institutional support is
given. In Serbia, knowledge of the advantages and disadvantages of family
economic entities is still not sufficiently promoted, as there is no real information.
The feature of all FCs is that one family is the owner of significant shares in
the ownership of the company (more than 20%, mostly over 51%) and based on it,
it has acquired the right to manage the company in proportion with its participation
in the capital. The larger the participation, the greater are the managing rights of
the family.
Faculty of Business Economics and Entrepreneurship 463
Figure 2: Percentage of family business contribution to the national GDP
Source: Family Firm Institute Inc., 2014
EMPLOYMENT POLI CY
The major and basic motive of the entrepreneur to start his/her own business,
in most cases, is to provide a source of financing for the family and himself/herself.
All other reasons such are self-reliance, self-realization in certain areas or
independent time managing, etc., are less present.
During the foundation of their own SME, entrepreneurs create their own work
environment. They employ the needed labor force, one which could fit within their
system of values and working mode. The entrepreneurs are the ones who create the job
and working atmosphere, giving direct orders and directly communicating with all
employees. This is the reason why most SMEs never grow into large companies and
furthermore, only a small number of entrepreneurs, 5-10% according to Deakins & Freel
(2012) create the enterprise as a system which should develop and grow during time.
According to data from the Family Firm Institute Inc. website (2014), during
2012 between 50% and 80% of workplaces in most world countries were created
by FCs (Figure 3). For financing the start of business, 85% used family funding.
464 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 3: Percentage of workforce employed by family businesses
Source: Family Firm Institute Inc., 2014
Same sources claim that in the EU, family companies create over 5 million
workplaces which make 40% to 50% of the total number of workplaces. During an
economic crisis, FCs will delay the positioning of new people in management
positions, as well as engaging professional management, but will attempt to retain
or employ a new labor force. The tendency of retaining a labor force, even in
negative macroeconomic trends, is a fact which can be seen in the statistical
records of the number of employees in EU SMEs (Gagliardi et al., 2013), during an
economic crisis and the decrease of the GVA created by economic entities.
According to research by the Agency for Regional Development (TNS
Medium Gallup, 2013) the reasons for starting a private business in Serbia during
2012 differs according to gender. Firstly, there is a desire to be independent (self-
employed) (33% of men and 30% of women). Secondly, unemployment is a major
factor for 17% of men and 22% of women. Thirdly, another reason for founding a
SME is spotting a business chance in the area of the founder’s previous
professional area (with 23% male and 18% females).
FAMI LY ENTERPRI SES AS SMALL SOCI O-CULTURAL
SYSTEMS OF THE FOUNDER
Family enterprises reflect the features of their founders. As illustration for
such a theory is quoted by Boris Vuki? (FBC Family Business Development
Center, ASEE, 2014) which gives the following three axioms of family enterprises:
1. All founders see their companies as their own children.
2. All children look like their parents.
3. Possessive parents make their children ‘imbecilic’ and incapable of
fighting through life.
4. If the founder fails to personalize the company (enterprise) and does
not move forward from ‘entrepreneurship to professional
management’ and does not make clear rules, then his biological
grandchildren will not get to know the family enterprise.
Faculty of Business Economics and Entrepreneurship 465
Adopted values are of a long-term character and are very hard to change. They
represent some sort of starting point in forming the long-term strategy of the
development of the family and family business.
Family companies represent socio-cultural systems of the countries where the
family originates from and/or in which family members have spent a significant part of
their lives. This is firstly related to the value judgments and culture which the family
members have accepted as their own standards in life. It can also be connected to the
environment which they originated from, with small or large influences from other
environments and cultures where they spent a significant part of their lives.
Just like family enterprises can reduce the unemployment of emigrants from
other cultures and speaking areas, they can also, in the long term, represent the
restrictive factor of their own development. The problem of the inclusion of ethnic
minorities is one of the big problems which even the most developed countries
have failed to solve, albeit investing significant sources into various programs.
The family enterprises of immigrants as a rule employ firstly their relatives and
employees which come from their own regions, speak the same language and belong to
the same culture. Their premises usually abound with national symbols of the culture
they originate from. To facilitate communication with customers and suppliers, they
are often located within quarters and parts of the city where other members of their
national minorities settle. Thus, districts in where members of one nation or culture
dominate are created, such as Chinese, Indian, Muslim, Christian, etc neighborhoods.
In some cases, many years pass by and immigrants from various countries never
learn the language of their host country. In a certain way this isolates entrepreneurs
from national minorities and limits the development of their family enterprises in
regards to the possibilities offered by the country. Due economic migration, migration
directions as a rule develop from less developed to more developed countries and
regions. The host country offers much greater possibilities than the settlers had in their
home environment but due to insufficient language skills and a lack of formal
education, the immigrants often cannot meet the employment conditions and when
they do, they often have smaller wages than their hosts. It is without doubt that there is
discrimination but the mentioned reasons make false differences. Thus, family
enterprises formed by immigrants can be a restrictive factor for employment.
Ceja et al.,(2010) claim that an organization can create strong emotional
relationships between the employees if it has goals and values which coincide with
the individual values of the employees. Sharing the common values and
accomplished results can make employees feel proud to work in such an
organization, no matter how big or significant the business activity is. In this way,
each employee striving to fulfill his/her own goals will contribute to accomplishing
the goals of the organization. This is characteristic for successful FCs and gives
strength and a recognizable corporative culture. Each member of a FC knows what
the acceptable behavior for an organization. Basically, values are the essence of the
spirit of FCs and lead to accomplishing all matters between a family and its
business. Shared family values of a family business are the basics for making a
strategy and long term plans.
466 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
MANAGI NG A FAMI LY ENTERPRI SE
The long-term goal of family business development managing is preserving
and developing of the family business, which in turn should provide a growth of
wealth and values for the family in time. In the conditions of extremely negative
macroeconomic trends, the goal of managing is continuation of business or
minimizing in the case of profit loss.
Each FC during time goes through a recognizable life model, which can be
completed, depending on the company, in a certain life cycle. According to Ward
(2006) during the generation shift of the founders, each family enterprise is faced
with two crucial challenges:
The transition from one to another generation of owners and enterprise leaders,
Adopting new and unconfirmed approaches for managing a family enterprise,
which the new generation of owners most likely wish to implement.
The family enterprise, according to Irena Bulat (FBC Family Business
Development Center ASEE, 2014), can have several models of ownership transfer:
? Family transfer – a successful ownership transfer from one generation to
another. A new generation of founders often holds the value standards of
their predecessors and culture from which they originate. It is reflected in the
continuity of work by the customers and suppliers, etc., of their ancestors. A
new generation of heirs usually introduces smaller or larger changes in FC
business activities.
? Insider purchase - this usually implies selling the company to the
management or the employees. If the heirs are not interested in the company,
there is a possibility for the company to be bought by the management or the
employees.
? External purchase - selling the company to new owners.
THE MOST SI GNI FI CANT FEATURES
In order to completely understand the problem of transfer of ownership from
one family generation to another, the correlation between the family and their
business must be understood. This correlation is depicted through the features of
family companies. In the further text, some of the most significant features of the
correlation between a family and business related to the various aspects of
managing and the business activities of family enterprises will be reviewed.
Members of family enterprise are, due to family relations and common
business interests, usually loyal to each others. Occasional conflicts and
misunderstandings regarding the managing of the enterprise are secondary
compared to the family business and family relations. Managing of the enterprise is
based on family consensus and the main priority of a family business is the
Faculty of Business Economics and Entrepreneurship 467
development of the family business and protecting personal property. The business
policy is based on safeguarding the long-term interests of the family which gives a
special stability to these enterprises in comparison with their competitors,
especially in times of turbulence. According to the research by KPMG and Family
Business Australia (2013) 83% of the respondents believe that a family business
and family way of business activities help to attain economic stability.
According to the Family Firm Institute, Inc. (2014), the basic features which
depict the most successful FC business activities are the following:
? Optimism of family members - most family members believe that a family
will retain control over a family business in the following five years.
? Loyalty, based on blood and family relations.
? alertness based on the trust that family members will take care of family
funding.
? Competitiveness.
? Innovations.
? Agility.
? Dedication and a desire to create a legacy for future generations.
In their research, IFC (2011) noted that FCs have strong as well as weak sides.
Numerous FCs are not sustainable in the long term. Two thirds to three fourths of
all FCs fail or are sold by the owners. Only 5%-15% of family owned companies
survive to the third generation of an ownership transfer. However, the numerous
deficiencies of FCs can also pertain to other SMEs. They too have strengths and
weaknesses, as follows:
Strengths:
? Dedication of the family to the preserving and progress of the family
business. This is the reason why family members identify themselves with
the enterprise, working hard and reinvesting part of their salary into the
company.
? Continuity of knowledge. The family has a priority of transferring their
accumulated knowledge, experience and skills on to the next generation.
? Reliability and pride. The family business is connected to the family name
and the reputation is linked with their products and services.
Weaknesses:
? Complexity. Managing a FC is, from the standpoint of management, more
complex in comparison with the other companies. A crucial problem in the
management of enterprises is the link between the family and the company.
Family members take up various positions and have different roles in the
management and leadership of the enterprise. Their status in the family and
in the enterprise are not necessarily equal.
? Informality. Considering that they have the feeling that they are managing
their own business, family members pay attention to formalizing relations
and following procedures. If a FC grows, there can occur a problem of an
468 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
inefficient managing of larger and more complex relations, which if
escalated, can be a serious threat to further growth and business
development.
? Lack of discipline. Numerous family members lack to synchronize their
decisions with the chosen FC development strategy. It is customary that
influential family members are more interested in employing their relatives
than engaging a skilled workforce from the labor market. This fact leads to a
work inefficiency and nepotism.
Research conducted by KPMG and Family Business Australia (2013, p. 10)
states that private enterprises have the following competitive advantages in
comparison with other enterprises:
1. Mutual values and a code of ethic.
2. A strong network of family members support.
3. Vision and strategy.
4. A strong brand and participation on market.
5. Customer service.
6. Possibility to make decisions rapidly.
7. Possibility of long-term perspective.
The basis of the relationship between family and their business is the complex
correlation within the family, ownership and the enterprise (Figure 4). Thus, there
are three dominant perspectives for an analysis, these being the following
correlations:
? Family-ownership. This correlation implies the link between personal
funding and that of the enterprise.
? Family-enterprise. This aspect analyses two dynamics of the development of
biologic heirs through forming family relations (sons-in-law, daughters-in-
law, heir of the second line, etc.) with the dynamic of the family enterprise.
? Ownership-enterprise. This aspect is engaged in the problem of inheritance
of the ownership and enterprise managing.
Even this aspect is crucial for this paper, although all three mentioned aspects
have to be observed jointly. A change in one aspect of the correlation impacts
changes in the other two segments.
Faculty of Business Economics and Entrepreneurship 469
Figure 4: The connection between family and enterprise with finances and
ownership
Source: the Family Firm Insitute, Inc., 2014, p. 39
Passing on the business reputation and the experiences of one generation to
another can have very positive and significant effects, along with numerous
problems. These are the following: a transfer of knowledge from one generation to
another, an introduction of innovations and harmonization of the FC with changes
in the environment, using the reputation acquired by older generations with
suppliers and customers, etc.
Due to preparing heirs to take over a private enterprise, older generations
usually invest a lot of effort and time to transfer their management experiences to
their heirs. With some business activities, this can be a significant way to create a
competitive advantage.
Growing up in an environment of a family business, the new generation of heirs
perceives the needs for harmonizing the enterprise with the new market requests.
While older generations are more interested in the traditional leading of business,
younger generations are prone to introducing innovations in their businesses.
The reputation which an entrepreneur enjoys can make it significantly easier to
introduce a young generation into business without the customers fearing any
changes in business conditions or the quality of the products and services. The
same attitude is related to the correlations with the suppliers which together makes
a financial position of a FC more stable. This resolves the numerous problems
which entrepreneurs face during enterprise start-up.
Family enterprises can usually count on the financial help of family members.
In the situations when entrepreneurs are starting a new business, this sort of help is
especially significant, considering that newly-founded enterprise have insufficient
funds for normal business activities, as well as no credit rating at business banks.
470 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Due to years of familiarity long-term mutual family interests, the system of
decision-making in well-organized FCs can be faster than in other economic
entities of the same size.
Along with the significant positive effects of ownership transfer from one
generation to another generation of heirs, there are numerous problems which
should be solved in time and in an adequate way.
The dynamics of family development and the number of heirs can have a
totally different development dynamic than the growth of the family business.
Thus, it can happen that family enterprises, with time, have a smaller number of
heirs or even no heirs at all. The successors which are not family members or are
more distant relatives may not see themselves running a family business when
inheriting ownership shares in a family company. When the number of heirs grows,
then the ownership share of each member decreases. It could happen that in time a
part of the ownership share which a family possesses starts to decrease and thus, a
major family owner becomes a minority shareholder. In any case, the bigger the
number of heirs, the larger the problem of managing a family business is.
The direction of family business development is an issue which can be a
potential problem for forming the long-term policy of the enterprise. Different
family members or even different family divisions can have varying interests and
visions about the development of the family business. In these situations, the
problem how to make decisions about the strategic direction of family business
development arises. The decision about the development direction is usually made
collectively or is made by the family member with a major ownership share, in
consultation with other family members. Family businesses last until there is
harmony in the family and until it is possible to find a common interest.
A long-term family interest can be in conflict with the personal interest and
ambitions of one family member. It has been established that a major long-term
interest of the family members is continuation and improvement of the family
business and property. However, the personal skills of one member can be out of
proportion with his/her personal ambitions. If an individual, as a family member,
has limited mental and physical abilities for managing the enterprise, making him
or her the manager of the family enterprise can endanger the company, which is a
common occurrence. Inheritance law has minimized tensions in struggles for
power, but it has also imposed the question of who will operatively manage the
state or the enterprise. During the history of operational management, persons
which have managed and provided the normal functioning of the enterprise and/or
the state have been chosen.
The issue of professionalizing manager positions and nepotism is ever-present
as the conflict in the choice of family members and engaging professional
managers. If there are no clear rules, FCs could become social institutions in which
members air their unresolved social problems. During the choice of staff, families
may prefer their relatives, instead of experts. As additional problem could be
rewarding family members instead of other employees, due to a lack of any
criteria.
Faculty of Business Economics and Entrepreneurship 471
The problem of separating or inheriting FCs is especially sensitive. Family
circumstances and problems, separation, divorce and inheritance are linked with
ownership distribution in FCs. With the breaking up of a part of ownership, there is
always the issue of financial as well as strategic nature. How to separate property
and not imperil the entire business entity? In some countries, inheritance rights are
separated according to gender. In contemporary economies, inheritors of different
genders have the same inheritance rights.
In the case of managing a family enterprise, it is difficult to distinguish
personal from family finances. Thereby, financial problems are transmitted to the
personal sphere due to bad business-conducting.
The family is the owner but also often the participant in managing these
enterprises or the executor in regular business activities. Top management
positions are usually taken up by prominent family members. In a large number of
cases, especially within SMEs, family members manage and work in the same
enterprises, which means that family members are also in the structure of the
ownership and the managerial structure.
Family members can be engaged in family enterprises in the following roles:
? Owners (a minimum 20% in the structure of the capital with two owners).
? Managers (not compulsory).
? Employees (nor compulsory), whether as family members (in
entrepreneurships), temporary employees or employed on contract.
Professor Walter Zoki, the department chair of the Strategy and Control of
Family Businesses and a consultant describes it quaintly as sitting at four tables.
The first table are the owners, that is the stakeholders, who together with the other
co-owners establish the FC strategy. The second table are the board of directors,
with the representatives of the owner structure or the co-owners themselves
(although it is unnecessary for all of them to sit at the table). The role of the board
of directors is to carry out strategic decisions and protect the long-term interests of
the owners. The third table is the manager team which manages the FC
operationally. The fourth table are the supervisory board members. Their role is to
control the work of the managers, supervise the carrying out of the decisions and
whether the company is conducting business within the confines of the law. If the
same people sit at these tables, a confusion regarding authority is inevitable.
In order for the FC to do business successfully, the roles must be defined. The
most important matter is to define the owner and the operational FC manager. The
system of decision-making and authority must be clear or otherwise the FC can
have problems making decisions and managing. The larger the enterprise, the
greater are the needs for professional managers to manage the business. This fact
separates the roles of owners and professional management all the more.
This process is shown in Figure 5. The smaller white circles symbolically
represent the owners and the larger black ones the business itself. At the beginning
of the process, when the enterprise was founded, the owner and the enterprise
coincide. With the growth of the enterprise into a complex business system, the
472 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
demands for management and development of a business system surpass the
mental and physical abilities of the entrepreneurs, and thus professional
management is engaged. In the situations when the FC becomes a large enterprise,
the owners increasingly start to get involved with social and humanitarian work,
promoting enterprises and family values.
Figure 5: Separating ownership from the function of management in SMEs.
Source: Churchill,Lewis, 1983
In the beginning stages of developing, FCs belong to SMEs. The essence of
the problem of separating ownership and management in SMEs is introducing
professional management into the companies where there are certain prerequisites.
THE I SSUE OF OWNERSHI P TRANSFER
Even though family enterprises are a usual occurrence everywhere, there are
many stereotypes about them. Many consider that they rarely survive more than
three generations. According to this stereotype, the first generation creates an
enterprise which is successful. The next generation uses the benefits and the third
one is left with nothing, and must start from the beginning. From the point of view
of strategic managements, this is a failure.
A family develops a model of a life cycle of a family enterprise through many
generations. The mentioned model represents a recognizable predictable model in
family enterprises during time, which can be used for long-term planning of the
development of a family business, where ownership transfer is one of the main
issues. The long-term strategic planning of a FC is based on the idea of knowing
the basic FC life cycle mode, and creating the activities to create the desired future
of the family business (Ward, 2006).
Ownership transfer from one generation to another implies much more than
ownership transfer in itself. Except for inheriting a market share, the successors
gain several material and non-material uses from the life experience of the older
generations. The following generations of successors of the family business, except
property, also gain the knowledge on how to lead and survive a business, as well as
benefit from a reputation with other interest groups on the market such as suppliers,
buyers or financiers. Also, the new owners are faced with the problem of
introducing innovations and changes in business activities in order to adapt to
changes in the environment. This from one side represents a potential crisis but
also a way in which an enterprise can adapt in the long term to environmental
changes through a business vision of the new owner generation. A change in
Faculty of Business Economics and Entrepreneurship 473
ownership thus represents a moment of crisis in the development of enterprises as
well as a chance for enterprises to be revitalized and directed towards new business
directions. In this way, a fundamental flexibility in strategy management can be
achieved.
IFC (2011) defines the life cycle of an enterprise through ownership transfer. It
records three stages in the life cycle of a FC:
Stage 1 – The founder (or founders). This implies owner control.
Stage 2 – A partnership of brothers and sisters.
Stage 3 – An alliance of relatives.
Table 1 presents the issues and problems faced by owners in life cycle stages:
Table 1: Key issues linked with FC management according to their life cycle
stages.
The stage of a life cycle of ownership
transformation
Dominating owner issues
Stage 1. Founder (or founders).
? Leadership transformation
? Legacy
? Planning property
Stage 2. Partnership of brothers and
sisters.
? Maintaining teamwork and
harmony
? Sustaining of family ownership
? Inheritance
Stage 3. An alliance of relatives.
? Allocation of corporate capital:
dividends, loans and profit
levels
? Pay-out of dividends to capital
owners
? Resolving family conflicts
? Participation of family and their
roles
? Family vision and mission
? The link between family and the
business
Source: IFC 2011, p. 16
In literature, there are several works which mention the model with three more
or less same stages in the life cycle.
474 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
The paper will present the model presented by Ward (2006) with four stages,
of which the first three are the same. He claims that FCs have four stages of life
cycles which they pass through:
Stage 1. The company managed by the entrepreneur as the owner.
Stage 2. Partnership of brothers and sisters.
Stage 3. An alliance of relatives.
Stage 4. Long-term perspective.
STAGE 1. THE COMPANY MANAGED BY THE ENTREPRENEUR
AS THE OWNER.
Entrepreneurs found their enterprises in order to carry out their business idea.
An entrepreneur identifies himself and his idea with the fate of the enterprise.
When the demands of the enterprise exceeds the possibilities of the entrepreneur, it
is necessary to leave the work to professional management.
With the growth of the business, the entrepreneur first engages his family
members, the work force from the labor market and after that professionals in order
to secure a long-term business success. The family forms its value system which it
conveys to the enterprises, and which is the basis of the reward system of all the
members. In order to motivate the professionals who come from outside and are
not family members, the family is given the possibility of acquiring wealth. The
conducted research (Family Firm Institute Inc., 2014) points out that the reward
system for working in FCs is less stimulating than in other enterprises.
Successors are taught about family values from early childhood, whereupon
the family is in the first place and business in the second. They are first trained in
formal education and later on acquire practice in their family business. A
significant part of the education system are representatives of the older generation
which spend a lot of time in contact with the young people in order to convey
knowledge and experience in business conducting.
If they achieve success in business, the older generation feels it is their
commitment to educate the young family members of the future generations how to
behave with family wealth. The problems which occur in personal lives and the
functioning of the family are passed on to the business of the private enterprises,
and this is the reason why a family takes care of each member, even getting
involved with the private problems of individuals. At times, the border of
involvement into privacy is hard to gauge.
Faculty of Business Economics and Entrepreneurship 475
STAGE 2. PARTNERSHI P OF BROTHERS AND SI STERS
After inheriting the ownership share, family members who have the same
values and similar interests continue to cooperate, motivating other successors to
sell their shares and leave the family business. However, there is an endeavor for
the family to buy off the company shares in order to retain majority management
rights.
The members who remain in the family business invest jointly in business but
also family members. Investment activities start to appear within the community,
as the family and enterprises support and help one another.
The family endeavors to ensure that the most competent family members are
involved with the business. In order to reduce taxes and achieve significant results,
owners start to hand over a part of their ownership to their children and
grandchildren. FCs are, with the enlarging of wealth, significant philanthropists,
donating significant funds to social and humanitarian causes within their
community (Family Firm Institute Inc., 2014).
With the aging of the second generation of successors, the educating of the
following generation begins. Parents introduce them to enterprises early on in order
to motivate them to acquire formal as well as practical experience. However, they
do not exert any pressure on their heirs to commit themselves to continue the
family business.
The family makes sure that its members in the early years have ‘rainy day’
funds and retirement. This in a certain way is also accomplished by the FC “reserve
financial fund”. Siblings make agreements regarding further investing into good
opportunities.
Families carefully instruct their spouses, which are not blood relations, in the
areas such as family values, culture, the nature of work, family agreements and
conflicts, etc. Thus there is acquired support of the spouses and their eventual
tutoring of the children until they become independent and until they start to
manage the family business on their own.
The values fostered by the family are from the beginning installed into the
successors and enterprises, as a part of the organizational culture. In order to
centralize the decision-making system, the family sets up a central personality,
which has the greatest trust of the majority of family members. Such a person is
viewed as a leader of the entire family, taking care of the interests of all the family
members. Except for the role of the central figure or the pillar of the family, this
person also plays an important emotional role for the family. The central figure has
certain commitments, such as maintaining contact with relatives which are not
blood relations, the media, the community and others. This is a respected person
who represents the family and its interests to the world but the family as well. In
the case of family conflicts, this person should be the reconciler for the conflicted
parties and a possible arbiter.
476 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
STAGE 3. COOPERATI ON BETWEEN RELATI VES
Even though they are not blood relations nor do they belong to the cultural milieu
of the family, relatives may alter the culture of the family and the enterprise and thus
they contribute to the family and the family enterprises to become more flexible. Their
influence can to a large extent contribute to strategic changes in business.
If these changes are accepted, they can inspire family members to deal with new
jobs and turn to new entrepreneurial ideas. This in turn stimulates new endeavors,
useful in the commercial as well as social sense, which helps to integrate new family
members and create a feeling of unity and dedication to family. The changes incurred
and a new common dedication to work creates the success of the family, which in turn
creates the conditions for a further increase of wealth and social respect from the
community members. A feeling is created that “this company will last forever.” All the
family members do not fare equally well but the family helps to learn about business
and capital management within the family.
The family enables a free sale of shares to all the family members equally,
under certain conditions and at fair prices. With the growth of the business and
separating ownership from the management, the capital owners experience the
family business less as a profit-making vehicle and increasingly endeavor to
develop an entire family business system.
Family meetings are organized on a regular basis, in the interest of the family.
New members are from an early age taught about ownership responsibilities, from
knowing the business, finances and reporting to management. Spouses are often
included in these programs.
Family members try not to get involved in the operational managing of the FC,
as they support the adopted strategy and act as cultural ambassadors. They support
their management in the function of managing the FC.
Family members are trained in three basic areas:
? Communication skills, necessary for managing the growing business.
? Personal growth and development, through formal education.
? Family culture and tradition.
Family and relatives experience the role of the family leader as being very
significant. The family leader can be a respected member of the group of family
members (larger families). His role remains more or less the same, to take care of
all the family members as well as the family business. His role is also to offer help
to family members who are in trouble, the causes of which can be purely personal
reasons or some special needs (illness, addiction and similar). The politics which
the family leader takes up is conveyed to all the family members, and must be
adhered to. Each family member is considered equally significant and valuable.
The family devotes increasingly more time to humanitarian work, and family
members not in the FC structure are also included in these activities, as family cohesion
is thus maintained and the power and status of the family is demonstrated to the world.
Relatives understand that occasional rivalries and conflicts are less valuable than the
advantages and power which is enabled by the unity of the family and its support, and
Faculty of Business Economics and Entrepreneurship 477
thus they contribute to reducing the tension among the conflicted sides in the family. This
helps to placate the conflicts among blood relatives and increases family cohesion.
Family members attempt to define the family mission separately from the FC.
This enables the family members to strengthen their dedication to the family and
the FC, also enabling the family and the FC to review various options of further
development. Family values are conveyed to the institutions established by the
family, as a result of their social and humanitarian work, such as foundations,
endowments, and similar.
The conviction of family members that the company is a means for achieving
the common good increases which serves to further increase dedication to the
family and its values.
The process of maintaining continuity becomes especially significant, as it
helps to coordinate personal attitudes and interests with long-term family attitudes.
An individual learns how to work and think as a member of the team (group). In
this way, every family member matures through the process of continuity and
decision-making, learning how to become a respected family member.
Respected and appreciated families start to share their enthusiasm and
knowledge about the family business with other families and its members.
STAGE 4. A LONG-TERM PERSPECTI VE
Families which understand and embrace the challenges posed by time increase
the chance to increase the continuity of the family and the family business. This
need for change and adapting is characteristic for all families which endeavor to
preserve the essential values of the family. Furthermore, each family experiences
values in their own special way.
Even though there is trust among family members which originates from
childhood, it is also necessary to take into consideration the opinion of experts, who
view the situations from different angles. All families have problems which are more
or less the same and thus predictable. Consequently the help of expert consultants is
essential and can help to overcome problems more quickly. It is equally important that
there are different views and perspectives of viewing the problem and solution, as is
the fact that family members need to rise above their personal opinion and bring a
decision which is in the long-term is acceptable for all members.
Two things are relevant in this process: communication and the decision-
making method. Communication is essential for the exchange of information on the
attitudes of the other side and the possibility of presenting the personal attitudes of
the other members. The possibility of understanding and accepting other
perspectives and attitudes is the second part of this problem. If the participants in
decision-making are prepared to accept other attitudes as well and not just their
own, there is a possibility to arrive at a sustainable solution which is acceptable for
everyone. Furthermore, the final solution does not necessarily have to seem like the
solution which all the parties had at the beginning of the negotiations.
478 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Key for long-term planning is sustaining continuity. Planning in this stage is
carried out on the following levels:
1. A business strategic plan.
2. A plan on inheriting, leading and ownership in the family.
3. Personal financial plans of family members.
4. Plan of family continuity.
KEY SUCCESS FACTORS OF OWNERSHI P TRANSFERS
According to Srisomburananont (2004) many consider that an FC depends on
the competence of family members, their dedication and hard work, which is only
partly true. For the family, it is important to maintain its business in the long term.
Reducing the impact of all the external and internal factors which can disable a
successful transfer can be achieved by three approaches:
-The existing of awareness about negative feedback and corrective activities.
A negative feedback is made up of three significant dynamic forces:
? The ability of managing a FC by family members. During time, the
possibility of the family to efficiently manage and control the business is
continuously falling. As a result of the limitations which occur with the
possibilities of the family to manage complex work demands, there occurs a
tendency of stagnation which reduces the work volume and raises it to a
level which family members can manage.
? Organic forces. The negative impact is reflected through loss of flexibility
due to an increase of bureaucracy which ensues from the growth of the
organization. The more an organization works to raise its efficiency, the
more grow the needs to define the work method, which has the negative
consequence of reducing organization flexibility.
? Work complexity. The growth of the FC also impacts the growth of the
business of the enterprise. Work diversification leads to an increase of its
complexity. This opens the issue of the efficiency of the entire organization.
- Corporate management.
- Professionalism.
The same source claims that for a successful ownership transfer, the following
should be prepared successfully:
? The next generation of successors, for taking over the family business.
? Securing a large dedication to family tradition, values, loyalty and hard work
of all the family members and especially the successors.
? A successful business transformation. It secures the adapting of the FC to
changes in the environment. One of the main causes of the disappearing of
FC enterprises may be organizational inertia which is deeply ingrained in the
processes and organizational culture of families.
Faculty of Business Economics and Entrepreneurship 479
CONCLUSI ON
The development of FCs makes up a great part of the total number of SMEs
with their specific features. The research conducted points to the large significance
of FCs for the economy and development of the entire society. In spite of this
probable fact, the state fails to adequately follow the problems of FC development.
With every ownership transfer, the number of FCs is reduced by about 50%.
Thus, every third generation of successors has only 25% of the total number of
SMEs, which is why the number of FCs in the world is relatively low, even though
their success and impact on business trends is significant. Sustaining a family
business through the generations is considered to be a large challenge.
One of the key issues linked with the managing of FCs is the separating of
ownership and the managing function during a life cycle. In the families where
there is a strong combination of family and ownership relations, traditional family
values can be a big burden for the necessary changes in business and managing a
FC. The traditional values are confirmed by business results from the past and are
used as an adequate way of thinking about the future.
Viewing matters in the long term, the family with their values represent a force
which directs the family and its business in the same direction. On the other side,
changes in the size of the organization and the business environment of the
enterprise demand other changes. Coordinating these three antagonistic forces can
be achieved by a successful preparing of successors which will accept the basic
interests of the family but at the same time seek new work methods and businesses
which will correspond to the demands of the new age.
According to Miloš Švarc, a consultant at the Center for Developing Family
Companies ASEE (2014), the owner can save his/her FC by long-term planning the
development of the enterprise, whereupon the issue of ownership transfer to the
next generation of owners is one of the most important issues. In order to realize
this successfully, it is necessary to plan the following for the ownership transfer
process:
? The company for future changes.
? The successors for taking over the FC management.
? Oneself, as the owner, for the future ownership transfer. Every owner has a
difficult time, emotionally speaking, with ownership transfer.
? The family, for the new owners which will take over the managing of the
family and the FC, introducing the necessary changes.
480 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
PROPOSALS FOR APPLYI NG RESULTS AND FURTHER
RESEARCH
Due to an obvious large economic and social significance which FCs have for
the development of society, it is necessary, from the standpoint of various interest
groups, to carry out the following activities:
1.To be carried out by state institutions and the local self-government:
? Recording and statistical following of the growth and development of family
enterprises.
? Periodically carry out research of the problems faced by the family
enterprises.
2.To be carried out by educational institutions and entrepreneurial associations:
? Promote family enterprises.
? Train entrepreneurs for ownership transfers.
? Stimulate long-term planning of enterprise development.
3.To be carried out by entrepreneurs in family enterprises:
? Attend courses on the methods of ownership transfers in family enterprises.
? Plan the activities of long-term development of enterprises and ownership
transfers.
? Carry out specific activities according to plan.
Perhaps the most important advice which can be given to entrepreneurs is
related to the fact that they should acquaint their successors as children with the
values and attitudes of the family and the business. By getting to know the work of
FCs, the new generations can assimilate the knowledge of the previous generations
and acquire their own knowledge.
Medelsheim, in his thesis (reprint of the 1929 issue) gives advice for FCs
which deal with trade. As the advice is of a universal character, it can be applied to
all FCs regardless of activity. Some of the activities which can be applied to
entrepreneurs for preparing the new generations of successors are the following:
? If your children show any interest in business, let them work for others. This
is the way for them to learn about discipline and work. Also, they will see
other work methods as well, different from yours.
? Allow your children from their young years to be present in your business
space, shops, workshops, offices. Ask them if they are interested in seeing
anything or having something explained to them other than what they have
seen or heard. It may be the case that they will be in the way but this is the
best way to stimulate your children’s interest for the work you do.
? Teach your children to respect your vocation and be proud of their parents.
In this way you can stimulate their ambition to take your place one day.
Faculty of Business Economics and Entrepreneurship 481
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[17]TNS Medium Gallup. (2013). Istraživanje o stanju, potrebama i problemima
malih i srednjih preduze?a i preduzetnika (MSPP) u Srbiji: Kvantitativno
terensko istraživanje. Beograd: Nacionalna agencija za regionalni razvoj.
[18]Ward, D. (2006), Razvoj porodi?nih kompanija. N. Sad: Adižes.
482 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THOUGHTS ON ENTREPRENEURSHIP AND ITS
LINKAGE WITH INTRAPRENEURSHIP:
IMPLICATIONS FOR ECONOMIC DEVELOPMENT
Muhammad Omolaja, PhD
48
Ana Aleksic
49
ABSTRACT
An entrepreneur is someone who is willing to bear the risk of a business
venture where there is a significant chance for making profit (Chell, Ozkan, 2010).
This is particularly where the opportunity comes from outside of the enterprise.
Entrepreneurship is basically the practice of starting a business in order to earn
profit on new found opportunities (Ercan Ekmekcioglu). Generally,
“entrepreneurship represents a wide area for various business moves where the
entrepreneurial activities take place. How entrepreneurial activities would develop
and whether their result would be positive or negative depends on many factors
that determine the development of those activities”(M. Radovi?-Markovi?,
Muhammad Omolaja, 2010). Alternatively, new businesses that are developed
within a company under the influence of permanent efforts of entrepreneurs for
changes in existing organizational structures are called intrapreneurship. In other
words, intrapreneurship represents restructuring of existing enterprises.
Accordingly, it can be said that there are two ways of developing
entrepreneurship; that is, establishing a new one and restructuring an existing
enterprise in a process known as intrapreneurship. However, what are the
alternative views on the theory of entrepreneurship? Is there a linkage between
entrepreneurship and intrapreneurship? How does this linkage affect economic
development? Provision of answers to this kind of questions is the core of this
paper.
Key words: Entrepreneurship, Intrapreneurship, Economic Development,
Innovation, Business ?deas
J EL Classification: L26, G34, O31
UDK: 005.591.1 005.346 005.961:005.914.3
48
Muhammad Omolaja, Intercontinental University, West Africa, [email protected]
49
Ana Aleksic, Best Western Hotel Šumadija, Belgrade, Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 483
I NTRODUCTI ON
Entrepreneurship and intrapreneurship have many uncertainties especially
when new products are created for which there is no existing market. Both
collectively affect economic development in many ways. It is through both
entrepreneurship and intrapreneurship that important innovations enter the market
leading to new products or production processes which eventually increases
efficiency or productivity through bringing competition in the market places. This
paper discourses the nature, types and forms of entrepreneurship and
intrapreneurship as well as their linkage and their impacts on economic
development. It also illuminates the ideas and concepts that emerge from
entrepreneurs increasing our knowledge and what consumers may prefer through
introduction of variations of existing products and services in the market. This
speeds up innovations pertaining to introduction of new products in the market as a
result of longer working hours and more efficient nature of entrepreneurs as their
income is directly linked with their working input. Entrepreneurship and
intrapreneurship lead to introduction of new goods with new quality and value.
Their innovativeness introduces new ways of production and new markets that
have not been exploited. It is through entrepreneurship that new source of supply
are discovered and influences creation of new business organisations that directly
affect the economy. Creation of new business opportunities through
entrepreneurship, intrapreneurship, productivity and innovation leads to economic
development. This therefore means that when there is more entrepreneurship and
intrapreneurship innovation in an economy, it will be accompanied by high rate of
economic development.
DEFI NI TI ON OF ENTREPRENEURSHI P
The first attempts at defining the basic meaning of entrepreneurship go back to
16
th
and 17
th
century. It was not until the 18
th
century (specifically, 1725) did
Scottish economist, Cantilion (1725) gave the first significant contribution to
understanding what it means to be an entrepreneur. Cantilion, in his definition,
however, described the functions of entrepreneur, rather than his personality. In
those days, the classic entrepreneur was a farmer, who was willing to take on
business risk despite uncertain climatic conditions and other variable business
circumstances. Later on, this concept began to expand to independent traders,
where more and more, the role of entrepreneur as a leader and a promoter of
“everything new” in the business were recognized.
484 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Adam Smith considered a case of capitalist who lent his money to other people
and so recognized the special function of people who take on the use and risk of
capital. The famous economist John Stewart Mill also noticed that taking risks
should be a part of entrepreneurial function. Say in 19
th
century (specifically, 1803)
in his book “Tractate of Political Economy”, emphasized the importance of
entrepreneurs. He defined an entrepreneur as “a person who moves economic
resources from the area of lower to the area of higher productivity and greater
profit”. Namely, Say defined the function of entrepreneur independently of a social
framework and did not include risk taking in the definition. On the other hand,
Knight in 1921, established his definition of entrepreneurship on the basis of risk
and insecurity. In his opinion, goods are primarily manufactured according to
personal motivations, and not according to manufacturers’ wishes; the
manufacturer takes the responsibility of anticipating the buyers’ wishes. This
definition was heavily criticized by the Austrian economic school, lead by the
famous scientist Schumpeter.
However, the first universal definition of entrepreneurship was developed in
the 20
th
century. It was given by Schumpeter (1934), and it emphasized the role of
innovation and creativity in entrepreneurship. In Schumpeter’s interpretation of
entrepreneurship, all firms, which tend to innovate, introduce one of the following
new combinations: new products or services, new production methods, new
markets, new resources, and new industrial organization. Unlike Schumpeter’s
definition, there is a group of definitions which assume that entrepreneurship is
related to the decision-making process and the development of profitable
businesses. This conceptual description of the essence of entrepreneurship is more
precise than Schumpeter’s definition and is regarded more acceptable. Despite that
fact, this definition has certain weaknesses, primarily because it does not include
the basic indicators for determining how and under what conditions a business
activity should be started.
Huge number of entrepreneurial theorists tried to present economic theory
based upon “rational postulates of human behavior” after Schumpeter and to
synthesize selected theoretical contributions in this area. Scientist Casson is
especially distinguished among these. He criticized the neoclassical economic
school for the fact that it has demonstrated extreme subjectivism, which has been
transferred to entrepreneurs and does not enable them to realistically anticipate the
future. According to Casson, Schumpeter’s, Kirzner’s, Knight’s and Hayek’s
theories are, although different in some aspects, are very much alike. Casson
believes that “entrepreneurs have more relevant information than other people and
are always motivated by personal interests”.
In order to simplify his theory, Casson (1982) focused on entrepreneurs
sincere intentions to gravitate towards maximizing profit at given a amount of
effort by conducting their business. Namely, the amount of entrepreneurial activity
is closely related to amount of possibilities for making profit. Casson believes that
an entrepreneur needs to have great number of specific personal qualities in order
to make a successful business decision. He states some of the qualities (knowledge,
imagination, analytical capabilities, researching capabilities and communication
Faculty of Business Economics and Entrepreneurship 485
skills). Some of these attributes he explains in detail, except for imagination to
which he does not give enough emphasis. Beside those outlined by Casson, other
scientists have added some other entrepreneurial attributes which are regarded as
desirable. Brockhaus (1982), Gartner (1989), Aldrich, Zimmer (1986), Carson
(1995) and Delmar (1996) have determined that key psychological characteristics
of successful entrepreneurs are, readiness for risk-taking, ambition, optimism,
willingness for independence and the need for power. Besides describing the
attributes which may contribute to an entrepreneur’s success, none of those
mentioned any universal or common attributes of successful entrepreneurs.
THEORI ES OF ENTREPRENEURSHI P
By reviewing the great number of theories and approaches, it is crystal clear
that it is not simple to answer the question of what entrepreneurship is and how to
distinguish one definition as the most universal. Perhaps one of the most universal
and, accordingly, the most acceptable definitions is the one given by the American
economist R. Hisrich (1985). According to him, entrepreneurship is “a process
which consists of creating something new which needs time and huge effort, while
psychological, financial and other types of risks are taken, and material satisfaction
is returned”. Beside the Hisrich’s definition, there are also a number of
contemporary approaches that have contributed to the theory of entrepreneurship.
Stevenson and Stahlman have systematized these theories from the last two
hundred years in an excellent manner. In 1987, they systematized these theories in
three basic groups; that is, theories that regard entrepreneurship as an economic
function, theories that define entrepreneurship from an individual aspect, and
theories that define entrepreneurship from a behavior aspect.
So, while some theories are based upon economic functions, others are based
upon researching the individual characteristics of entrepreneurs in trying to
understand and explain entrepreneurship. The other theories stress those personal
attributes that only entrepreneurial people possess. The scientists’ challenge from
those theories is therefore to identify personal attributes that are unique to
entrepreneurs, and to determine those attributes that play a key role in a successful
entrepreneur. This approach includes the psychological, sociological and
anthropological aspects of entrepreneurship. In the newer theoretical considerations
of entrepreneurship, Delmar’s (1996) theory stressed that earlier behaviorist
approaches are incomplete because they mainly focus on those entrepreneurs’
attributes that are stable and are not subject to frequent changes. He gave his
contribution to the contemporary theory of entrepreneurship, trying to integrate
economic-psychological models of entrepreneurial behavior, by developing a
model which is based on understanding the entrepreneurial behavior and
environment, as well as determining their influence on entrepreneurial
performances (the development of business and finances). “Entrepreneurial
behavior is determined by individual differences like intellectual capabilities,
486 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
motivation and business characteristics”. For those reasons, he represents the view
that interpersonal and organizational approaches are very important to the
understanding of entrepreneurship.
Some of contemporary entrepreneurship scientists have tried to explain small
differences between entrepreneurship and marketing. Scientist Gartner stated his
opinion that the development of entrepreneurship will greatly influence the
development of marketing theory and practice. Also, in 1992, this scientist tried to
demonstrate a difference between entrepreneurial and organizational behavior. For
an organization, to be an entrepreneur means relating personal capabilities to the
needs of the organization itself.
Meanwhile, despite the differences in definitions of the essence of
entrepreneurship, the common theme in the majority of definitions is that
entrepreneurship has creative functionality in the creation of new values by an
individual or group of business partners. In addition, in most agree that there is a
special kind of behavior which includes taking the initiative, taking the business
risk, business creativity, and organizing and innovating in all aspects of the
business where needed. A conceptual definition of entrepreneurship should
consider that differences in the interpretations arose primarily because economists
have different approaches to the matter than psychologists, sociologists or
anthropologists. Consequently, the dominating approaches are economic, cognitive
and behaviorist to entrepreneurship. Recently, organizational, marketing and
financial approaches have also been added.
However, all of these approaches should be as integrated as possible in order
to provide a complete understanding of entrepreneurship. Also, a conceptual
determination and definition of entrepreneurship should study the way organizing
and conducting entrepreneurial activities change over time. It should follow the
changes in the roles and tasks of entrepreneurs as the main conductors of these
activities, influenced by new flows of economic operation. These changes have
occurred not only in the “new economy” on firm level, but also on the global level.
TYPES AND FORMS OF ENTREPRENEURSHI P
According to Carree and Thurik (2002), entrepreneurs in history have often
been represented in many faces and assumed different roles. As identified by
scholars such as Schumpeter, Kirzner and Knight, entrepreneurs can be termed as
innovators, profit opportunists and uncertainties and risk takers respectively.
Schumpeter drew his attention to understanding an entrepreneur as an innovator.
As an innovator, the entrepreneur performs new combinations which Schumpeter
called enterprises (Karlsson et al, 2004). An entrepreneur according to Kirzner
perceived profit opportunities. This role is what was labeled Kirznerian
entrepreneurship. The last role of an entrepreneur is that of assuming the several
risks and uncertainties which may be associated with running a business. This role
is labeled Knightian entrepreneurship. As the individual introduces a new product
Faculty of Business Economics and Entrepreneurship 487
in the market or starts a new business, this entrepreneurial role can be described in
terms of the three labels. As posted by Audretsch, Lehman (2005), the individual
who launches a new firm or introduces new products can be termed as the
innovator and he assumes that he has perceived a previously uncertain profit
opportunity. The innovator also takes risks that the venture or the new product may
eventually turn out to be a total failure (Todtling, Wanzanbock, 2003).
However, according to one of the classifications of entrepreneurship by
professor Gartner (1986), we can distinguish eight different types of
entrepreneurship:
? Presenting something new: here, the businesses are partially started and
usually organized among family members and relatives with low degree of
innovating;
? Business network development: businesses are connected through
manufacturers, suppliers and distributors (different business aspects linking).
Everything operates perfectly due to “the right” selection of all participants
for business activities performing;
? Use of previous experiences, knowledge or business contacts: in this case, an
individual has no long-term interest to start a new business, which relates to
business risk. Therefore, individuals often start a business with little capital
(usually their personal savings), spending very little time in sales analysis
and marketing activities. Instead, they usually use previous experiences,
knowledge or business.
? Buying a company: individuals may get interested in buying a developed
company for running their own business. In this case individual’s attention is
focused on finding business with the least business risk;
? Conducting expert investigation: when an individual is not able to estimate
whether a business idea is good for the business or not, this is the approach.
In this case, one should hire teams of experts for conducting an
investigation, which should determine and present the validity of a new idea.
? Use of consulting companies services: an individual (small business owner)
may use services of authorized consulting companies when employing and
educating employees, giving expert advices related to various areas of
business activities, etc.
? Paying special attention to one idea: in this case, the emphasis is only on the
idea, which is not technically specified or is too complex to be implemented
easily. Regarding the fact that it has special quality, it demands hiring
experts and production of a report. Such expert opinion should be used as a
basis for development of, usually, a long term business;
? Development of adequate methods for new business organizing: An
individual (owner) is using various, well-known methods of business
planning, with intention to use them as a basis for creating his own method.
In addition, he is being acquainted with necessary details that are important
for starting a new business.
488 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
In general, entrepreneurship represents wide area for various business moves
where the entrepreneurial activities take place. How entrepreneurial activities
would develop and whether their result would be positive or negative depends on
many factors that determine the development of those activities. However, the most
relevant factor are economic environment, political conditions, technical-
technological level of development achieved and cultural environment General
social and personal context are closely related and therefore they have common
influence on performing suitable entrepreneurial activities. While on one hand
entrepreneurial activities change resources giving economical, political and social
contribution on local, national and state level (products, services, export, etc.), on
the other hand, economic conditions are especially important for development of
new businesses, including available capital and high-risk investment.
Considering that the largest number of business is financed from
entrepreneurs’ personal resources (savings, loans, etc.), their family members or
close friends, tax policy plays a significant role in starting and developing a new
businesses (Birley, 1988), as well as economic conditions (country’s economic
stability, benefits when applying for credits, etc.). Availability of capital, resources,
large goods and services markets, represent possibilities for gaining money and
appear as significant variables, which include perception of market conditions, risk
degree, unemployment rate, transporting costs, life standard, etc.The size of market
is a variable that is directly related to industry and new businesses and it includes
appropriate market structure – the number of vendors and customers,
differentiation of products and the degree of vertical integration, as well as market
development rate (Sandberg, 1986).
Social system, cultural environment, political and other conditions, under which an
entrepreneur starts new business, influence whether the new business will be successful
or not. Namely, the conditions for starting new businesses vary from national and
geopolitical, to industrial, governmental and cultural factors. These differences may be
considered when we explain difficulties, which encounter those who create policies for
favoring the development of new business and entrepreneurial activities.
DETERMI NANTS OF ENTREPRENEURSHI P
There has been a wealth of knowledge on the determinants of entrepreneurship
over the last few decades. Although studies bringing forth this knowledge have
rather been based on theoretical grounds, others have been drawn from empirical
evidence. Scholars have also been keen in investigating the impact of
entrepreneurship in relation to economic development which has further led to the
explosion of extensive literature in this field (Van Stel, Carree,Thurik, 2005). It is
important to note that a significant amount of existing literature has been based on
the observation of firms, establishments and regions in terms of their economic
performance, development and survival. The facts that can be derived from these
studies link economic development with the size and age of the firm or an
Faculty of Business Economics and Entrepreneurship 489
establishment. According to Van Stel, Carree and Thurik (2005), newly established
firms and very small firms experience systematically faster development compared
to the already established larger firms.
These findings have been found to hold in the modern industrialized economies as
well as across time periods (Karlsson et al., 2004, p.3). The connection between
entrepreneurship and economic development measured in terms of performance of the
firm has been extended even beyond observing the establishment to accommodate
geographic regions. This paper discourses how entrepreneurship can be related directly
economic development and how entrepreneurship is at the heart of economic
development of any nation. Entrepreneurship is a challenging task as many businesses
which start fail to take off
THE CONCEPT OF I NTREPRENEURSHI P
As a consequence of social and economic trends in many countries, which
appear due to fast marketing changes, there has been increasing number of new
businesses, both inside and out of existing organizational structures. New
businesses that are developed in a company under the influence of permanent
efforts of entrepreneurs for changes in existing organizational structures are called
intrapreneurship. In other words, intrapreneurship represents restructuring of
existing enterprises. Accordingly, it can be said that there are two ways of
developing entrepreneurship; that is, establishing a new one and restructuring an
existing enterprise in a process known as intrapreneurship.
Intrapreneurship is becoming the main component of existing enterprises’
development, which rose as an efficient answer to new challenges and extremely
competitive environment. Namely, for a company, in order to encourage
entrepreneurial spirit and creativity, it is necessary to develop appropriate
organizational structure. What it would be like or would it be able to change and adapt
itself, largely depends on existing business climate in a company. In other words,
where traditional management dominates, hierarchical structure will develop more
strictly, with main goal to cut down the business risks. In this manner, good business
results are achieved in shorter time. On the other hand, creativity and flexibility of a
company are reduced. Due to that, most companies demonstrate the need for
intrapreneurship development, in order to create good conditions for encouraging
development of new ideas, elimination of bad and attractive jobs expansion, teamwork,
long-term planning, adequate rewarding system and motivating the best individuals, as
well as providing the support of the top management.
Introducing intrapreneurship has great benefits because of the use of existing
technological base, developed marketing network as well as the employees who know
one another well and who had developed good relations. Besides all these advantages of
intrapreneurship, it demonstrates certain disadvantages, primarily concerning great
dependence on environment and needs for all employees in organizations to be
convinced in validity of new ideas and the need for their implementation.
490 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I MPLEMENTI NG I NTRAPRENEURSHI P I N ENTERPRI SES
For implementation of intrapreneurship process in an enterprise, it is necessary
to secure systematic realization of several phases of this process. As shown Fig. 1,
the first step in the process of intrapreneurship implementation in modern day
enterprises is providing support of the top management and mid-level management.
Without it, organization will not be ready for all the changes related to inner
transformation and restructuring of the company. One of the necessary initial
frameworks of new business concepts, in order to identify, select and train the
leaders of intrapreneurship, is development. This training should point out
providing adequate human resources in organizations.
Figure 1: The Process of Intrapreneurship Implementation Enterprises
Source:Adopted from M. Radovi?-Markovi?,Muhammad Omolaja (2010), Modern
Entrepreneurship: Concepts, Practice and Innovations)
During the training, it is necessary to develop mentor work, as well as to
provide sponsors for it. Without sponsors, there is little hope that something will
change, because the success or otherwise of introducing intrapreneurship greatly
depends on providing adequate financial means. Parallel to training of potential
entrepreneurs is the fact that it is necessary to train managers to enable them to
pool and share their knowledge with other colleagues. The training is usually
organized once a month and lasts for probably eight months.
The process of
implementing
intrapreneurship in
enterprise
Top management support
for intrapreneurship
Development and
representation of
intrapreneurship concept
and collecting
entrepreneurial ideas
Education of
entrepreneurs and
managers
Faculty of Business Economics and Entrepreneurship 491
REQUI REMENTS FOR I NTRAPRENEURSHI P
To in introduce intrapreneurial process in an enterprise, the following factors
are of paramount significance: understanding of the environment, vision and
creativity determination, flexibility in operations, creation of manager options,
encouragement of team work, and encouragement of open discussions among
colleagues at work whether senior or otherwise. Taking one after the other, these
facts are explained as follows:
? Understanding the environment includes monitoring and analysis of internal
and external company environments in order to have complete insight into
possible weaknesses, advantages or internal abilities of the company,
? Visionary approach is needed for determining company position, prices,
expenditures, planning of the informational technologies and demands for
hardware and software in order to provide company’s development and to
improve business efficiency,
? Flexibility in operations assumes quick adaptation to changes; namely, if the
organizational structure relies on flexibility of operation, it will be able to
change at will within a short time,
? Creating managers’ options means that managers should not only change
their behavior, but also their opinions and to offer various solutions to
problems of the moment. We should also keep in mind that managers are
different in their approaches to changes. It is perfectly natural that many
managers are usually afraid of changes and that they see them as stresses
before they are able to see their advantages. Likewise, many assume that
they cannot easily change their way of thinking and see the needs for
changes in a different way,
? Encouraging teamwork is necessary, as well as information flow in order to
keep managers’ efforts constructive and resulting positively. Bad
communication will hardly lead to positive changes,
? Open discussions among organizational members are necessary so that all
employees as well as other organizational members will get to know the new
ideas and possibilities of organizational change and to have a feedback. In
this way, confidence is built among the employees and faster acceptance of
changes will be assured, and
? Finally, we should point out that this kind of tasks are organized as integral
part of the organization or system, and not as independent business units; so
it is necessary to establish good cooperation and collaboration with different
units of the enterprise.
492 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE LI NKAGE BETWEEN ENTREPRENEURSHI P AND
I NTRAPRENEURSHI P
Going by the discussion so far in this paper, it would be crystal clear that
entrepreneurship do occur mainly from the outside of an enterprise whereas
intrapreneurship usually originate from, and operate within, a particular enterprise.
All innovations and creativities aiming at generating and improving gains or profits
within an enterprise are tantamount to intrapreneurial activities nowadays
commonly termed internal reengineering or organisational restructuring in modern
management. This approach to modern management in most cases lead to creation
of new products (goods or services) or improving the existing ones but it must take
place within a particular enterprise.
On the other hand, all efforts concerning new innovations and creativities with
the ultimate aim of making profit or improving productivity from outside of the
organisation as well as setting up of new business ventures are tantamount to
entrepreneurship. Hence, Intrapreneurship and entrepreneurship are complements
of each other. Both concepts in practice collectively lead to productivity
improvement which, in turn, lead to profit by the entrepreneurs, and as a
consequence, they play integral parts in economic development through creation of
more jobs, making availble more facilities (amenities) as well as advancement in
technology. In practice, however, not many people would differentiate between the
concepts of entrepreneurship and intrapreneurship as they see them synonymously.
Hence, from now onward, we will use the term entrepreneurship to refer to both of
them for the ease of analyses and explanations.
UNDERSTANDI NG ENTREPRENEURSHI P AND ECONOMI C
DEVELOPMENT
In terms of how entrepreneurship has been a stimulant in economic
development, there exist enormous discussions and debates but it is however
eminent to realize the importance of constant innovations and rivalry enhancement
(Todtling, Wanzanbock, 2003). There has been a problem in defining and
measuring entrepreneurial factors and this has further complicated the exact
contributions to economic development. According to Carree and Thurik (2002),
the concept of entrepreneurship is multidimensional and largely ill-defined.
Understanding the role of entrepreneurship in the process of economic
development will therefore require a framework because of the nature of
intermediate variables and connections which exist (Bygrave, Minniti, 2000). The
best examples of these intermediate variables include innovation, competition
mainly characterized by exit and entry of firms, variety of supply and particular
energy and efforts of invested by entrepreneurs. Other conditions of
entrepreneurship also add up when it comes to their contributions to economic
Faculty of Business Economics and Entrepreneurship 493
growth (Robbins et al., 2000). These conditions according to Carree and Thurik
(2002) include personal traits, cultural and institutional factors as shown in Figure
2 that follows:
Figure 2: Appreciating Entrepreneurship
EXTENDED DEFI NI TI ON OF ENTREPRENEURSHI P I N
RELATI ON TO ECONOMI C DEVELOPMENT
While entrepreneurship is all about the activities carried out by individuals, the
concept of economic growth has often been relevant at firm level, industrial,
national and regional levels (Robbins et al., 2000). This implies that linking
entrepreneurship to economic development will be to amalgamate individual to
aggregate levels. Considering this linkage however requires revisiting the
definition of entrepreneurship, whereby entrepreneurs, either as individuals or a
team, manifest their willingness and abilities to create new opportunities in
economy (Todtling, Wanzanbock, 2003). In this manner, novel products,
production modalities, organizational schemes and product-market combinations
are created. The entrepreneurs seek to introduce their newly crafted ideas in the
existing market in the face of obstacles and uncertainties. They also make critical
decisions in terms of business location, forms and the utilization of available
resources and institutions. In a nutshell, entrepreneurship refers to the behavioral
attributes of individuals and should not be confused with well-defined professional
persons (Lloyd-Ellis, Bernhardt, 2000).
Entrepreneurship (largely multidimensional)
Intermediate Linkages (Innovation, competition variety and entrepreneurial
efforts)
Conditions (Personal traits, institutional and cultural elements)
Economic Development
494 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ENTREPRENEURI AL EFFECTS I N THE DEVELOPMENT OF
ECONOMY
To sum up the contributions of entrepreneurship to economic development,
Carree and Thurik (2002) have provided five strands of empirical evidence to show
their involvement. The first evidence mainly deals with the turbulence effect of
entrepreneurship on the development of economy. Turbulence can be viewed as the
total entries and exits in regions or industries and can easily be interpreted as one
of the powerful indicators of entrepreneurial activities. The effect of and changes in
size distributions in regions represents the second strand of evidence as identified
by the two researchers (Lloyd-Ellis, Bernhardt, 2000). It is believed that the change
in size distribution and its ultimate effects can have a significant impact on the
development of economy (Carree, Van Stel, Thurik, Wennekers, 2002). Thirdly,
the number of market participants in any industry will finally have an important
effect on economic development and this is recognized as another strand of
evidence of the role of entrepreneurship in economy expansion (Chell, Ozkan,
2010).
Empirical literature has also identified the effect of the number of business
owners and self-employed individuals in economic development. This is the fourth
strand of evidence that seeks to appreciate the role of self-employment in the
development of economy in any state. Lastly, the economic history of previously
centralized and planned economies will also have an influence in economic
development of countries (Carree et al., 2002). For instance, in Eastern Europe,
small enterprise development served as the most vital part of the transitional
process which has seen economic development in the area.
The turbulence effect of entrepreneurship on economic development refers to
the entry and exist which however appears to have minimal contributions to the
development of the economy in the short run (Bathelt, 2001). Nevertheless, the
entry-exit turnover will make a significant contribution especially in service
industry than in manufacturing industry in the long run as evidence by empirical
research done by Bosma and Nieuwen-huijsen (Chang, 2011). The effect of size
distribution changes of firms on development performances has also been
recognized particularly when examining the share of small firms in the
manufacturing industry in the European states. Competition among firms which is
a commonplace for entrepreneurs has been shown to have a positive effect in the
development of economy (Carree, 2002). The increased numbers of participants in
the market compounded with entrepreneurial activity are some of the contributions
of entrepreneurship in economic development (Chell, Ozkan, 2010). In particular,
local competition which is measured in terms of the relative number of businesses
in a region per worker encourages development of employment in industries thus
economic development.
Entrepreneurship encourages self-employment and this has been found to have an
impact in productivity development (Chang, 2011). This is however a much contested
Faculty of Business Economics and Entrepreneurship 495
observation whether countries should adopt the equilibrium or the elf-employment
model which has largely failed counties such as Italy. According to Chang (2011), the
high levels of self-employment in the country have proved to be inefficient for
economic development. Italy has in the past experienced large negative impacts on the
development of its economy because of self-employment. Scandinavian countries
represent cases of countries with relatively low rates of self-employment than the
equilibrium and have often been characterized by extensive public sector and low rates
of entry and exit. The contrary is seen when analyzing the business structure in West
Germany where they have low rates of self-employment (Van Stel, Carree, Thurik,
2004a). In Germany, there is a total failure in the restructuring the economic policies as
the United Kingdom has done. The industrial policy in German has repressed the
structural changes by solely supporting large-scale industries with enormous subsidies
(Van Stel et al., 2004b). This has led to the lack of a vibrant economic development
made of new industries and firms in German and thus a serious barrier to innovative
activity.
FUTURE PERSPECTI VE I N ANALYSI S
From various strands of literature, there have been many insights that have
inspired a number of frameworks which should be embraced in the analysis of how
entrepreneurship plays a critical role in economic development. Carree and Thurik
(2002) found three different levels of analysis to be evident when associating
entrepreneurship to economic development as this meant that the individual level could
be linked to the macro-economic sphere. These levels include the individual, firm and
the macro levels of analysis. According to Bruce, Deskins, Hill and Rork, (2009),
entrepreneurial actions usually take place at the level of the firm and thus require a
vehicle which can transform their individual ambitions and qualities into workable
actions (Todtling, Wanzanbock, 2003). In small firms, the entrepreneur usually has the
controlling stake which acts as the vehicle for transformations. Larger firms have also
been found to mimic smaller firms in terms of business units, joint ventures and
subsidiaries in order to introduced entrepreneurship or corporate entrepreneurship. The
results of such entrepreneurial manifestations at the level of the firm must do with how
novel processes, products, innovations, and entry to new markets or start-ups are
(Tesreau, Gielazauska, n.d). At national, industrial and regional levels, entrepreneurial
actions are all composed of new experiments.
496 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON AND FURTHER RECOMMENDATI ONS
Entrepreneurship play a critical role in the development of the economy as this is
the key contributor to innovativeness and product improvement. It is one of the
important ingredients to the creation of new employments and in the building of
communities in ways of offering them jobs. By contributing to local charities, taking
part in local business, investing in projects in communities and creating and
participating in different networks in entrepreneurship, they build up robust
communities which contribute to the community development. Governments should
develop policies which will enhance entrepreneurship by understanding the critical
difference existing between small business owners and entrepreneurship. At the same
time, a misconception about entrepreneurs and where entrepreneurs can be found can
also help the local people to create the right picture of entrepreneurship and thus
become aggressive and contribute to economic development.
REFERENCES
[1] Acs, Z.J, Armington, C. (2004); Employment Development and
Entrepreneurial Activities in Cities. Regional Studies, 38(8):911- 927
[2] Audretsch, D., Lehman, E (2005); Does the knowledge spill over theory of
entrepreneurship hold for regions? Research Policy, 34: 1191-1202
[3] Bathelt, H (2001); Regional competence and economic recovery: divergent
development paths in Boston’s high technology economy, Entrepreneurship &
Regional Development, 13(4): 287-314
[4] Bruce, D., Deskins, J.A., Hill, B.C.,Rork, J.C (2009); Small business activity
and sta economic development: Does Size matter? Regional Studies, 43(2):229-
245
[5] Bygrave, W.D., Minniti, M (2000); The social dynamics of entrepreneurship.
Entrepreneurship Theory and Practice, 24(3)25-36
[6] Carree, M., Van Stel, A., Thurik, R., Wennekers, S. (2002) ; Economic
development and business ownership: an analysis using data of 23 OECD
countries in the period 1976-1996. Small Business Economics, 19: 271-290
[7] Carree, M.A (2002) ; Industrial restricting and economic development, Small
Business Economics, 18:243-255
[8] Carree, M.A., Thurik, A.R (2002) ; The impact of entrepreneurship on
economic development. Website 22
nd
March, 2012
[9] Chang, E.P (2011) ; Exploring the effects of entrepreneurship capital on the private
economic impact of American counties. Retrieved 24
th
March, 2012, from:http://usasbe.org/knowledge/proceedings/proceedingsDocs/2011/PaperID99.pdf
[10]Chell E., Ozkan, K. M (2010); Nascent Entrepreneurship and Learning.
Northampton: Edward Elgar
Faculty of Business Economics and Entrepreneurship 497
[11]Karlsson C., Friis C., Paulsson T (2004); Relating Entrepreneurship to
Economic Development. Retrieved 24
th
[12]March, 2012, from:http://papers.cesis.se/CESISWP13.pdf
[13]Lloyd-Ellis, H., Bernhardt, D (2000); Enterprise, inequality and economic
development, Review of Economic Studies, 67: 147-168
[14]Robbins, D.K., Pantuosco, L.J., Parker, D.F.,Fuller, B.K (2000); An empirical
assessment of the contribution of small business employment to U.S state
economic performance, Small Business Economics, 15:293-302
[15]Tesreau, K., Gielazauskas, V; Entrepreneurship: a driving force in the new
economy, Retrieved 24
th
March, 2012, from:http://www.missourieconomy.org/community/econ_policy/pdf/en
trepreneurship.pdf
[16]Todtling, F., Wanzenbock, H (2003); Regional differences in structural
characteristics of start-ups. Entrepreneurship & Regional Development, 15:
351-370
[17]Van Stel, A., Carree, M., Thurik, R (2004a); The effect of entrepreneurship on
national economic development: An analysis using the GEM database.
Retrieved 24
th
March, 2012, fromhttp://www.ondernemerschap.nl/pdf-
ez/N200320.pdf
[18]Van Stel, A., Carree, M., Thurik, R (2005); The effect of entrepreneurial
activity on national economic development. Small Business Economics,
23:311-321
498 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
JOURNEY OF A SMALL TOWN ENTREPRENEUR : AN
INDIAN CASE STUDY
Reena Agrawal, PhD
50
ABSTRACT
This case study showcases the vision and initiative of a small town
entrepreneur who belonged to a business family and who inherited the legacy of
entrepreneurial traits from his father. He always had a passion to establish and
operate a business of his own and generate employment opportunities for others in
the society. This case study showcases his exemplary work and discusses in detail
the education acquired by the entrepreneur, his vision, how he became an
entrepreneur, his entrepreneurial endeavours, the milestones achieved by him,
major challenges faced by him, the growth enjoyed by him and his plans for future
expansion and growth.
Key words: entrepreneurial traits, revival of sick unit, entrepreneurial
initiatives, future growth
J EL Classification: L26, F43
UDK: 005.961:005.914.3(540-77)
50
Reena Agrawal, Jaipuria Institute of Management, India, [email protected]
Faculty of Business Economics and Entrepreneurship 499
I NTRODUCTI ON
As early as the 1950s, researchers began looking for personality factors that
determine who is – and who is not – likely to become an entrepreneur. McClelland
(1961) found that entrepreneurs had a higher need for achievement than non-
entrepreneurs and were, contrary to the age old belief, moderate risk takers rather
one can say they take calculated risk. A great deal of research on the personality
characteristics and socio-cultural backgrounds of successful entrepreneurs was
conducted in the 1980s and 1990s. Timmons (1994) in his analysis of more than
fifty studies found a consensus around six common characteristics of
entrepreneurs: (1) commitment and determination; (2) leadership; (3) opportunity
obsession; (4) tolerance of risk, ambiguity and uncertainty; (5) creativity, self-
reliance and ability to adapt; and (6) motivation to excel. A related stream of
research examines how individual demographic and cultural backgrounds affect the
chances that a person will become an entrepreneur and be successful at the task.
For example, Bianchi’s (1993) review indicated that factors such as: (1) being an
offspring of self-employed parents; (2) being the oldest child in the family and (3)
being a college graduate often etc often lead a person to take up entrepreneurship
as a career. In the words of Timmons (1994) "Entrepreneurship is the process of
creating or seizing an opportunity and pursuing it regardless of the resources
currently controlled".
The present case study truly brings out that the Anil Singhal`s choice to
become an entrepreneur was not a sheer chance or pure luck but was the outcome
of several other factors that closely touched his life his family background,
family`s financial condition, his role and responsibility towards his family, and
above all the basic personality traits that he possessed.
METHODOLOGY
The methodology adopted includes the following: visiting the project site,
conducting series of interviews of the entrepreneur and interacting with the other
stakeholders. A questionnaire was drafted and then those questions were
administered on the entrepreneur. A rough draft was prepared and then it was
refined. The entrepreneur`s endeavours, experiences, hardships, success and other
nuances of business have been developed by way of a case and the vital learning’s
drawn have being illustrated by way of figures and diagrams.
500 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ABOUT THE ENTREPRENEUR
Mr. Anil Singhal is a resident of Bahraich district in Uttar Pradesh. He
belonged to a business family and his father had an oil mill. He completed his
education in arts stream from a government college. While he was still pursuing his
education, his family was going through financial difficulties and he being the
eldest child in the family was compelled to look out for opportunities to earn an
livelihood and give financial support to his family. The only thought that struck
him was Anil to start a business of his own. As he belonged to a business family he
had seen life of a businessman very closely and had experienced all the shades of
highs and lows. These had inbuilt in him several entrepreneurial traits such as self-
motivation, courage, ability to take risk, hard work and patience. He had inherited
several characteristics such as leadership, interpersonal skill and co-operative
nature from my father. He was hardworking person, who was open to new ideas
and who would pursue his work with great passion. He asserts that, the personality
traits that assisted him in becoming a successful entrepreneur are his patience, hard
work, capability of handling the complexities, an eye for opportunity and the
ability to tap the opportunity on right time, self-motivation and positive attitude.
Figure 1: Factors that made Anil an Entrepreneur
Father
As
Mentor
Oil
Manufacturing
Unit
Family
Business
Background
Personality
Traits
Entrepreneur
Practical
Exposure
Hard Working
Risk-taking
Ability
Leadershi
p
Skills
Passion
Self-Motivation
Patience
Entrepreneurship
Development
Program
Faculty of Business Economics and Entrepreneurship 501
ENTREPRENEURI AL I NI TI ATI VES
Once Anil decided to start a business of his own he realized that establishment
of a business required huge capital investment and at that point in time he was not
in a position to arrange funds to initiate a venture. But he did not get disheartened,
he looked for another alternative. The idea that crossed his mind was of re-starting
his father`s oil mill which was shut down due to unavoidable reasons. He knew he
would need funds for the same. He had a small saving of INR 12,000/- which was
not sufficient for the cause. He prepared a business plan for re-starting the sick oil
mill and submitted the same to the Unemployed Yojna Samiti, a government
agency, which provided financial support to the projects, which had financial
viability. His business plan was appreciated by the agency and they sanctioned him
a loan of INR 50,000/- with which he re-started his father`s oil manufacturing unit.
The reasons for re-starting the oil mill were: the capital investment was minimal as
the machinery such as spiller and filter was already installed; he as a child
accompanied his father to his work place so he already had practical exposure in
that business; he knew the experienced work force and had to make little effort to
bring the back to work; there were existing business contact which he could soon
revive.
Figure 2 : Revival of a Sick Unit
The process involved in manufacturing of edible oil was as follows: firstly,
mustard was bought from the market and cleaned; second, the clean mustard was
put into machines and oil was extracted and third it was filtered and stored in tanks;
Sick Oil
Manufacturing
Unit
Hiring Skilled
Employees
Funding From
Government Agency
Practical Experience of
Operating the Business
Reviving the Old
Business Contacts
Profit Generating Unit
502 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
fourth the packing was done in the tinned boxes of 15 kg and drums of 180 kg and
lastly it was dispatched to market. The initial production capacity of the oil plant
was 112,000 kg per annum but gradually he expanded the production capacity to
324,000 kg per annum. He could generate an annual income of INR 72,000/- from
this business. He largely catered the local market and a few markets of the
neighbouring cities. Although the amount was not big enough, but was enough to
fulfill his family’s basic needs. Till four-five years, his business was operated
profitably but then it started experiencing a down ward trend, this was alarming but
with his business acumen Anil managed to retain the stability. But he realized
within that it was appropriate time to look out for new business opportunities
During this time he got an opportunity to join a seven days “Entrepreneurship
Development Programme” conducted by National Alliance of Young Entrepreneur
and sponsored by the Government of Uttar Pradesh. He stated that he greatly
benefitted from that program. As he was an arts graduate he never acquired formal
business education. The learning’s drawn by him from that program included the
following: how to identify new business opportunity, how to conduct a research
before starting a venture, how to initiate a new venture, what are the different
sources from where the funds could be arranged, how to arrange necessary
resources, how to manage the day to day operations, how to tap a new market etc.
He asserted that the training programme instilled in him courage and confidence
and he passionately moved towards his goals and progressed in life.
Figure 3: Learning Drawn from Entrepreneurship Development Program
How to arrange funds and other
resources?
Entrepreneurship
Development
Programme
How to identify new
business opportunity?
How to conduct
market research?
How to initiate a
new venture?
How to manage the
day to day operations?
How to tap a new
market?
Faculty of Business Economics and Entrepreneurship 503
As there no scope for further growth in the oil manufacturing business, he
decided to venture out for some new product. He thought he should deal in such a
product which enjoys constant demand in the market, he did some market research
he analyzed that demand for rice never come down. He decided to establish a rice
mill. He arranged the necessary resources and with a capital investment of INR
100,000 and on a land area 2,400 square feet he installed the machines such as de-
husker and an imported polisher. It was a very risky decision for him as he was
invested all that he had earned so far in his life. But his thinking was that, a person
who takes risks succeeds in life, and high risk gives high returns. He strongly feels
that every entrepreneur must have an ability to take risk. The production capacity
of the rice mill was 5,184 tons per annum. The production process included the
following steps: firstly paddy was cleaned, second clean paddy was dried, third it
was put into de-husker in which rice and husk was separated, fourth the rice was
polished, fifth it was packed and sixth it was dispatched. He majorly catered to the
various markets within Uttar Pradesh. With this rice mill he was able to earn INR
20,000/- per month which was much higher than what he used to earn from oil
manufacturing unit. This was a turning point in his life where he started getting
progress in his business and the credit goes to his hard work and his never ending
motivation towards his life. Till a few years, he was individually handling his
business but he was facing some problem in the finance and accounting due to
which he had to suffer a few losses as well. Anil had a number phobia since his
childhood, so he engaged his brother to take care of the monetary aspects. Anil said
an entrepreneur should be able to do self assessment and should not shy away from
his weaknesses rather he should be able to design a proficient and trustworthy
support system for all the missing expertise.
504 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 4: Entrepreneurial Initiatives by Anil Singhal
Successful execution of the rice mills boosted Anil`s confidence and he started
looking for another business opportunity. He then took an agency of Gold Mohur
rubber roll, it is rice polisher rubbers used in machines used in rice mills. This rubber
roll was the best quality rubber available in the Indian market and was manufactured
by a company called in Delhi. Anil knew that there would always be a regular demand
for such rubber rolls in the rice mills. This new business preposition generated
additional revenue for him. Today he supplies the rubber rolls in all over Uttar Pradesh.
Anil wanted to expand the rice business even further and he desired to expand
his reach in the foreign markets as well. So he decided to apply for a license to
Agricultural and Processed Food Product Export Development Authority (APEDA)
Ministry of Commerce, Government of India so that he could seek the necessary
permission, to export rice outside India. He got the license and started exporting
rice to Nepal. Today he exports almost 2,400 tons of rice annually to Nepal. This
again resulted in substantial growth of the revenues. With this increase in market
size Anil decided to set up one more rice mill to fill up the gap. Gradually he also
started exporting cattle feed in Nepal which he bought from local market. He also
supplied cattle feed some of the states in India as well.
Two
Rice
Mills
Technolog
y Institute
Export of
Cattle Feed
Export to
Neighbouring
Country
Agency of
Industrial
Rubber
Dairy
Unit
Singhal Enterprises
Ice-
Cream
Factory
Chilling
Plant
Domestic
Market
Faculty of Business Economics and Entrepreneurship 505
Anil believes that “today there is a need for knowledge based society, having
skilled youth who bring innovations and lead the world.” Therefore, technical and
professional institute of global standards needs to be established all over the country.
He observed that the Purvanchal region in Uttar Pradesh lacks behind in educational
development. There was lack of good quality technical institutes in the region. The
youth living in that region either moved to other cities, which are recognized as
educational hubs, to seek education and those who could not afford the same had to
forgo their dreams. So Anil decided to open an engineering institute in the Purvanchal
region. He gathered support of some like minded people and together they established
an institute named “Buddha Institute of Technology”, at Gida in district Gorakhpur,
Uttar Pradesh (India). It is approved by All India Council for Technical Education, a
statutory body and also the apex body of Government of India for technical education
and affiliated to Uttar Pradesh Technical University, a state level affiliating body for
technical education. The programme that is offered is B.tech. At present 5 branches
engineering such as Civil engineering, Computer Science, Electronics and
communication, Information Technology and Mechanical Engineering are being
offered to the students. They have total of 300 seats. The institute has picked up well
and serving the society in special manner.
Anil recently started a Dairy Unit which has milk chilling plant and an ice
factory. The capital investment was of INR 4,000,000. The production capacity of
this milk chilling plant is 30,000 liters per day. Milk is procured from local
vendors, then cooling is done in the chilling plant, the milk is supplied to the ice-
cream factory and a local milk powder manufacturing unit. The daily production is
of 30,000 kg of ice creams per day.
OPERATI ONAL STRATEGY
He stated that he has a policy of changing the machineries in every five years. This
facilitates the use of latest technology; ensures superior quality production and also
prevent undue wastage of money on repair and maintenance of the machineries.
Anil started with a workforce of six people and today he is providing
livelihood to hundreds of people. He lays special emphasis on the training and
development of the workforce. People are trained to handle the machines in safe
and proper manner. This helps in avoiding undesirable mishaps at the work place.
He arranges medical insurance for all his employees along with their families and
gives bonus during the festival season.
The major challenges faced by him included cut throat competition, fast
changing technology, climatic condition which affected the agricultural produce.
These hardships helped him to learn that one must build long term relationship
with the customers, to be always ready with the product when demanded by
customers and the most important is to be confident and the ability to stand against
the failure. Another important thing is to have goodwill in the market. A business
should be known for its quality of production, timely supply and fair dealing. All
these are important principles for enjoying sustainable growth.
506 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Anil who started with an annual turnover of INR 200,000 per annum today
approximately has an annual turnover of INR 70,000,000.Starting with a single
manufacturing unit today Anil owns and owns and pilots six different diversified
projects. Today his product basket comprises of: agricultural products; industrial
products; dairy product and education.
AGENDA FOR FUTURE GROWTH
Anil stated that he has come a big way but he feel he still has to go for mile.
He would constantly be on a lookout for new business opportunities. He said that
due to globalization and liberalization there are fast moving changes in the
government policies, economy and society. There are new avenue which are
opening up and people demand diversified products and services. So if he comes
across any financially viable business preposition he would certainly love to
venture into the same. As of now he has a dream to establish school to impart
primary and secondary education to the kids living in his region. He plan is to
create a state of art infra structure, employee highly qualified and trained faculty
and deliver a contemporary curriculum which is at par with the world`s best
schools. At the moment he is busy drafting a blueprint for his dream project.
TEACHI NGS FOR YOUTH
One must work hard and be fully dedicated to whatever work they do. One must
keep their eyes and ears open for any upcoming opportunities and grab them on time.
One must be ready for failure, keep taking challenges, and don’t let the failure bring
down the morale and self-belief. One should deliver his very best. Before plunging into
any specific sector one must have in-depth knowledge of that sector, must gather
necessary expertise in that field, work hard to arrange the necessary, work passionately
the most important thing is have patience. Once a person has firm determination there
is nothing in this world that cannot be achieved.
REFERENCES
[1] McClelland, D. C. (1961). The achieving society. Princeton, NJ: Van Nostrand.
[2] Timmons, J.A. (1994) New Venture Creation: Entrepreneurship for the
21
st
Century. Fourth edition. Irwin Press, Burr Ridge, IL.
Faculty of Business Economics and Entrepreneurship 507
THE APPLICATION OF THE EU PUBLIC SERVICES
GUIDELINES IN SERBIAN PUBLIC ENTERPRISES
Daliborka Petrovic, PhD
51
Tihomir Gligoric, PhD
52
ABSTRACT
The subject of the paper refers to the unique concept of public services at the
level of European Union. The main principles of the management of these services
are outlined and issued by the European Commission within the White paper of
Services of General Economic Interest (SGEI) in the year 2004. The aim of this
paper is to analyze the level at which the management of public enterprises in the
Republic of Serbia is aligned with the new European Union’s public services
concept and management principles defined in the White Paper of SGEI. In order
to achieve the aim of the paper, empirical research and collection of the primary
data were necessary. The research method applied is qualitative by nature. The
interview with in advanced prepared section of questions was used as the research
instrument. Based on the results of the empirical research it could be concluded
that there is enough place for making the adequate changes that would improve the
market and consumer orientation of Serbian public enterprises, which would
substantially contribute to alignment with the EU guide principles in this field.
Key words: Services of General Economic Interest, European Union, Public
Service Management, Republic of Serbia
J EL classification: M20
UDK: 005:351.076(497.11) 005:351.076(4-672EU)
51
Daliborka Petrovic, University Business Academy, Novi Sad, Faculty for apllied management,
economy and finance, Belgrade, [email protected]
52
Tihomir Gligoric, University Apeiron, Banja Luka, Republika Srpska,
[email protected]
508 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
According to the new European Union concept of public services, all public
services are divided into two groups- Services of General Interest (SGI) and
Services of General Economic Interest (SGEI)- based on the (non)economic nature
of their activities. The first group of services refers to the public services such as
police, security, judicature and a like, where the active role of the state in their
provision and delivering is indispensable. The second group of public services
includes: electricity, public transport, postal services and telecommunication.
When it comes to the services of general economic interest, new elements such as
introducing market mechanisms, strengthening the competition, improving the
consumer and market orientation and professionalization of public management are
added. With the aim to give member states the framework for organizing the
services of general economic interest at the national level, in the year 2004 the
European Commission issued the White paper on SGEI outlining the basic
principles of management of these services. Although public management in the
European countries has undergone several changes since 1980 (England) and 1990
(Germany), this new EU framework for public services makes all European
countries more interested in finding the ways to improve management of public
enterprises especially in order to improve the quality of services, efficiency in their
provision and citizens’-consumers’ satisfaction. Putting the accent on the
competition, market and consumers, new EU concept of services of general
economic interest arises more interest in the professionalization of management in
the process of public service provision and delivery.
THE NEW CONCEPT OF PUBLI C SERVI CES I N THE
EUROPEAN UNI ON
The main characteristic of the new concept of public services in the European
Union refers to the unique combination of the two economic traditions- continental
and Anglo-Saxons. In the field of public services, the traditional continental
economic approach emphasizes the equality, social justice, universal access to
services for all citizens, absence of discrimination, support for low income,
vulnerable and marginalized social groups as well as the strong, active role of state
in the provision and delivery of public services. On the other hand, the Anglo-
Saxons economic approach put the accent, among the others, on the improvement
of public service quality and efficiency in the process of their provision, on the
availability of alternatives for citizens who should be seen primarily as consumers
of the public services and the professionalization of public service management.
The role of state is considered to be very important in the domain of planning,
making adequate policies, monitoring and controlling rather than in the direct,
Faculty of Business Economics and Entrepreneurship 509
often monopolistic provision of public services. Instead of choosing only one way,
European Union, from the year 2000, opted for the harmonious combination of
continental and Anglo-Saxon economic approaches, respecting the elements of
both. As a result of that, the idea of European citizens and socially balanced Europe
has been enriched with the concept of consumerism, competition and market-
oriented approach to the management of public services.
The new European concept of public services has two aims- modernization of
public service system on the internal market while maintaining the fundamental
European values in the domain of social politics where the state is perceived as
their main guarantor. In other words, the European Union strives for balance
between high level of social protection, fair national income redistribution and
achievement of planned growth rate and the improvement of EU competitiveness
(Maroto, Rubalcaba, 2002).
Modernization and competitiveness of European public services are supposed to
be achieved by selective introduction of certain Anglo-Saxons economic elements,
such as opening the market, introducing some form of competition, treating the citizens
as consumers of public services offering them the chance to choose among different
alternatives and have more influence by ensuring mechanisms for their potential
complains and reclamations. In other words, the channels for two-way communication
should be developed in order to encourage the citizens’-consumers’ active involvement
in the service provision process. Apart from that, Anglo-Saxons approach to public
service management, known as the New Public Management, also stresses the
importance of researches of consumers’ real and actual needs, their attitudes, opinions
as well as the level of their satisfaction with the various aspects of public services they
use and pay for, either directly or through taxes. Additionally, elements such as
evaluation of performances, inclusive management, better transparency and protection
of consumer rights are also highly ranked in this system of public service management.
The possibility of the integration of more economic approaches into one,
unique, European approach could be explained by the fact that social politics is
perceived not as the burden but as the important prerequisite for sustainable
economic growth in Europe (Clifton et al., 2007). Therefore, European tendency to
competitive public services goes hand in hand with the project of socially balanced
Europe which indisputably includes the guarantee of access to basic public services
for all citizens and care for socially vulnerable groups. According to that specific
mission, all enterprises providing and delivering the public services are obliged to
accept and respect the rules defined by Universal Service Obligation.
In conclusion, the idea of implementing certain elements from Anglo-Saxons
approach to public service policy and management should be understood in that
specific context of European public services concept; not as the opposite, but more
as the compatible additional elements that supports and strengthen current attitude
of the European Union that all citizens should have rights to affordable, good
quality public services which efficiently satisfy their actual needs.
510 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCI NG THE NEW EU TERMI NOLOGY I N THE FI ELD
OF PUBLI C SERVI CES
Respecting the traditional, continental economic approach as well as the
mechanisms like competition, market-orientation and consumer right to choose,
European Union opted for new, unique concept introducing even new terminology.
All public services are divided into two groups according to the predominant nature
(economic or noneconomic) of the activities of public services. Group of services
with predominantly economic nature of activities are opened to the competition on
the internal European market and named “Services of General Economic Interest-
SGEI” (electricity and gas, telecommunication, postal services, public transport).
The second group includes services which are non-economic by their very nature,
where the role of state has always been essential for their provision, like the police,
security, and judicature. This group of “Services of General Interest-SGI” is
excluded from the competition on the internal European market. This
categorization of public services in the European Union matches the orthodox
economic dichotomy of public good- pure and non pure public good, by the criteria
of non-rivalry and non-excludability (Gnjatovi?, 2005). So, the SGEI are non pure
and SGI are pure public good.
EUROPEAN REGULATORY FRAMEWORK FOR SERVI CES OF
GENERAL ECONOMI C I NTEREST
The process of forming the European regulatory framework of services of general
economic interest (SGEI) has been going through a long and continuous process,
which is characterized by the active involvement of the state members, the formulation
and updating of the official documents of the European Commission. Although the
process of creating regulations in the area of services of general economic interest is
still subject to amendments and modifications, it is possible to distinguished basic
legislative and regulatory documents governing the area of services of general
economic interest. These are: Treaty of the European Community ECT, in particular
the Articles 86 and 16, Green Paper on SGEI, White paper on SGEI. For the purpose of
this paper, Green Paper on SGEI and specially White Paper on SGEI are accented.
In the year 2003 the European Commission published Green Paper on SGEI
which is the first document at the supranational level dealing exclusively with the
issues of SGEI. The goal of Green Paper on SGEI was to open the series of
important questions in this area, and invite all member states, as well as other
stakeholders, to actively participate in shaping the future of the European concept
of public services. Hence, Green Paper on SGEI represents the first step toward the
formulation of the official European regulatory framework for services of general
economic interest. Green paper on SGEI is consisted of five main parts, in addition
to the introduction and operational conclusions.
Faculty of Business Economics and Entrepreneurship 511
The first part refers to the new terminology and definitions, as well as the role
of public authorities in the system of services of general economic interest. The
second part deals with the objective that the Community wants to achieve through
their engagement in the area of services of general economic interest. The third
chapter deals with a number of elements that could potentially constitute a common
concept of services of general economic interest. The common principles refer to:
the universal access, continuity, quality of services, affordability, consumers’ and
users’ rights protection. Additional principles had been later added as a result of
member states’ participation in the process of forming the final common European
framework of SGEI. The fourth part covers issues relating to the organization,
financing and evaluation of SGEI, while the fifth part is devoted to the
international dimensions of services of general (economic) interest.
White Paper on SGEI is consisted of introduction as a first part of the document,
Second part deals with the issue of common responsibility of public authorities in the
EU and the member states. In the third part there are basic common principles for
SGEI defined and outlined. These principles represent the EU guidelines for Services
of General Economic Interest, and as such, are given special attention in the following
part. The fourth part deals with the policy improvement with the aim to accomplish the
higher degree of coherency in the area of services of general economic interest along
with the respect of diversity. Hence, White paper on SGEI is final document regulating
this field. But it has not nevertheless to be understood as a finite step in shaping the
common regulatory framework for SGEI.
Common EU principles defined in the White paper on services of general
economic interest are in line with the basic idea of linking up the elements from
European continental and Anglo-Saxon economic traditions. Although the sharp line
can not be underlined, still it is possible to note that the principles of cohesion and
universal access to services for all citizens, respecting diversity of situations,
maintaining safety and security, providing legal certainty reflect the traditional values
of European continental economic approach. On the other hand, the principles such as
achieving public service objectives within competitive open markets, highlighting the
consumer rights, monitoring and evaluating the performance, increasing transparency
are in line with the Anglo-Saxon economic tradition.
EU GUI DELI NES FOR SERVI CES OF GENERAL ECONOMI C
I NTEREST
In the year 2004 the European Commission published the White paper on
Services of General Economic Interest, based on the suggestions and conclusions
of member states that took part in the constructive dialog at supranational level.
Despite the expected differences in opinions and attitudes of member states,
consensus was reached that services of general economic interest should be
organized with a harmonious combination of market mechanisms and the specific
mission of public service.
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In the third part of White paper on SGEI, nine guiding principles of the
Commission’s approach are outlined: enabling public authorities to operate close to
the citizens, achieving public service objectives within competitive open markets,
ensuring cohesion and universal access, maintaining a high level of quality, security
and safety, ensuring consumer and user rights, monitoring and evaluating the
performance, respecting diversity of services and situations, increasing transparency
and providing legal certainty (Commission of the European Communities, 2004).
Very important new part of EU public services policy reffers to the separation of
the process of policy formation from the process of the direct delivery of the public
services. Those who are involved in the defining the policy framework of public
services are not included in the production or direct delivery of services of general
economic interest. This part is done by the other subject or organization, which is
engaged by public authorities. Between these two parties the conflict of interest must
not exist and their mutual relationship is regulated through legal means and contract.
This kind of separation of production and delivery from policy making has already
been done in several member states of the EU, specially in England and Germany.
Based on these experiences, authority in charge of the policy making forms the policy
framework but in order to organize production and direct delivery of services of geeral
economic interest, this authority makes contracts with other parties-organizations and
agencies, which on the behalf of the public authoritz and in line with the previously
defined policy, have the responsibility for the quality and the efficiency of delivered
services. The public authority, which chooses and makes the contract with other
organizations or agencies, is accountable for monitoring and control of the delivery
process. Apart from that, in the cases where some parts of public authory are included
in the direct delivery, there has been a practice of making the semi-contracts with those
parts. This kind of semi-contracts approach forms the internal quasi market where the
relations are defined and based on the contractual principle. In addition to that, the local
authorities also has the right to engage the other parties for public services delivery and
improvement at the local level. In this case local authority enters into a contract with
the chosen organization. Reasons for local cooperation in the domain of services of
general economic interest can range from overall improvement in quality and
efficiency of services up to the need for organizing tailor-made services' delivery for
special or marginalized population groups. In all these cases, the organizations in
charge of production, organization and direct delivery of services of general economic
interest are run by professional managers.
The separation process of policy making from production and direct delivery of
services resulted in the greater and clear distinction between the policy decision making
and the professional management process. It is the relation known as principal agent
relation, in which one party (agent) acts on behalf of the other party (principal). This kind
of relations are well known in the private sector, but it is regareded as innovative in the
field of public sector. For example, the companies' shareholders (as principals) choose
management (agents) to act on their behalf. Precize conditions of the relation between the
principal and agent is defined by contract. The separation of the policy makers from the
professional management is considered to be crucial for the development of market
mechanisms in the domain of services of general economic interest.
Faculty of Business Economics and Entrepreneurship 513
The new, contract - based relatinship in the field of services of general
economic interest led to the profound change of traditional hierarchical relations,
which had generally dominated in the public sector for a long period of time.
Instead of that, modern EU aprroach puts an accent to the relations based on
contracts, with clearly defined responsibilities and accountability.
The party, which is responsible for direct delivery of public services, gets
more freedom at the operational level but at the same time it is more accountable
for the quality and efficiency of services delivered to the citizens. The party, which
is responsible for policy making is also in charge of control and monitoring of the
chosen organization's work and management. The innovative contract- based
approach also changes the previous hierarchically structured control in the public
sector towards the control based on the contract, where all the rights and
obligations of both parties are defined and specified. Therefore, the cooperation
becomes the standard in the domain of public services. By engaging the other
parties, the public authorities enlarge their capacity to offer the better quality
services to the citizens. Apart from the fact that cooperation has positive effects on
the savings in public spending, main goal of including partners in the delivery of
services to the citizens refers to the greater capabilities to offer services of better
quality (Gray, 2003). The contractual principle in the domain of public services
encourages institutional competition between the public enterprises, public-private
and regulated enterprises, cooperants as well as social organizations.
New EU framework for services of general economic interest requires the
definitions of the responsibilities for the performances of these services. Wheather
the public authorities enters into the contract with the private enterprises or the
special agnecies within the public authorities are formed, the clearly defined roles
and responsibilities are neccessary for the achievement of overall quality and
efficiency improvements in the the process of public services' delivery to the
citizens. Following the example of the private sector, public sector also turns
towards professionalism, by strenghtening the role of and significance of
management and employees who are directlz involved into the process of public
services' delivery. Although the performance appraisal is new for public sector, and
its effects are very specific, yet the general processes and techniques for the
appraisal of organizational and individual performances are considered to be the
solid foundation whcih can be apllied in several fields, regardless of whether the
organizations belongs to the private or public domain (Daley, 1992).
Appraisal of performances entails also the need for precise definition of goals
which have to be accomplished, as well as the clear criteria for appraisal of
performances and responsibilities. The responsibility is closely associated with the
evaluation of performances. If the professional managers are given the greater
control over the resources in order to achieve certain defined results, then they are
considerd to be accountable for the performances of public services (Stewart,
Walsh, 1992).
The price of services of general economic interest, method of payments and
the labor cost in public secotr had long been regulated exclusively by government.
514 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
However, with the changes of relations among the parties and bigger
responsibilities of professional management in engaged agencies and
organizations, governmental approach of price and labor cost determination has
often been seen as obstacle that limits the freedom of management's action and
affects their capabilities for effective and efficient use of available resources. The
requirement for competitive bidding, as an ingredient part of the new EU policy of
services of general economic interest, is not compatible with the restrictive
framework of labor cost and prices determination.
However, the more flexible approach to public services' prices and labor cost
determination entails also the need for the profound changes in the human resource
management in public sector. There is a need for creation of the new business
culture, where employees are adequately motived for more active involvment in the
process of creation and delivery of services of general economic interest. In order
to modernize the public services according to the EU guidelines, it is necessary to
make the public sector more attractive for current as well as future professionals.
Therefore, the new human resource management has to open more space for
personal initiative fostering the enterpreneurial spirit and encouring new ideas and
team work. The role of employees is crucial because they are mostly in direct
contact with the users-citizens and without their full engagement and initiative, the
process of implementation private business like approach would hardly be done
successfully. Modernization of services of general economic interest directly
depends on the operational effectiveness and efficiency of all employees and
management together. The employees should be offered stimulative environment,
where they can have real chance for professional improvement, career development
and promotion according to the achieved results and final outcomes. To make
employees more motivated, there is also a need for delegation of more
responsibility for tasks and operations, as well as for defining the encouraging
system of rewards. Therefore, the careers of employees in public sector should be
in line with their work performances and results achieved. In this regard, incentives
for successfull performances and the penalties for under average results have to be
more precisely defined.
The public services market had long been consisted of only one or a few
enterprises, mostly or entirely government-owned and managed. The consequence
was that management decisions had been evaluated and made in accordance to
political rather than economic criteria. In that case, enterprises involved in public
services' delivery are monolithic because in one center there is a concentration of
whole management, financial monitoring and budget control. With the new EU
policy for services of general economic interest, the existence of more bidders is
encouraged through the mehanism of public tenders. Local authorities are also
suggested to turn to the alternative ways an resources of supply and delivery of
services at the local level. This kind of chnage opens up the possiblity of
competition (or quasi-competition within the public bodies) between different
bidders that have the capacity to cover the market and satisfy users' needs for
public services.
Faculty of Business Economics and Entrepreneurship 515
Additionally, one of the major innovation in the EU public services' approach
refers to the empowerment of the citizens' role since they represent the major users
of public services. Treating the citizens as users of services or clients became
known as the concept of consumerism, well known in the private sector but entirely
new for public sector area. The concept of consumerism, instead of concept of
citizenship, represents one of the main instruments for strengthening the market
orientation in the field of services of general economic interest. Individual needs
and right to choose between different alternatives are emphasized, which is
significantly different from the previous collective, one-size-fits-all approach of
public sector. Concept of consumerism opens up the possibility of marketing
implementation in the public sector, which is also relatively new for this field
(Kosti? et al., 2013). New element of consumerism is underpinned by the fact that
citizens pay for services of general economic interest, either directly or through
taxation, which gives them the right to have better quality services, in line with
their actual needs. Respecting the citizens as consumers of public services chnages
at the certain extant the nature of relationship between the state and its citizens.
This relation is not only about obligations and responsiblities to pay taxes, but also
about getting adequate level of quality and efficincy of public services the citizens
pay for. Therefore, the state is more often understood as the guarantor of rights,
and less as the active economic entity that has to be directly invloved into the
process of public services delivery.
Although the role of government in the direct delivery of services of general
economic interest is reduced, its role in making adequate regulation and legislation,
doing continous monitoring and control of bidders has become bigger and more
important. In the very developed economies, such as England, almost every
privatization of public services had been followed by establishment of regulatory
agency in charge of monitoring and control of the private enterprise bidder
(Stewart, Walsh, 1992). The public authority bodies responsible for supervision
and control of the work processes must be separated from the interests of the
organizations/enterprises over which this control is exercised. So, the previous
practice where the inspection, monitoring, control as well as the regulation had
been done by the same organization is not compatible with the new EU market
oriented approach to services of general economic interest. According to the EU
guidelines, it is important to have independent entity in charge of supervision and
control of those enterprises directly involved in public services' delivery, with their
mutual interest strictly separated.
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TRANSFORMATI ON OF MANAGEMENT
European Union concept of services of general economic interest has given the
impetus for organizational and management changes in the field of public services
at the level of member states. In spite of differences in extent and speed of changes,
there is a clear tendency toward reducing the public sector inefficiency, which
mostly results from organizational differences compared to private sector: soft
budget constraint, lack of bankruptcy, the role of political factors, lack of
competition, specific constrains in employment policy, procurement and budgeting,
presence of principal-agent problem, strong emphasis on bureaucratic goals and
risk avoidance, rigid procedures (Stiglitz, 2004).
Since public services have distinctive mission, purposes and tasks which
private sector does not deal with, the process of introducing market mechanisms in
the management processes must not undermine and jeopardize their fundamental
components such as social justice and equity, public interest and socio-economic
welfare of society. So, the public services should be treated differently than the
private sector services (Van de Walle, 2008) even though some of private sector
mechanisms would be useful for managing the public services. This means that, in
spite of introducing market mechanisms and private sector approaches to public
service management, respect of public interest, social responsibility and traditional
European values remain vital components in the process of public services
modernization.
European socio-economically balanced approach to reform of SGEI
management is mostly focused on creation and implementation of business, private
sector alike approach in managing scares public resources, on defining clear
responsibility and accountability for the results achieved and on performance
management in line with the basic economic criteria of cost-effectiveness and
efficiency (Doherty, Horne, 2002, pp. 16).
Although not limited to that, certain key themes reflecting the transformation
of SGEI management can be identified (Steward, Walsh, 1992): the separation of
the purchaser role from the provider role, the growth of contractual or semi-
contractual arrangements, accountability for performance, flexibility of pay and
conditions, the separation of the political process from the management process,
the creation of market or quasi-market, an emphasis on the public as customer, the
reconsideration of regulatory role, a change of culture.
Faculty of Business Economics and Entrepreneurship 517
EMPI RI CAL RESEARCH ABOUT MANAGEMENT OF SGEI I N
THE REPUBLI C OF SERBI A
Topic of the authors’ empirical research refers to the question at what extent
the principles defined at the level of European union are used in the management of
public enterprises that provide services of general economic interest in the
Republic of Serbia. Since the topic of professional management in the field of
public services is relatively innovative at the national level, qualitative
methodological approach is used.
The research sample is limited by European Union categorization of SGEI so
that includes only those enterprises that provide SGEI at national level: Public
Utility City Transport Company “Belgrade” (public transport), Company
“Elektroprivreda Srbije-EPS” (electricity and gas), P.E. of PTT Communications
“Srbija” (postal services) and Telekom Srbija (telecommunication). Although there
is a certain difference between the management of the enterprises mentioned
above, the aim of this paper is to try to make general conclusions summarizing the
results of the interviews with all four enterprises (marketing departments) in order
to get the average result about the level of EU principles implementation in the
provision of SGEI in the Republic of Serbia.
The research instrument used is the interview, structured in two parts: the
current use of activities which enhance consumers’ orientation of public services,
then the alignment of management with the principles of European framework of
SGEI (defined in the White Paper of SGEI).
The research is conducted by the authors of this paper in the period from
01.07.2012 up to 15.07.2012, on the territory of city of Belgrade. The chosen
enterprises provide SGEI at the national level.
Main limitations/problems in conducting the research relate to the in advance
defined sample of only four enterprises (only SGEI as defined at supranational
level), as well as the strong hierarchical structure of the duties and responsibilities
in public enterprises and closed, “not easy available” way of internal functioning
which make the access to the persons of charge more difficult. Respecting these
rules, full anonymity of interviewees is accepted.
This research is dealing with the perspective of the public enterprises, in other
words, the supply side whereas the opinions of the consumers of SGEI, albeit
demand side, are still there to be enquired, analyzed and synthesized. Accordingly,
suggestion for the future research refers to the consumers’ perspective and their
satisfaction with the access, quality, efficiency and affordability of the services of
general economic interest in the Republic of Serbia.
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SUMMARI ZI NG AND ANALYSI S OF THE EMPI RI CAL
RESEARCH RESULTS
All of the four public enterprises analyzed have the active marketing
department in the organizational structure, within which most of the activities
concerning relationship with consumers of services are dealt with. In other words,
awareness of consumers and customers exists at the operational level in each public
enterprise. However, when it comes to the effective and efficient usage of
marketing principles in practice, there are evident differences between the public
enterprises. Nevertheless the aim of this research is to give the overall picture of
the consumer orientation and professionalization of management in the analyzed
public enterprises, so the comparisons between individual cases and their ranking
are intentionally left out.
Table 1: The level of consumer orientation in the analyzed public enterprises
(providers of services of general economic interest in the Republic of Serbia)
Activities enhancing the consumer orientation
Level of
application
Dissemination of the relevant information to citizens-
consumers
Full
Managing the system of feedback from the citizens-
consumers
Partial
Managing the system of consumers’ appeals and
complaints
Partial
Managing the system of consumers’ satisfaction Nonexistent/low
Source: Authors’ analysis
The main characteristic of SGEI providers in the Republic of Serbia refers to
the nonexistence of competitive environment. Strong monopolistic ambience
discourages the management of SGEI to apply and strengthen the market and
consumer orientation in the process of delivering public services. Hence, in all four
enterprises analyzed, only the mass marketing principles are being used
(characterized for production firms more than the service sector). So, there is only
one-way mass communication. However, from marketing perspective, the
communication means the exchange of information and their flow from two sides-
providers and consumers, supply and demand. The implementation and
management of feedback system from consumers as well as the system of
consumers’ appeals and complaints are only partially developed and used often
only as a way to satisfy the form, leaving the substance aside. Although there are
some forms of collecting the information from consumers, the level of motivating
consumers on active participation in information exchange is very low and in
certain cases even the existent mechanism of appeal is quite complicated and
Faculty of Business Economics and Entrepreneurship 519
therefore discouraging for consumers. Therefore, both mechanisms for two-way
communication with the consumers (feedback and system of managing the appeals,
complaints) are not given the proper attention. Moreover, the almost nonexistent
system of monitoring the consumers’ satisfaction additionally justifies the absence
of two-way communication with the service consumers indicating at the same time
a very low level of market orientation in the field of services of general economic
interest. To conclude, the weakest point of the providers of SGEI can be found in
the relationship with the consumers and overall market orientation of the service
providers. Hence, the development and management of organized, systematized
and strategically focused channels of communication with the final users of the
services of general economic interest should be improved.
Table 2: The application of the European Union’s principles of SGEI in the
analyzed public enterprises (providers of services of general economic interest in
the Republic of Serbia)
Guiding principles of SGEI
Level of
application
To operate close to citizens Partial/Low
Ensuring cohesion and universal access Full
Maintaining a high level of quality, security and safety Full/Partial
Ensuring consumer and user rights Full
Monitoring and evaluating the performance Partial
Respecting diversity of services and situations Partial /Low
Increasing transparency Full/Partial
Source: Authors’ analysis
The analyzed enterprises judge their operations as being close to citizens. In
almost all cases this principle is predominantly understood as active, one-way of
information dissemination through the mass media. However, to operate close to
citizens means much more than mere use of mass media. It also means getting to
know the consumer needs, demands and preferences as well as having more
flexibility in creating the service offer. These elements cannot be found in the
business strategy of the SGEI providers. The probable reason for enterprises
equating this principle with the mass communication comes from the fact that
modern, strategic reform of public sector has not been done yet at the macro level.
Consequently, the providers of services of general economic interest still operate as
a highly bureaucratic monopoly, under the influence of the government structures
and political issues. Without the macro environment that foster competition,
motivation for practicing marketing philosophy at the micro level (level of
enterprises) is substantially reduced and often considered as unnecessary.
Therefore, the public enterprises are still unfamiliar with the notion of real market
orientation and management of their operations close to citizens.
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When it comes to the principal of universal access and territorial coverage, the
situation is quite satisfactory. Moreover, the improvement of the infrastructure in
order to achieve better territorial coverage with SGEI and make them accessible for
all citizens is one of the major business priorities in all analyzed enterprises.
The standard concerning the quality, security and safety is fully implemented
in the management of analyzed public enterprises. Although static, technical and
technological sides of quality are indeed very important, maintaining the full
quality of services requires also the implementation and constant improvements of
its dynamic elements- two-way communication, interpersonal relationships and
orientation to the real needs and preferences of the consumers. So, regarding the
dynamic dimension of service quality, there is enough space for development and
additional improvements. All of the analyzed enterprises comply with the legal
regulations and rules in the domain of consumer and user rights. The necessary
information about every service of general economic interest (type of service,
prices) is publicly available and users are not misled by incorrect, inaccessible,
confusing or outdated information.
Principles of monitoring and evaluation of performances represent the
important segment of management in all SGEI providers. The annual business and
financial reports are regularly published and made publicly available. Nevertheless,
the integral parts of this standard also include the clear definition of responsibility
and accountability for performances and results achieved, the mechanism of
independent, professional control over business performances and the strategy for
timely corrections in case of unsatisfactory results. These elements are quite weak
in the management of SGEI providers in the Republic of Serbia. So, the principle
of monitoring and evaluation of performances is considered as half-done, and
hence cannot lead to a conclusion that the analyzed enterprises are goal-oriented.
In respect of diversity of services and situations the performance vary between
the analyzed enterprises (some of them are more flexible in differentiating their
services than the others). However, in average the level of flexibility in
customizing the services according to the actual needs and possibilities of the users
should be improved. The philosophy of “one-size-fits-all” is still dominating in the
management of SGEI providers. Marketing tools such as segmenting the market,
targeting the certain groups of consumers and creating customized service offer are
not systematically applied in the marketing strategy of these enterprises. Bearing in
mind that services of general economic interest have unique public mission, special
attention should be paid to the services designed for vulnerable and marginalizes
groups of users.
Since the annual business and financial results are published regularly, the
level of transparency is judged as quite positive. However, in order to increase the
transparency this principle should include all aspects of service production and
delivery. According to that, there are still enough places for certain improvements
when it comes to transparency of finance management, human resource
management, evaluation of service quality and efficiency, control systems and
management of consumers’ appeals and complaints.
Faculty of Business Economics and Entrepreneurship 521
CONCLUSI ON
Starting from the new concept of public services in the European Union, in the
year 2004 the European Commission issued White paper on Services of General
Economic Interest (SGEI) stressing the main guidelines for improvement and
professionalization of public service management: enabling public authorities to
operate close to the citizens, achieving public service objectives within competitive
open markets, ensuring cohesion and universal access, maintaining a high level of
quality, security and safety, ensuring consumer and user rights, monitoring and
evaluating the performance, respecting diversity of services and situations,
increasing transparency and providing legal certainty.
In order to see at what extant the public service enterprises in the Republic of
Serbia are aligned with the new, market and consumer orientated EU concept of
public services and at what extant the management practices are in line with the EU
basic guidelines, the empirical research is conducted and primary data are collected
in the four public enterprises at national level.
Based on the analysis of data collected, it can be concluded that lowest level of
compliance with the EU concept can be found in the domain of market and
consumer orientation of the analyzed enterprises. Development and maintaining of
providers’-users’ relationship and “win- win” profitable exchanges have not yet
been applied systematically and seriously in the management of SGEI providers at
the national level.
When it comes to the management principles, certain aspects of SGEI
providers’ management are well aligned with the EU principles (universal access,
territorial coverage, technical quality and safety, respect of consumer rights defined
by the law, system of continues monitoring and evaluation of service performances
and transparency of final business and financial results). On the other side, there
are aspects where considerable changes could be made (conducting business as
closer to citizens as possible, understanding quality management from broader
perspective, expand the system of monitoring and evaluation by defining the clear
responsibility for final results, the system of independent control and the plan for
future improvements, increasing flexibility in service provision and delivery in
order to be able to react on the diversity of situations, making all aspects of
management more transparent).
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Public Administration, Vol. 70 (Winter): 499-518
[9] Stiglitz, E., J. (2004), Ekonomija javnog sektora, Beograd: Ekonomski fakultet
[10] Van de Walle, S. (2008), What services are public? What aspects of
performance are to be ranked? The case of “services of general interest.
International Public Management Journal, 11(3): 256-274
[11]http://eur-lex.europa.eu/LexUriServ/site/en/com/2004/com2004_0374en01.pdf
(18.06.2014)
[12]http://eur-lex.europa.eu/LexUriServ/site/en/com/2003/com2003_0270en01.pdf
(22.06.2014)
Faculty of Business Economics and Entrepreneurship 523
NEW SYSTEM OF ASSOCIATION CORNER SHOP's IN
SERBIA
Nemanja Damnjanovic, PhD
53
,
Slavica Andjelic, PhD
54
ABSTRACT
Retail space has become a set of resource around which a number of entities
are fighting to provide a position for their items on the shelves of Retail Alliances.
Also, the retail space is becoming a new marketing ground with a very strong effect
of advertising on consumers decisions during the buying process. Creating and
maintaining competitive advantage requires that Retail Alliance has advantages
that its rivals do not have on the target markets. Of particular importance is
competitive advantage based on knowledge. Retail stores gathered in the alliance
have the opportunity to make sure that "the competition by working" in association
with providing benefits to all members. The work traces the future activities of
Retail Alliances, the way in organizing, survival in the market in order to
competition and efficient response to consumer demands. The main objective of
this paper is to present a focus on the demands of final consumers, which
represents a general approach to explore the new role of retail in overcoming the
gap between procurement market and sales market. Finally, the goal of the paper
is derived from the object itself, and refers to the tendency to establish a
theoretical framework and adequate empirical platform on which will be
generated opportunities for defining new strategies for positioning retailing
subjects, valid for achieving business success. Method in the study will be consist
in the fact that on the basis of theoretical assumptions and the available published
data to construct a model that future alliance should operate on the basis of the
author's practical experience.
Key words: Retail Alliance, A Partnership, Efficient Consumer Response,
Flexibility, Suppliers.
J ELClassification: L81, D71
UDK: 334.728(497.11)
53
Nemanja Damnjanovic, Graduate school of proffesional studies ,, Prof.dr Radomir Bojkovi?,,
Krusevac, Serbia, [email protected]
54
Slavica Andjelic, Graduate school of professional studies ,, prof.dr Radomir Bojkovi?,,Krusevac,
Serbia, [email protected]
524 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
The main task of this work is to adequately shows the main directions in the
way of gathered action for corner shops on the Serbian market. The main
objectives of the action are: the fight against monopolies, competition in the market
associations, better commercial terms, procurement centralization, greater
purchasing power.
MAI N CRI TERI A FOR MEMBERSHI P AND DEVELOPMENT
PHASE OF THE ASSOCI ATI ON
Retail Alliance in the market is represented as a solvent partner in trade.
Management has to worry about the conditions of competition in the short-term
(meet customer needs) and on the long-term effectiveness of Retail Alliances. So,
strategic management must be oriented in a way that the long-term Retail Alliance
was effective. Management has to prepare an alliance for a successful business in
the future, to answer the questions of what it was before and how it should be
developed in the future, in order to take competitive advantage in the market.
Retail Alliance is a newly formed system which strengthens the competitive
position of local retailers and local shops, and the survival of many small and
independent participants in the trading process. Retail Alliance members should
respect each other in order to progress and improve the operations of retail stores.
Membership in the Retail Alliances allowes them to overcome the weaknesses that
exist in terms of competitiveness of some national retailers. Within members are
exchanging a lot of knowledge and information, where the cooperation of members
takes place in relation to joint contracting, strengthen purchasing power,
cooperation in the promotion, logistics, marketing and lobbying. So, the task of
Retail Alliance is daily strengthening.
The objectives of the association or Retail Alliances:
? strengthening and improving the position of the members;
? belong to the group of top leaders in the market in the sector of high-current
products;
? cover the entire (large) market;
? creation of a single retail systems, ie. unique functional and visual identity of
the alliance;
? advancement made partnerships with suppliers;
? more flexible and longer payment currency and define additional rebates;
? implementation of centrally coordinated marketing activities, sales
promotion: action sales and promotional activities at point of sale;
Faculty of Business Economics and Entrepreneurship 525
? joint public relations;
? computerization of operations;
? opportunity to develop products with trademarks of Retail Alliances.
Retail Alliance mission is to provide consumers high-quality goods and
services for daily use with prices lower than the competition. Also, mission is to
win market share and defending against monopolies. Gathered in alliances
members have the opportunity to see for themselves that "competition through
cooperation" clubbing action provides benefits to all of them. Membership in this
group overcome the weaknesses that exist in terms of competitiveness of some
traders, because in alliance they share a lot of information and knowledge and
achieve a number of advantages. Some of them are:
? advantages in terms of supply chain management and the purchase price
through the definition of lower prices in order to achieve price
competitiveness, as well as more flexible and longer payment currency;
? the possibility of prepayment;
? better meet the expectations of consumers and suppliers,
? reducing the total cost;
? develop their own brands and expanding its image;
? protection from takeovers;
? transparent dissemination of business knowledge, information and
experience;
? the performance advantages of promotional and other marketing activities
? number of specific and short-term benefits (making action leaflets,
secondary position).
Development stages of Retail Alliances can be defined as follows:
? Defining business strategies and criteria for membership
? conducting interviews with prospective members and presenting ideas of
business alliances,
? Beginning of preliminary business discussions with suppliers,
? Defining of the accession treaty in the Alliance
? signing contract with the members and provide all necessary information on
the business member
? continued negotiations with suppliers and the signing of new commercial
contracts for the year,
? the beginning of the implementation of the defined strategy.
The main criteria for membership in the alliance is their liquidity. It is
essential that the potential member is financially capable and that in the last two
years he has not been blocked. Financial liquidity can be easily checked on the
website of the National Bank of Serbia and sales through suppliers in the field. The
most important thing is that each member has to pay its dues payable to the
eventual tolerance, if it is defined in the agreement on business cooperation with
526 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
suppliers. Before joining and signing the contracts with Retail Alliance, each
member must provide the information listed in the following table.
Table 1: The pre-accession documents
No
Name
of retail
outlet
Street Municipality Phone Store
manager
Annual
turnover
Lease or
owner-
ship
Prop
e-rty
size
1.
2.
3.
…
Company Name: Best-selling
products in
2013.
The
largest
suppliers in
2013.
The
vendor
participation in
sales as a
percentage
Company location:
Adress:
Authorized person:
Tax number:
ID number:
Account number:
Number of employess:
Number of vehicles for goods
transport:
Authorized person:
Phone number:
Mobile phone:
e-mail:
Fax number:
Submit copies of the following
1.solution for the Serbian Business
Registers Agency
3.certificate of registration to the
tax
5.notarized signatures of authorized
representatives
2.certificate of incorporation 4.list of signatures 6.ID copy
Faculty of Business Economics and Entrepreneurship 527
Data listed in the table may serve Retail Alliances to meet future member of
the alliance, to form an idea of the financial power of the future item. With the
signing of the contract and receipt of the above information, each member is
required to submit within 7 days information about turnover for a period of two
years. The information must have the following data: annual sales by product
category, the financial market for products and suppliers, as well as sales volume.
Retail Alliance thus can predict their potential, ie. purchase power and thus on
meetings with suppliers negotiate new commercial terms for the new fiscal year.
I NTRODUCI NG PRI VATE BRAND PRODUCTS I N ASSOCI ATI ON
The process of introducing products under private brand is conducted in two
phases (Barac, 1999., pp. 38-45):
? a concept phase and
? executive phase.
Private Label Department conducts their projects based on the business plan
approved by the director of the retail chain where is specified start and date of
implemetation of each project as well as the responsible person. The basis for
corrective measures is to analyze variations planned / realized and identify the
causes. The process of introducing new products under private brands is kept in a
computer program MS Project, which chronicles the phases of the project, when,
how, deadlines, responsible, planned comparison - realized, deviation and
everything else that is necessary for the information of the individual projects.
After the completion of each phase (concept and executive) of each project Private
Label Department informs service projects. At the beginning of the year, Private
Brand Manager informs the Project Director and Sales Director about projects that
are planned for that calendar year. At the regular monthly meetings, Private Brand
Manager report to the Project Director and Sales Director about realized projects
and the results of these projects.
THI RD FI NANCI AL FLEXI BI LI TY ASSOCI ATI ON
In this section, special attention will be paid to the association financial
flexibility through contracting commercial conditions.
Retail Alliance at meetings with suppliers as the main argument for improving
commercial conditions mentioned two things:
? Increased purchasing power,
? financial security,
528 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? implementation of the agreed across the network alliance.
Goal of the meetings is to improve waged on commercial terms, which is the
purpose of the alliance. Agreed commercial terms would apply to every member of
the alliance, regardless of its fair game. Retail Alliance should be seen as one
entity. We will list such commercial terms, if the maximum rebate from a supplier
to any member of the alliance was 11%, with an increase in merger and acquisition
of power, retail alliance will agree to a minimum of 12%, but the vendors are
required to pay quarterly Alliance 1% to finance the operations and management of
the alliance. This would give suppliers a total of 13%.
Price competition recording can easily determine the rebate with competitors. The
purpose of the negotiations with suppliers is to provide similar commercial terms with
other retail systems in the market to competition. Retail Alliance's strategic goals
should be to set up in each fiscal year to sign contracts with suppliers who have a stake
in a maximum of 70% of financial transactions. Why? This is the way it creates
flexibility in payments due debts. If a member of the alliance is unable to make a
payment to a supplier with whom the Retail Alliance has a signed contract, he has the
ability to redirect the money that is intended for suppliers who make up 30% of the
turnover to suppliers with which the contract was signed, in order to respect the agreed
currency and term partnerships with suppliers.
Corollary of this theory is that the vendors with which the alliance has signed
the priority for payment of overdue invoices. Through this flexibility alliance can
survive for long without significant problems that threaten its business.
CONCEPT OF COMPETI TI VENESS AMONG SUPPLI ERS I N
ASSOCI ATI ON
Because of the financial flexibility as a key strategy for the alliance, which
introduces competition among vendors, suppliers to the demands of the alliance
will came out with positive thinking. For example, if there are five manufacturers
of soft drinks on the market, the Retail Alliance will sign contracts with
manufacturers that participate in the trade about 70%. Which vendors will sign
contracts with Retail Alliance is depending on suppliers, their flexibility and
acceptance of the fact for improving commercial terms.
Suppliers with which the alliance had signed agreements will have the
following benefits:
? defined amount per annum,
? defined marketing,
? payment security,
? defined positions in retail stores,
? defined range,
? the increase in turnover,
Faculty of Business Economics and Entrepreneurship 529
? a strategic partnership through the production of products under private
brands.
COMPETI TI ON I DENTI FI CATI ON
Create and maintain a competitive advantage in the retail demands form
Alliance that has advantages that are not available to its rivals in the target markets.
Particularly important competitive advantage is based on knowledge. Once you
identify your main competitors, Retail Alliance must consider their strategy, goals,
strengths and weaknesses. Group companies apply the same strategy in a given
target market is called a strategic group. When Retail Alliance identifies its main
competitors and their strategies, should ask the following questions: what each
competitor in the market is looking for? What affects on the behavior of each
competitor? Many factors influence the goals of competitors, among them: (Ristic,
2008. pp. 98-105)
? size,
? history,
? current management and
? financial situation.
If a competitor is one division of a larger company, it is important to know
whether it uses the parent company for growth, profit and exploitation. One of the
benefits of assumptions that competitors are striveing for is to maximize profits.
However, companies vary in how they bit short compared to the long-term profits.
Another hypothesis could be that a competitor is trying to accomplish a number of
objectives: (Ristic, 2008. pp. 98-105)
? current
? profitability,
? growth,
? market
? share,
? cash flow,
? technology leadership or
? leadership.
Finally, the Retail Alliance must be accompanied by expansion plans of
competitors. The company needs to gather information about the strengths and
weaknesses of each competitor. Generally, companies should monitor three
variables when analyzing competitors: (Kotler, 2006. pp.222-231)
? Market share - share of competitors in the target market.
530 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? Participation in awereness - the percentage of customers who indicated
competitor when answering the question "Specify the first company that you
can think of when it comes to this industry sector."
? Participation in the emotional attachment - the percentage of customers who
indicated competitor when answering the question "Indicate the company
from which you wish to purchase a product."
LONG-TERM AND SHORT-TERM RELATI ONSHI P I NTERESTS
BETWEEN ASSOCI ATI ON AND SUPPLI ERS
Looking at the substance and the types of relationships with suppliers,
retailers, the right question is the practical feasibility of defining and securing the
common goals of both complementary to the strategic partnership. It is noticeable
that there is a tendency and growth trend of development of strategic partnership in
the channels, but with those entities and to the extent it is economically rational.
Partnership and cooperation are not imposed by force, they are the result of the
need for pooling and concentration of power. However, is a great number of
suppliers with which retail cooperate and continuous trend is to increase this
number, which indicates the inability to establish the same level of quality
relationships with all stakeholders in the supply chain. On the contrary, retail
achieves cooperative relations with various degrees of complexity, which produce
significantly different interests and results of operations. At this point, the question
is raised of defining the boundaries between long-term and short-term interests of
interconnected entities in channels of distribution and quantification of the effects
that are achieved. (Gullberg, 2003. pp. 122-125)
Subjects in the Retail Alliances channel will seek increasingly to establish
long-term cooperation with suppliers due to demand for improving business
performance, resisting competitive pressures, reduce uncertainty and gaining
mutual trust. However, there will always be a certain number of entities in the
chain with which will be reasonable to establish short-term relationships, especially
given the current interest, as opposed to aligning business goals and strategies in
the long run. This trend is present due to dynamic and volatile market conditions,
which require a change in the balance of power, position and role of particular
companies. Although partnership with supliers is common practice in business of
modern retailers there are some real dangers from unexpected flows that can
cause. Partners and alliance members can become mutually dependent, that will
certainly encourage deeper cooperation, but also can reduce the flexibility of the
rapid growth of retail alliances. Because of pleasure of the existing supplier mix
and long-term relationships it can be missed reactions to the changing market
conditions and the emergence of new products that will achieve higher growth in
sales and market share jeopardize existing suppliers. In this sense we can say that
the retail alliance must constantly monitor changes in market supply and market
sales in order to retain the dynamic range management and portfolio of suppliers in
Faculty of Business Economics and Entrepreneurship 531
the supply chain. If the agent is concentrated on the acquisition of existing partners,
it can happen to overlook or ignore better deals from other sources of supply for
the product category for which he is responsibile. Therefore, it should be
emphasized the importance of combining short-term and long-term interests to
maximize profitability and maintain a competitive advantage in the specific
organizational format - Alliance. In the case of a short-term interests between
suppliers and Retail Alliance is when retail sales, developing private trade mark,
trying to replicate the brand of suppliers who have already expressed market
image. The main motive of Retail Alliances to achieve an additional source of
profit is to quickly introduce products to the market under the assumption that
conscious consumers will equate quality and characteristics of products with
private label brand suppliers whose products are copied. In this case the partnership
is not expected, but a priority of both parties can be given by short-term interests
for the supplier - to take advantage of economies scale effects and unused
production capacity, and for retailers to exchange views and experiences in
organizing the production process. After that, both subjects are independently care
for the success of their brands in the market, without pretending to define a
coherent strategy. Finally, it can happen the deterioration of relations and mutual
hostility in the case when Retail Alliance copy brand of the manufacturer's as an
attempt to appropriate a certain amount of national brand goodwill. In extreme
cases there might be a war by market vendors sometimes try to point to the
ultimate retail consumer brands trying to copy the appropriate built a reputation
and image producers. Manufacturers can point out that the production of similar
products is used only to manipulate and mislead consumers in order to achieve
placement with the image of the original brands. Also, in practice, retailers are
really trying to identify the attributes and characteristics of private labels with
attributes and characteristics of the national brands, without investing significant
resources in advertising and promoting their brands as producers have in the
process of building its image. Manufacturers, as brand owners, warn that this type
of unfair competition in the long term lead to a narrowing of choices and less
interest in the future the manufacturer for further innovation. In addition to
accusations of unfair competition, the manufacturers claim that copying designs
and even packaging retail products do not invest in research activities,
development, planning and implementation of marketing campaigns, but also to
account for the effects that are achieved manufacturers, investing in that purpose,
developing and original building of national brands. Because of this situation
producers are less interested in developing new products because there is a high
probability that the copied products of retailers, directly threatening the planned
profit of potential national brands. If Retail Alliance thus prevent producers, who
will lose the sale directly by the production of a copy, they will not be able to
invest enough money in the development of new products in the future. The
occurrence of copies before achieving a certain level of profitability from sales of
national brands hindering the reproduction manufacturers and permanently affects
the decline of interest in investing in the development of new products. The answer
is that the similarity of retail products to their quick and easy comparison,
532 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
encouraging positive competition in the interests of consumers. Retailers accept the
claim that their products are similar as products under the brand manufacturers, but
reject accusations of unfair copying and emphasize a commitment to fair
competition. The next potential field of disagreement interests between suppliers
and Retail Alliance is determining the final price of the product. Each of these
parties wants the possibility of a certain type of control and influence on the price.
Manufacturers often want to project a unique image in the market by attempting to
provide unique price for their products, regardless of the chosen distribution
channel. They even sacrificed their own part of the price difference covering both
retailers lower efficiency compared to others in order to achieve a unique
calculation of rates in all channels of distribution. Nevertheless, many retailers
want to base prices on its image, goals and current business concept. Suppliers can
control prices in the event of system use exclusive distribution, launching its own
retail stores and discount retailers refusing delivery.On the other hand, the retailer
may not have control over pricing in the event that the company is an important
customer, it may inhibit the overall sales of the supplier in the event of termination
of cooperation, that has a range of products under private label items within the
same category or have the ability to sold on the gray market. Sometimes it happens
that deliberately charge high retail margins achieved regardless of the purchase
price in the negotiation process with suppliers, to be able to favor the sale of its
private label products due to their price-competitiveness in relation to the supplier
of the product we have on the shelf. This form of promote sales and create a more
favorable position for its products may jeopardize long-term relationships among
related entities and put the focus solely on short-term transactional relationships
and interests. (Barac, 2008. pp. 89-94)
Next, highlight the advantages with respect to short-term interests are reflected
in the situation when e.g. Retail Alliance requires suppliers to pay compensation
for the involvement of its product in retail stores. As we have said, by requiring
compensation for inclusion in range, Retail Alliance wants to protect itself from the
potential risks of market failure of new products. Thus a source of additional
revenue and profit from the use of force in the channel that was controlled retail
space. Manufacturers, even though they are aware that the practice is widespread,
not look favorably on such a relationship and to understand as unfair way of
redistribution of profits among companies in the marketing channels for the benefit
of retailers. Short-term stress refers precisely these forms quickly and easily make
extra profit, long-term relationships stress the mutual goals of improving
profitability on the basis of growth in sales. In today's market conditions
undoubtedly prevail commitment to collaboration and co-operation in marketing
channels and supply chain. The main areas of cooperation, which are manifested to
a greater or lesser degree are: (Borota, 2006. pp. 145-152)
? Value chain (in the form of savings and optimization of logistic processes
and increase inventory turnover ratio)
? Financial analysis (analysis of the efficacy of pricing policies, presentation,
promotion and ABC cost analysis);
Faculty of Business Economics and Entrepreneurship 533
? strategic marketing (understanding of consumer habits and perceptions,
creating demand and improving the image of the joint).
Cooperation can be achieved in three ways: an open long-term cooperation,
"hot-cold" relationship and transactional type relationships "buy-sell". In any case,
the importance of open collaboration means focusing on creating more customer
value, that is multifunctional ie. team approach, a joint business plan to maximize
mutual opportunities and coordinated development of strategic projects. Finally,
the specific field of operational and strategic cooperation between suppliers and
retail alliances are: (Borota, 2006. pp. 145-152)
? Promotion planning. Associated entities jointly plan the promotion; must
first negotiate a mutual responsibilities, planned expenditures and revenues,
plan execution, and evaluation method generated effects.
? Management of space, which can be seen as a set of common activities and
the development of effective standards of visual merchandising plans,
operational best use shelf space in retail outlets.
? Managing the development of new products, including an active role in the
design, planning, manufacturing process, packaging and defining the basic
functional characteristics of the product.
? The introduction of a new product. The main objective of the joint
introduction of a new product is to reduce potential problems in entering the
market and the costs related to that occurring. The process involves the
choice of a specific product to be introduced in assortman, making the
introduction of the operating plan and related promotion and development of
a methodology for measuring the results achieved in relation to expectations.
? Relationship management costs and prices to ensure fulfillment of the
trunover volume that generates the maximum profit (given the level of price
elasticity and total costs).
? Manage orders include specific activities such as receiving orders,
processing and delivery of goods, in order to meet the demand for certain
goods in the right quantity, at the appropriate time and with the correct
invoice for the goods.
? Transportation management planning process involves joint transportation,
handling, transfer and payments by the manufacturers, distributors and retailers.
? Inventory management is aimed at improving the level of inventory control at all
stages of the supply chain and the optimization of the costs thereof. Plan and
complete inventory of retail stores for the next period depends on the historical
sales data from the POS terminal and expected trends in the market.
? Management of unsold goods not only involves a process in which slow moving
and obsolete inventories down goods, but also preventive actions to forestall the
emergence of phenomena destroyed, damaged and substandard quality goods.
This reduces the costs that are caused in this way, and reduces the number of
cases of return purchased goods that consumers were not satisfied.
534 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
In this sense, ask questions of business ethics in the interaction and
interrelationship between related entities in marketing channels. Respect codes of
ethics and good business practice to the dominant position of power and do not use
unfair for profiting in the distribution of some participants at the expense of others,
whose market power is significantly lower. In the development of mutual relations
and the competitive bidding during the evolution of the channel, reveals and new
forms of pressure on other businesses, so that limits intrusion into the unethical
issues become so thin that it is almost double the possibilities of interpretation,
depending on the angle of observation and possible analyst bias. Notwithstanding
the commitment to long-term or short-term interests, in all respects, to be
honorable requirement to comply with business ethics. This is a necessary
precondition for the further development of Retail Alliances and encourage fair and
loyal competition.
I MPROVI NG MARKET PARTI CI PANTS I N COOPERATI ON
WI TH SUPPLI ERS
When the strategic partnership is established with the aim to improve market
performance of joint operations, critical decisions are related to the selection of
partners. Then you have to define clear criteria for evaluating the benefits and the final
choice of partner. Election of the members in the planning phase of the strategic
partnership is a two-way process. In fact, the producers should choose the traders, and
the trade should choose suppliers. The main objective of the manufacturer when
selecting retail is to ensure an adequate distribution channel for their products to the
consumer and in this sense the new improved market performance of the power of
partnerships. In assessing retailers, manufacturers often can use criteria such as market
share, the number of retail outlets, the number of consumers who shop at these
facilities, financial strength, purchasing and negotiating power, representation
competitor in the retail portfolio and the level of cooperation with them, the future
development retail network and the potential for new markets, the method of supply
retailer prefer, geographic dispersion of retail stores and distribution center distance,
reputation and image among consumers. It is therefore in the interest of retailers to join
forces in order to increase the above criteria.
Retail Alliance when choosing manufacturers as a strategic partner wants to
achiever the availability of products in the package, on the shelves of retail stores
in accordance with the requirements and needs of the end consumers. In this sense,
partner selection criteria can be:
? brand strength,
? quality and performance of products,
? market orientation and taking a global marketing campaign to support the
sale,
? the willingness to accept the return of unsold products,
Faculty of Business Economics and Entrepreneurship 535
? reliable and the possibility of efficient and accurate processing of orders,
? timeliness of delivery,
? the presence of other products in the range of retail,
? supply conditions,
? complementarily with existing retail assortment,
? joint readiness development of new products,
? benefit from the standpoint of supporting private label projects etc.
There are many criteria for evaluating the potential benefits of establishing
strategic partners, long-term relations of cooperation. Finally, we conclude that the
importance of the selection criteria individually selected just depends on the area in
which he wants to achieve the improvement of market performance. Final, Retail
Alliance will be improving economic performance, reduce production costs,
promotion of innovation and increased market orientation through diversification
of economic activities are important for improving the quality of life and a better
environment. (Ostoji?, 2013.)
FI NANCI AL POWER OF STRATEGI C PARTNERSHI P
ASSOCI ATED
Inevitable motive in establishing the strategic partnership of suppliers and
Retail Alliance is to create a joint financial strength of suppliers members,
especially the alliance. In developed market conditions integration and
concentration of capital are growing and becoming a necessity and a critical factor
in the survival of the market. The pooling of resources partners see opportunity to
help overcome the barriers to entry into new markets that increasingly require large
investments, and facilitate negotiations with a management and implementation of
the agreed overall network aliance. Financial power can manifest itself in two
ways: by increasing revenues and profitability on the one hand, and reducing
administrative and other operating expenses, on the other. Associated investments
can provide growth in sales and profits achieved, triggering a spiral of further
growth of financial strength. Certain administrative and operating costs can be
divided between partners or even reduced concerted activities and the exchange of
professional opinion about a possible their optimization. Also, this should be
considered as an advantage and share the burden of the investment risk due to the
combined financial strength. There is no need to analyze individual growth effects
of financial strength which in itself implies. There is a need to emphasize the
possibility of using financial strength of associated members as a strong motive for
entering certain entities in the partnership in alliance.
536 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DEVELOPMENT TECHNOLOGY AS A BASE FOR SUPPORT
SERVI CES
Information technology is a necessary infrastructure for the functioning of
modern strategic partnerships. This requires the exchange of information, and the
improvement in this area can be strategic. Affiliate relationships may constitute a
platform for continuous improvement and integration of technology as a support
service to business-related subjects. We can summarize that information
technology is an important factor supporting business concepts like retail alliances
such as:
? quick and efficient response to consumer demand,
? integrated management
? inventory
? joint planning,
? forecasting and replenishment,
? Category Management,
? Customer Relationship Management,
? Shelf Management
? merchandising strategies etc.
CONCLUSI ON
The first and the most important task that needs to be addressed in the policy
portfolio is to identify customer requirements in terms of quality and product
properties. It is, in fact, determine the quality of the properties which will give
consumers a priority. Product purchasing decisions involve choices between a
number of functional, structural and aesthetic properties. Retail Alliance has to
produce quality products on the market, or certain categories that consumers are
looking for. Therefore, management of Retail Alliances must procure and sell
quality products that meets their requirements. Gaps in structuring qualitative
assortment are accompanied by frequent bargains, excessive inventories, and often
permanently lost customers. On the other hand, unnecessarily tying funds for goods
with a low turnover ratio equals disaster. Range policy of Retail Alliances should
coordinate the interests of consumers and producers alliance. This means a balance
between the needs and demands of consumers, on the one hand, and reality
producers, on the other hand. The above equilibrium can not be achieved unless
production and trading companies are not cooperating. Joint planning and
production of the best selling range reflects to the unity of production and
marketing of commercial enterprises. To stumbled upon receipt of the consumer
products, retail assortment structure of the alliance to meet next looks, price and
Faculty of Business Economics and Entrepreneurship 537
consumer demands in terms of quality. Customer can perceive the value that it
provides retail in several dimensions:
? Compliance with requirements;
? the possibility of a wide selection of products;
? the price level and brand image;
? services that add value;
? establishing relationships and creating experiences.
As with any business in general, there are certain risks associated with the
operation of strategic alliances. The primary issue for Retail Alliance is to achieve
the greatest possible value, while maintaining control, and how to choose members
to achieve such a goal. There are two types of risks associated with strategic
alliances:
? risk refers to the probability that the partner will appreciate the elements of a
cooperation agreement,
? the risk environment is the amount of property that would be directly
affected by changes in political, economic and competitive environment.
REFERENCES
[1] Barac N. (1999). The role of managers in the company offers. Monograph
"Management in transition economies", Economic issues, Economics Faculty,
Nish
[2] Barac N., Goran Milovanovic. (2008). Anatomy of competitive advantage. the
book, "Developing competitive advantage in Serbia in the European
integration", Faculty of Economics, Nish
[3] Berman B., J. Evans. (2005). Retail Management. Prentice Hall, Englewood
Cliffs, New Yersel
[4] Borota Tišma A. (2006). Management in Retail. Belgrade Business School,
Belgrade
[5] Gullberg M. (2003), Retail Supply Chain Management. Goterborg University,
International Management
[5] Kotler P. (2006). Marketing Management. 12e, Pearson / Prentice Hall, New
York
[6] Ristic M. (2008). Strategic positioning of retailing. CID, Faculty of Economics,
Belgrade
[7] Ostoji? S., (2013). Potencijal porodice kao baza ruralnog razvoja, EEE 2014,
Internationaln Conference, Belgrade
doc_216841586.pdf
Entrepreneurship Factors Affecting Smallscale Business Performance And Development
Faculty of Business Economics and Entrepreneurship 1
EMPLOYMENT, EDUCATION AND
ENTREPRENEURSHIP
15-17 October 2014 Belgrade Serbia
ENTREPRENEURSHIP:
FACTORS AFFECTING SMALL-
SCALE BUSINESS
PERFORMANCE AND
DEVELOPMENT
Faculty of Business Economics and Entrepreneurship 3
Faculty of Business Economics and Entrepreneurship (BEE) from Belgrade, Serbia
www.vspep.edu.rs
International Research Institute for Social Entrepreneurship & Economic Development
(IRISEED), Birmingham, United Kingdom
www.iriseed.org
International College of Interdisciplinary Sciences, United Stateshttp://www.americanschoolofgenealogy.com
Faculty of Entrepreneurship, University of Tehran, Iran
www.ut.ac.ir
College of Economics and Management, Northwest University, China,
Yangling, Shaanxi, Chinahttp://en.nwsuaf.edu.cn
University of Business Engineering and Management, Banja Luka, Bosnia i Hercegovina,
www.univerzitetpim.com
Sofia University,,St.Kliment Ohridski,, Faculty of Philosophy, Sofia, Bulgariahttp://phls.uni-sofia.bg
ECSB - European Council for Small Business and Entrepreneurship, School of Economics,
University of Turku, Finland
www.ecsb.org
jointly organize
The Third International Scientific Conference
EMPLOYMENT, EDUCATION AND ENTREPRENEURSHIP
(EEE 2014)
4 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
EDITORS
Full Professor Mirjana Radovic Markovic, PhD
Sladjana Vujicic, MA
Assistant Professor Dragan I vkovic, PhD
INTERNATIONAL SCIENTIFIC COMMITTEE:
Academician Professor Mirjana Radovic Markovic, PhD, Faculty of Business Economics
and Entrepreneurship, Belgrade, Serbia (president)
Academician Professor Radmila Grozdanic, PhD, Faculty of Business Economics and
Entrepreneurship, Belgrade, Serbia
Academician Professor Slavko Karavidic, PhD, Faculty of Business Economics and
Entrepreneurship, Belgrade, Serbia
Full Professor Krum Krumov, PhD, St. Kliment Ohridski University in Sofia, Bulgaria
Full Professor I mani Silver Kyaruzi, PhD, Institute of Social Entrepreneurship
(IRESEED), Great Britain
Full Professor Ayinla Omolaja Muhammed, PhD, International College of Management
and Technology, Nigeria
Full Professor Ugur Demiray, PhD, Anadolia University, Turkey
Full Professor Emine Demiray, PhD, Anadolia Universityr, Turkey
Full Professor Sofronija Miladinoski, PhD, Faculty of Tourism and Hospitality, Ohrid,
Macedonia,
Full Professor Nezameddin Faghih,PhD, Faculty of Entrepreneurship, University of
Tehran, Iran
Full Professor Radovan Pejanovic, PhD, University of Novi Sad, Serbia
Full Professor Vlajko Petkovic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Full Professor Edita Kastratovic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Full Professor Radojko Lukic, PhD, Faculty of Economics, University of Belgrade, Serbia
Full Professor Hasan Hanic, PhD, Belgrade Banking Academy, Belgrade, Serbia
Associate Professor Beatrice Avolio, PhD, Faculty of Entrepreneurship, CENTRUM
Católica, Lima, Peru
Associate Professor Mohammad Reza Zali, PhD, Faculty of Entrepreneurship, University
of Tehran, Iran
Associate Professor Dragana Vojteski Kljenak, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Associate Professor Milan Krstic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Associate Professor Slavoljub Sljivic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Associate Professor Natasa Tanjevic, PhD, National Bank of Serbia, Belgrade, Serbia
Associate Professor I siaka Esema, PhD, Prentice Nigeria Ltd, Lagos, Nigeria
Assistant Professor Reza Mohammadkazemi, PhD, Faculty of Entrepreneurship,
University of Tehran, Iran
Faculty of Business Economics and Entrepreneurship 5
Assistant Professor Plama Hristova, PhD, St.Kliment Ohridski University in Sofia,
Bulgaria
Assistant Professor Dragan Milosevic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Assistant Professor Almir Pestek, PhD, Faculty of Economics, University of Sarajevo,
Bosnia and Herzegovina
Assistant Professor Vera Karadjova, PhD, Faculty of Tourism and Hospitality, Ohrid,
Macedonia
Assistant Professor Zélia Breda, PhD, Department of Economics, Management and
Industrial Engineering of the University of Aveiro, Aveiro, Portugal
Assistant Professor Neven Vidakovic, PhD, EFFECTUS University College, for Law and
Finance, Croatia
Lecturer Vasileus Kallinterakis, PhD, University of Liverpool Management School,
Liverpool, Great Britain
Tatjana Brankov PhD, Institute of Agricultural Economics, Belgrade, Serbia
Lecturer Dusan Markovic, MSc, Belgrade Business School, Belgrade, Serbia
Lecturer Aidin Salamzadeh, MSc, Faculty of Entrepreneurship, University of Tehran, Iran
Prof. Boufeldja Ghiat, PhD, Faculty of Social Sciences Oran University, Oran, Algeria
Prof. José G. Vargas-Hernández PhD, University Center for Economic and Managerial
Sciences, University of Guadalajara,Guadalajara, Jalisco, México
ORGANIZING COMMITTEE:
Full Professor Goran Kvrgic, PhD, Faculty for Business Economics and Entrepreneurship,
Belgrade, Serbia
Assistant Professor Dusan Cogoljevic, PhD,Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Assistant Professor Dragica J ovancevic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia, president of the Organizing Committee
Assistant Professor Djordje Minkov, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia, PR of the Conference
Assistant Professor Zorana Nikitovic, PhD, Faculty for Business Economics and
Entrepreneurship, Belgrade, Serbia
Sladjana Vujicic, MA, Faculty for Business Economics and Entrepreneurship, Belgrade,
Serbia
Marija Petrovic, MA, Faculty for Business Economics and Entrepreneurship, Belgrade,
Serbia
6 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
PUBLISHING AND ORGANIZACION
Faculty of Business Economics and Entrepreneurship
8 Mitropolita Petra Street
11000 Belgrade, Serbia
PERSON RESPONSIBLE FOR PUBLISHING
Full Professor Goran Kvrgic, PhD, Director of Faculty of Business Economics and
Entrepreneurship, Belgrade, Serbia
CIP - ?????????????? ? ???????????
??????? ?????????? ??????, ???????
334.71(082)
005.961:005.9(082)
005.961:005.9:316(082)
INTERNATIONAL Conference Employment,
Education and Enterpreneurship (3rd ; 2014 ;
Belgrade)
Entrepreneurship : factors affectin
small-scale business performance and
development / #[The #Third] International
Conference Employment, Education and
Enterpreneurship [EEE 2014], 15-17 October
2014 Belgrade Serbia ; [organizer Faculty of
Business Economics and Entrepreneurship ;
editors Mirjana Radovic Markovic, Sladjana
Vujicic, Dragan Ivkovic]. - Belgrade :
Faculty of Business Economics and
Enterpreneurship, 2014 (Valjevo :
Valjevoprint). - 537 str. : graf. prikazi,
tabele ; 25 cm
Tiraž 250. - Str. 11-12: Foreword / Mirjana
Radovic-Markovic. - Napomene i bibliografske
reference uz tekst. - Bibliografija uz svaki
rad.
ISBN 978-86-6069-106-6
1. Radovi? Markovi?, Mirjana [???????]
[????? ???????? ??????] 2. Visoka škola za
poslovnu ekonomiju i preduzetništvo
(Beograd)
a) ???? ???????? - ?????????????? -
???????? b) ?????????????? - ???????? c)
?????????????? - ?????????? ?????? -
????????
COBISS.SR-ID 210590476
Copyright© 2014
Faculty of Business Economics and Entrepreneurship, Belgrade.
All rights reserved.
Printing 250 copies
Faculty of Business Economics and Entrepreneurship 7
CONTENTS
I PART. ENTREPRENEURSHI P DEVELOPMENT & FI RM
PERFORMANCE ....................................................................................... 13
THE DI GI TALI ZATI ON ERA CHALLENGES FOR THE
ORGANI ZATI ON OF XXI CENTURY ..................................................... 15
SASA TRANDAFILOVIC, PHD
IVANA CVETKOVIC
THE ROLE OF FREE ZONES, TECHNOLOGY PARKS AND
BUSI NESS I NCUBATORS I N THE DEVELOPMENT OF SMALL
AND MEDI UM ENTERPRI SES ............................................................... 30
MOMCILO ZIVKOVIC, PHD
VUK BEVANDA, PHD
DOWNSI ZI NG AS A MEASURE FOR THE I NCREASE OF
EFFI CI ENCY AND FLEXI BI LI TY OF AN ENTREPRI SE ................... 50
NENAD RAVIC, MA
VLADO RADIC, PHD
MARKET ORI ENTATI ON AND BUSI NESS PERFORMANCE ........... 67
VLADO RADIC, PHD,
JOVANKA POPOVIC, PHD
BUSI NESS I MPROVI NG WI TH CLOUD COMPUTI NG
TECHNOLOGY .......................................................................................... 98
DJORDJE ILIC, MA,
MARIJA MARKOVIC BLAGOJEVIC, MA
APPLI CATI ON OF BUSI NESS I NTELLI GENCE AND OLAP
TECHNOLOGY I N BUSI NESS DECI SI ON-MAKI NG ......................... 118
JOVAN ZIVADINOVIC, PHD
ZORICA MEDIC, PHD
LEAN LEADERSHI P AS A PRECONDI TI ON FOR SUCCESSFUL
BUSI NESS OPERATI ONS OF ENTERPRI SES ................................... 140
SAVETA VUKADINOVIC, MA
JOVANKA POPOVIC, PHD
THE RESEARCH OF THE ECONOMI C EFFECTS OF
STANDARDI ZATI ON .............................................................................. 159
MILAN KRSTIC, PHD
ANA SKORUP, PHD
COMPANI ES RESTRUCTURI NG - MYTHS AND
MI SCONCEPTI ONS ................................................................................ 184
SLAVICA ANDJELIC, PHD
NEMANJA DAMNJANOVIC, PHD
8 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BUSI NESS NEGOTI ATI ON .................................................................... 204
VLAJKO PETKOVIC, PHD
ZORANA PETKOVIC
AMI CABLE FI NANCI AL RESTRUCTURI NG OF COMPANI ES I N
REPUBLI C OF SERBI A .......................................................................... 225
VLADIMIR KOZAR, PHD
ANA OPACIC, PHD
THE ADOPTI ON OF OPEN I NNOVATI ON PRACTI CES I N
SERBI AN I CT I NDUSTRY ...................................................................... 241
JELENA LUKIC, MA
I I PART. SOCI OLOGI CAL AND SOCI AL PSYCHOLOGI CAL
ASPECTS OF ENTREPRENEURSHI P ................................................. 259
ROLE STRESSORS AND ORGANI ZATI ONAL COMMI TMENT:
EMPI RI CAL RESEARCH ....................................................................... 261
PLAMA HRISTOVA, PHD
ALBENA KRUMOVA, PHD
JULIKA NOVKOVA
DEVELOPI NG BUSI NESS CULTURE THROUGH MOTI VATI ON
AND CONFLI CT MANAGEMENT ........................................................ 275
ZARKO PAVIC, PHD
MARIJA CUKANOVIC KARAVIDIC, PHD
THE TRANSFORMATI ON OF TRADI TI ONAL ORGANI ZATI ONS
TOWARDS A MODERN APPROACH BASED ON QUALI TY
MANAGEMENT AND EMPLOYEE MOTI VATI ON ............................ 295
MARINA GASIC, MSC
ENABLI NG EMOTI ONAL I NTELLI GENCE: EXPLORI NG THE
SOURCE OF MOTI VATI ON ................................................................... 307
VAIBHAV BIRWATKAR, PHD
THE MORAL VALUES OF BUSI NESS I N VI RTUAL
ORGANI ZATI ONS ................................................................................... 325
KATARINA MAJSTOROVIC, MA
DEJAN RADULOVIC, PHD
ORGANI ZATI ONAL DI AGNOSI S AND MANAGEMENT OF
CHANGE I N ORGANI ZATI ONAL CULTURE OF BANK
I NSTI TUTI ON .......................................................................................... 338
MIRYANA STANCHEVA, PHD
SNEZHANA ILIEVA, PHD
STAFF MANAGMENT AND EVALUATI NG THE STAFF
EFFI CACY ................................................................................................ 349
BORKO SOMBORAC, MA
DEJAN ILIC, PHD
Faculty of Business Economics and Entrepreneurship 9
EMPLOYEE PERFORMANCE AND DEVELOPMENT: ALCOHOL
AND I TS EFFECT ON ORGANI SATI ONAL PERFORMANCE ......... 368
SAMUEL OSEI-NIMO, PHD
IMANI SILVER KYARUZI, PHD
REFORM OF THE HUMAN RESOURCES MANAGEMENT
FUNCTI ON I N THE MI NI STRY OF I NTERI OR OF THE
REPUBLI C OF SERBI A - THE STRATEGI C BASI S, KEY
ACTI VI TI ES AND CHALLENGES ........................................................ 379
MILAN KLISARIC, PHD
SINISA DOSTIC, PHD
I I I PART. PART CASE STUDI ES ........................................................... 401
I NNOVATI VE GLOBAL COMPANI ES – SOME CASE STUDI ES ..... 403
MIRJANA RADOVIC MARKOVIC, PHD
SLADJANA VUJICIC, MA
PROFESSI ONAL EDUCATI ON AND YOUTH EMPOWERMENT
THROUGH ENTREPRENEURSHI P FOR SOCI O-ECONOMI C
DEVELOPMENT I N NI GERI A .............................................................. 418
ISAAC ELIJAH ESEMA, PHD
SASA STEFANOVIC
FEMALE ENTREPRENEURSHI P AND THE WOMEN CHAMBER
OF COMMERCE AND I NDUSTRY: ECONOMI C
EMANCI PATI ON AND CLOUT FOR PAKI STANI WOMEN ............. 431
IQBAL KHAN
I MPORTANCE OF OWNERSHI P TRANSFER PLANNI NG FOR
FAMI LY BUSI NESS ENTI TI ES ............................................................. 458
DRAGAN MILOSEVIC, PHD
DRAGICA JOVANCEVIC, PHD
THOUGHTS ON ENTREPRENEURSHI P AND I TS LI NKAGE
WI TH I NTRAPRENEURSHI P: I MPLI CATI ONS FOR ECONOMI C
DEVELOPMENT ...................................................................................... 482
MUHAMMAD OMOLAJA, PHD
ANA ALEKSIC
J OURNEY OF A SMALL TOWN ENTREPRENEUR : AN I NDI AN
CASE STUDY ............................................................................................ 498
REENA AGRAWAL, PHD
THE APPLI CATI ON OF THE EU PUBLI C SERVI CES
GUI DELI NES I N SERBI AN PUBLI C ENTERPRI SES........................ 507
DALIBORKA PETROVIC, PHD
TIHOMIR GLIGORIC, PHD
NEW SYSTEM OF ASSOCI ATI ON CORNER SHOP'S I N SERBI A... 523
NEMANJA DAMNJANOVIC, PHD,
SLAVICA ANDJELIC, PHD
Faculty of Business Economics and Entrepreneurship 11
FOREWORD
This book is the fourth in sequence, and it relates to issues of entrepreneurship.
It was preceded by the following books Entrepreneurship (2012), Entrepreneurship:
Economic Development & Finance (2013), and Gender, IT and Marketing Issues in
Entrepreneurship (2013). For the past few years, in this way, we have been forming
and expanding the existing library in this multidisciplinary field, to which we
permanently add new aspects and develop existing concepts.
National and international experts are participating in creating the
entrepreneurial library. With their research papers, they always open some new
topics and inspire us to focus and dedicate our special knowledge to those topics,
which is also the case with this new monograph. Namely, this one is different from
the previous publications from the field of entrepreneurship where the role of
entrepreneurship in economic development and financial, gender, marketing and
informatics aspects were considered. Publication Entrepreneurship: Factors
Affecting Small-Scale Business Performance and Development joined economic,
psychological, social and other factors which influence the characteristics and
development of entrepreneurship, as well as entrepreneurial behaviour.
Monograph has three parts:
I Part. Entrepreneurship development & Firm performance
II Part. Sociological and socio-psychological aspects of entrepreneurship
III Part. Case Studies.
The first part analyses the possibilities of measuring and improvement of
business results of small enterprises. Effects of different factors on achieving the
ultimate business results are taken into consideration. Considering that
improvement of organizations’ performances in modern business is more important
than ever, this issue rightfully takes the central place in this publication. The
remaining parts are in its function and represent a connected whole.
The second part of the monograph considers the issues connected to socio-
psychological aspects of entrepreneurship (motivation, emotional intelligence,
stress management etc.).
The third part consists of case studies, which are original researches done from
the aspects of various kinds and categories of entrepreneurs put into global,
regional or national context. They give us a special insight in these issues and
possibility to understand and solve the problems existing in Europe, Asia or Africa.
At the same time, this enables us to understand the differences and similarities,
which exist in certain countries and parts of the world through the vision of
development and management of entrepreneurial activities.
12 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
It is our opinion that this concept of the book will at the same time be useful
and interesting to readers. Because of the limited number of pages, we reached
some of the factors and analysed them, which only sets the discussion into motion
and invites new opinions and analyses regarding this edition’s topic. Enriching this
field, from year to year, can be seen as our obligation, which is one of the basic of
the Faculty of Business Economics and Entrepreneurship (BEE) from Belgrade –
publisher of all previous editions.
August, 2014.
Acad. Prof. Dr Mirjana Radovic-Markovic
European Academy of Sciences and Arts (EASA), Salzburg, Austria
Academia Europea (EA), London, United Kingdom
World Academy of Art and Science (WAAS), United States
Royal Society of Arts (RSA), London, United Kingdom
Bulgarian Academy of Science and Arts (BASA), Sofia, Bulgaria
Faculty of Business Economics and Entrepreneurship 13
I PART.
ENTREPRENEURSHIP
DEVELOPMENT & FIRM PERFORMANCE
Faculty of Business Economics and Entrepreneurship 15
THE DIGITALIZATION ERA CHALLENGES FOR THE
ORGANIZATION OF XXI CENTURY
Sasa Trandafilovic, PhD
1
Ivana Cvetkovic
2
ABSTRACT
In today's business environment, and under the influence of globalization and
advances in the field of information technology, organizations are facing
increasing demands for information processing. In order to respond to the
demands of the current business context, modern organization are finding the
solution in creating adequate capacity and infrastructure to support the
establishment of harmony between the external and internal factors of the design of
organization. The phenomenon of "Big Data" is the most important creation of the
modern environment that pervades and influences all the elements of
organizational design. That is why the importance of creating a digital business
function that represents the core of experts in the field of modern technology is
more and more emphasized. These experts affect the company to keep pace with the
new environment through finding new ideas, sharing knowledge and experiences
and applying them in the organization.
Key words: Big Data, Digitization, Organizational Processes, Organizational
Design, Digital Skills and Knowledge
J EL Classification: C80, M15
UDK: 005.591.1:004.4
1
Sasa Trandafilovic,Ministry of Defence – Budget and Finance Sector (University of Defence),
Belgrade, Serbia, [email protected]
2
Ivana Cvetkovic, Ministry of Defence – Defence Policy Sector, Belgrade, Serbia,
[email protected]
16 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Business context for modern organizations becomes more and more dynamic,
complex and heterogeneous, due to the increased interdependence at the global
level and taking advantage of improvements in information technology.
Modern environment is bringing the creation of new phenomena that affects
all the elements of the organization and that changes its characteristics. In such
circumstances, companies must constantly adapt to changes in order to establish a
balance between internal (strategy and organizational design) and external
(environment) organizational factors.
Starting with the key challenges of the Digital Era and with the need for
adaptation, the aim of this paper is to identify: 1. Which is a key phenomenon of
the Digitization Era and its features; 2 How and in what manner the phenomenon
of "Big Data" influences the definition of the strategic orientation of modern
organizations, as well as the process of organizational design; 3. What is the role
and place of digital functions in the modern organization.
Characteristics of the "Big Data" as a key phenomenon of the Digital Era are
presented in the first part of this paper. Then, changes in the strategic orientation of
the company, formed under the influence of the phenomenon of "Big Data" are
defined. Also, it presents the key changes in the organizational design in the Era of
Digitization, viewed through the prism of Galbraith’s Star Model. In the end it
emphasizes the role of digital functions in terms of the sustainable development of
the modern organization, with presentation of appropriate conclusions.
BI G DATA - CURRENT CHALLENGE
The changes that marked the end of the XX century had a great impact on
modern business organization. New global markets have become highly
competitive, with demand for continual adjusting the strategy and structure of the
organization to external business environment. The basic characteristics of modern
environments become: complexity, dynamism, heterogeneity, and hostility
(Petkovic, 2011). In such an environment a key competence of the organization
becomes the ability to anticipate and implement future changes. Successful
companies increasingly develop the ability to create a stable environment for
continual changes at any time and as such are called flexible organizations
(Overholt, 1997). Following the changes in the environment and on the basis of
their needs for adjusting, flexible organization continually develop new strategies
and in accordance with that, change their elements of the organization in order to
achieve coherence between environment, strategic orientation and organizational
design.
Faculty of Business Economics and Entrepreneurship 17
In the extremely competitive global economy, inadequate elements of the
design of the organization that are chosen by the top management cost very much,
and delayed reaction of management can be even more damaging for the
company's position on the market, given the pace of implementation and adoption
of innovations, as well as complex technological and market knowledge. In these
conditions, organizational design becomes a key instrument for anticipating and
not only for monitoring and responding to the demands arising from changes in the
environment (Miles, Scaringella, 2012:69).
One of the most important factors of a modern environment is globalization, so
today we are talking about global companies, global consumer and homogenization
of consumer needs around the world, global manager, and global industries as the
basic creations of globalization. The global business environment brings greater
risks but also greater opportunities for the success of a company. The main
challenge that organizations of XXI century are facing is how to avoid threats of
the modern environment, and take advantage of the benefits it brings. Keeping in
mind the growing importance of the development of information technology and
innovations, the key challenge for modern organization is constant acceptance of
changes due to technological progress and alignment of strategic orientation and
design of organization with updates in the field of information and communication
technology.
Information technology requires new infrastructure of organizations, new
skills and knowledge while defining new roles and positions in the organization. It
increases the flexibility of the organization and facilitates coordination, and also
leads to changes in the decision-making process. The information in the Age of
Digitalization is available to everyone and is the primary source of competitive
advantage for modern companies. Successful management and use of information
from different sources become an essential way of creating value. Proceeding from
this, Galbraith (2012) predicts adding the new dimension to the structure of
organization for the future called "Big Data" which is defined as an independent
comprehensive database that includes data of all dimensions of organizational
structure (for example, information about customers, regions, business functions
and business units). These data are centrally collected and used by corporate
leadership in order to take real actions. Also, the strategic importance of the term
"Big Data" means adding analytical capabilities to existing organizations.
For many years, organizations have been taking advantage of databases,
gathering, and storing, analyzing and using information for making decisions. But
what is new about the phenomenon of "Big Data" is a large amount of information,
speed and variety (McAfee, Brynjolfsson, 2012:62-63). These innovations affect
changes in the organization and analysis of data in two ways (Galbraith, 2014), as
follows: 1) more varied data appear in quantitative and qualitative sense, which in
the past were clearly structured in rows and columns, and today it is stored
unstructured and if necessary, can be digitized, stored and analyzed 2) the new data
is available in real time, which basically means that the data that is related to the
previous actions is replaced by the information that is connected to the future
actions and that may affect the final results.
18 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Possession of the information in real time is one of the basic conditions for
achieving positive results of today managers. Also, very important condition
involves the creation of organizations whose processes will be designed to support
real-time decision-making in order to enable rapid response to changing conditions.
Organizations must take into account that the risk of inaccuracy and unreliability of
information increases due to the increased availability and visibility of information
and data transfer rates (Berner et al., 2014:15).
Basic characteristics of the Big Data Era, and comparison of these properties
with the Smart Machine Era, that preceded it, were presented in Table 1.
Table 1: Comparison of information visibility in the past and the future
Source: Berner M., Graupner E., Maedche A., (2014), The information Panopticon
in The Big Data Era, Journal of Organizational Design, 3(1) pp.15.
Starting from the need for innovative solutions in the field of data acceleration
and in order to speed up process of reporting and analysis, the IBM company uses a
special system for data processing that functions on the foundation of open-source
software solutions, which are used for analyzing and organizing large amounts of
structured and unstructured data. Using the platform, the IBM company receives
data from various sources (posts on social networks, digital pictures and videos,
online transactions, data obtained using the capabilities of modern mobile phones),
and then uses for decision-making and making the necessary analysis (Figure 1).
Faculty of Business Economics and Entrepreneurship 19
Figure 1: Platform of the IBM company
Source:http://turbotodd.wordpress.com/2013/04/03/big-moves-in-big-data-ibm-
new-data-acceleration-hadoop-capabilities/
Modern global companies are under constant pressure to analyze more data,
increase the speed and reduce costs in order to create deeper customer relationships
as well as to avoid threats and identify new opportunities for revenue creation. To
address these challenges, the IBM company introduced the implementation of
“BLU Acceleration” software that combines various techniques to improve
analytical performance and simplify administration by: 1. providing the ability for
users to have faster access to information and make the right decisions; 2. allowing
the use of, so-called, “data skipping” in order to exclude unnecessary and duplicate
data from the analysis; 3. providing an analysis of data simultaneously between the
two processors and 4. performing data compression which means that data would
not have to be decomposed to be analyzed.
In the following text we analyze the influence of "Big Data" on defining the
business strategy, the process of organizational design, as well as the role and place
of analytic function in the structure of modern organizations.
20 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BI G DATA AND STRATEGY
Organizations that manage to respond to the challenges of the Digital Era and
ensure a successful market position previously have defined strategy that will
monitor changes in the modern business environment, and which incorporates
phenomena from external sources. Modern authors (Galbraith, 2014; Miller, 2014;
Berner et al., 2014; Grossman, Siegel, 2014; Korhonen, 2014; Gabel, Tokarski,
2014) place an emphasis on the concept of the "Big Data" as the most important
phenomenon of the environment of the XXI century and its impact on the strategic
management of the company by introducing a number of changes in the strategic
orientation and defining strategies of modern organizations.
By analyzing the research and opinions of many authors in the field of
strategic management and organizational design we can distinguish the following
changes:
? the time of the decision making process speeds up
? the consumer needs are put in the foreground as the main condition to create
value
? there is a constant need to innovate
? the procreation of a need to create a complex organizational structure
? changing the characteristics of human resources through the emphasis of
new skills and knowledge necessary to perform new tasks.
Modern organizations have large databases in order to make adequate
decisions and properly react to changes in the environment. Communication
channels permeate all the elements of business activity and derive information
from them, whether it is about internal channels within the organization or external,
related to communication with stakeholders outside the company. Information is
becoming easily accessible to everyone, to both, strategic management and
operational managers, and this contributes to real-time decisions making which is
used as an instrument for facing immediately without delay and responding to the
demands that are imposed by the external world (Berner et al., 2014). The Nike
Company applies Software Developmental Processes that occur in the continued
and iterative cycles. New products is set on the company website with minimal
features, and then the visitors learn about the characteristics of the product, present
their experiences and propose appropriate adjustments which the development
team immediately consider for modification of the product in accordance with the
desires of potential customers (Galbraith, 2014:7).
This indicates that the main goal for the organizations of XXI is creating value
for their customers in order to sell their outputs in the market successfully, and
consequently increase their results and projected values. Constant communication
with customers using a variety of tools, especially social networks (Facebook,
Twiteer, Instagram, LinkedIn) is becoming increasingly important due to the
availability of instantaneous information about modern market trends and the
possibility of making optimal decisions in order to meet customer needs.
Faculty of Business Economics and Entrepreneurship 21
Therefore, the availability of information provides opportunities for companies to
innovate continuously and to improve products and services.
In the current conditions the modern environment has been shifting the locus
of innovation outside the boundaries of a firm, considering that entities outside the
traditional boundaries of the organization have specific knowledge and solutions
that can be used to create value for consumers, and for the organization, which
contributes to improvement of market position of the company. These innovations
are called open innovation (Gulati et al., 2012). The most important actors with
whom organizations share knowledge and skills apart from other organizations
(direct or indirect competitors, educational institutions, institutes, etc.) are
consumers themselves.
Visibility and accessibility of information to all organizational levels increases
the requirements for the creation of new capacity for processing information, and
the decentralization through the lateral forms of coordination (Berner et al., 2014).
Creating a new form of organization is the result of the needs of a company to align
its internal (strategy and structure) with external factors (environment). This
creates a multi-dimensional matrix model, an innovative model and horizontal
structure. Today only the most advanced and most successful companies (IBM,
Procter & Gamble) reached the most complex four-dimensional matrix structure
(dimensions: function, business unit, region, customer). Galbraith (2012) goes a
step further by envisaging the introduction of the fifth dimension, and thus creating
a fifth-dimensional matrix structure. This new dimension is the "Big Data".
In modern environment circumstances data becomes essential strategic assets,
the need for specialists in the new fields and new professions are much wider than
the needs of people who only know how to manage and use databases. Under the
influence of "Big Data" existing jobs are increasingly redefining, and therefore the
need for entirely new occupations. Modern operating systems require analytical
skills, complex knowledge related to finding software solutions, top professionals
in the field of data management and definition of information strategy.
Today, there is a lack of digital experts, experts in finding software solutions,
experts in social media, IT strategists, professionals in the field of database
management and analysis at the labor market. Therefore, there are more frequent
suggestions for coordinated and mutual cooperation of universities and modern
organizations from different sectors (for-profit or non-profit) which create
conditions for proper respond to requests for needed skills in the Era of "Big Data"
(Miller, 2014).
22 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BI G DATA AND ORGANI ZATI ONAL DESI GN
When it comes to organization, changes that the phenomenon of "Big Data"
causes can be best illustrated by using Galbraith’s Star Model shown in Figure 2
(Galbraith, 2014:11-12). In this model, Galbraith (2002) identifies five
organizational components to be matched with each other, and they include: 1)
Strategy - defining a clear vision, goals, values and sources of competitive
advantage; 2) Structure - defining structural elements (training, distribution of
authority, departmentalization) and relationship; 3) Processes - refer to the teams,
informal networks and integrated roles that are designed to allow the connection of
all elements of the organization; 4) Reward system - a special element that has the
aim to align individual goals with organizational goals and 5) People - defining
strategy in the field of human resources with an emphasis on skills, abilities and
competencies required of employees, except that the different strategic orientations
of company means adjusted human resources strategy.
Galbraith (2014) predicts that the use of dual strategy will be increasingly
important in the Information Era. The first strategy refers to the developing of
digital skills in order to make the best possible decisions and reduce the time of
their adoption. The second strategy assumes the use of data and analytical skills to
create appropriate analysis and preparation of data structured reports for the
specific needs of different stakeholders of the organization. In this regard, there is a
need to create special digital organizational unit that has the characteristics of a
profit center.
Figure 2: The impact of the Big Data phenomenon to the organization through the
prism of the Star Model
Source: Galbraith J. R., (2014), Organization Design Challenges Resulting from
Big Data, Journal of Organizational Design, 3(1) pp.12.
Faculty of Business Economics and Entrepreneurship 23
When it comes to organizational structure, the existence of digital corporate
officer, whose function is to promote the importance of analytic functions and the
digitization of management process can be noticed. In essence, this person has a
leading role, with the aim to show the importance of information and databases, as
a strategic asset of modern organizations. It is also assumed that the need for the
introduction of digital officer will be much wider, and that each dimension of
modern organization (regions, functions, business units, consumers) will require
digital business unit.
Despite the Galbraith's projections that the Big Data will become the fifth
dimension of complex matrix structure, this matrix is still not implemented in
practice. However, with the further development of information and
communication technology and the increasing computerization and digitization of
business processes, it is reasonable to expect its establishment in a relatively short
period of time. We could also expect that experts in the field of the most advanced
technology (software engineers, database experts, professionals in the field of
modern digital systems, etc.) will be implemented in the process teams that will be
formed for finding the most effective solutions.
One of the crucial consequences of the increasing importance of information
and the use of databases, as well as gaining the new knowledge and skills that are
necessary in order to meet up with the changes in the environment in which the
company operates is the transfer of power to the digital units (Galbraith, 2014).
They have not only the core of digital experts but also a huge number of updated
information about the market trends and internal processes, which significantly
increases the importance of their role in terms of making the best decisions.
Organization of XXI century must create processes that are consistent with a
changed structure and strategy. Digitization process involves the use of analytical
models, analytical infrastructure and analytical operations (Grossman, Siegel,
2014:22-23). Analytical models contain large amounts of data that are collected,
tested and structured using different methods. Analytical infrastructure includes
adequate software solutions, applications and platforms for data management and
data processing, as well as the creation of models and their implementation. It also
assumes creation of an infrastructure that can support the harmonization of
requirements for information processing with the requirements of capacity for
information processing. For example, the use of internal social networks as a way
of communication in the organization as well as the tools for communicating with
stakeholders in the external environment, creates cross-functional digital teams
which aim to share data from their domain in order to take joint measures and
come up with creative solutions through the exchange of knowledge, experience
and ideas. Finally, analytical operations are various processes undertaken to
produce the final outcomes of the model, which will be further used in the decision
making process and taking further actions in the business.
The last two elements of Galbraith’s Star Model are very closely connected.
Performance management system must be designed to be compliant with the other
elements of the Star Model, but primarily to reward those people in the
24 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
organization that have the most advanced skills and knowledge in different areas,
then the proper implementation of that knowledge, and teamwork. Due to the
frequency and intensity of change that organizations are facing, it can be noticed
that the need for new professionals who are specialized in different fields of
modern technology is becoming more frequent. Also, if we look at the today's labor
market, we can notice the lack of digital experts and specialists for implementation
of the most advanced technology. As a main solution for this issue Miller (2014)
suggests the cooperation between Universities all over the world and modern
companies. In this manner, the educational institution may, depending on the
current trends, in collaboration with modern business entities predict new jobs and
improve the existing occupations, and in this way make it possible to create an
adequate supply of labor, both in qualitative and in quantitative terms.
A major challenge for modern Universities involves the acquisition of the
necessary skills through appropriate programs of education and professional
development, that can create the ”T shaped professionals'' (Miller, 2014). Here the
vertical line of “T'' is considered the foundation and depth of knowledge that
should be possessed by a professional, and a horizontal line is its breadth of
knowledge, or more precisely, the knowledge that a student gains in collaboration
with experts from other parts of the organization, through teamwork, and
exchanging creative design solutions. In order to become an outstanding expert,
besides the narrow specialization, it is necessary to acquire knowledge from other
disciplines such as mathematics, statistics, engineering, analytical discipline,
management and decision-making, organizational science, computer science and
programming, the ethics of data usage, legal sciences, data security, visualization
and communication. According to the author mentioned above a recommendation
for closing the gap that exists between the need for certain skills, knowledge and
supply in the labor market includes the following: 1) create a formal definition of
priority tasks; 2) develop curricula that will produce the required knowledge and
skills; 3) set the minimum standards of literacy in the field of database
management which must be possessed in digital age; 4) create an open “online
community'' that will discuss topics of interest, which connects government,
academia and the business world; 5) provide the literature that will enable learning
from this area; 6) develop a working group to identify key issues in the field of
digitization of the organization, such as data security, individual privacy and the
ethical use of data.
Faculty of Business Economics and Entrepreneurship 25
BI G DATA AS AN I NDI VI DUAL ORGANI ZATI ONAL UNI T
Considering the growing importance of the impact of modern technology on
the organization of the XXI century, certain questions should be asked: 1) Is it
necessary to create a digital business function as a separate function in the
organization? 2) Where is digital business function located in the company? 3)
What is the degree of its independence? 4) What knowledge must digital experts
possess? In the following, special attention is given to these questions.
Correlation between digital functions in the organization and other parts of the
organization can be viewed through the prism of the theory of information
processing introduced by Nedler and Tushman (1978). This theory presupposes
linking the requests for information processing, on one hand, and the capacity for
information processing, on the other hand. The greater the complexity of tasks and
environment, as well as the interdependence of organizational units, the greater the
demands for information processing and decentralization. The capacity for the
most effective way to respond to requests for information processing could be
created through the implementation of digital infrastructure in modern
organizations. In this context, it can be assumed that the digital functions are
increasingly gaining in importance, and their primary basis represents the core of
professionals and experts in the field of software engineering, database
management, digital and social media experts. As the need for real-time decision-
making is growing, the role of digital decision makers is also growing. These
decision makers are seen as digital managers who have a mediating role in the
process of implementation of the "Big Data" (Galbraith, 2014).
Modern companies are constantly facing with the challenge of whether to
implement different types of digital functions in existing functions or to create a
new, separate, digital function. For example, a digital marketing and social media
experts can be included in the group for marketing. The Nike company decided to
create a separate digital unit, NikePlus.com. This unit is not fully independent, but
it is interdependent compared to other and play a mediating role in the
organizational structure of the Nike company. Functional digital structure of the
Nike company is shown in Figure 3.
26 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 3: Digital functional structure of Nike company
Source: Galbraith, JR (2014), Organization Design Challenges Resulting from Big
Data, Journal of Organizational Design, 3 (1) pp.8.
The next question to be answered is where the digital business unit is located in
the company. In this sense, there are three models of locating, and each of them
represents a settlement between centralization and decentralization (Grossman, Siegel,
2014:22): 1) Model of centralized digital function involves setting up all of digital
experts into a single unit. In this way it is easy to achieve a critical mass of experts, to
get the necessary data, to lead integrated infrastructure and to provide an adequate
expertise for the efficient use of statistical models. On the other hand, this model
emphasizes the distance of digital experts from other business units, and therefore the
lack of understanding of business units and their needs; 2) Model of decentralized
digital function implies the existence of digital experts in each business unit. In that
way the understanding of the needs of units is achieved and models are created in
accordance with their requirements. A shortcoming that is associated with this model is
the lack of a critical mass of professionals who will work for the welfare and
improvement of the system as a whole, and not just at the level of business unit; 3) A
hybrid model of locating digital function is a combination of the previous two models.
The critical mass of experts realizes their concentration in the central unit, except that
there are also digital experts who are located in different business units. This model
primarily aims to achieve the benefits of both centralization and decentralization.
In general, it can be concluded that the perfect model does not exist. Managers
need to identify the most appropriate model to match the requirements of an
organization.
Reports, analysis, reviews and other analytical materials which can be used for the
purposes of internal organizational units, as well as for external stakeholders could be
made by combining and processing of relevant information. Some companies have
Faculty of Business Economics and Entrepreneurship 27
recognized this opportunity, so they created the foundation for the creation of profit
centers, by assuming that digital organization units can sell their products to external
customers, and using that as a basis to generate their own income (Galbraith, 2014). In
this way, the level of independence of digital organization units extends, and each unit
has the opportunity to create "a small company", which could compete with other
companies in the same industry in the market through production of its output. It
should be noted that full autonomy of digital unit compared to others in the
organization is not a solution that will give the best effect, because of the fact that each
organizational unit requires maintenance and support of top management in order to
start with its own business. Constant harmonization of the pace of work with other
organizational units is also required because the effects of the organization as a whole
are greatest when there is the interdependence between organizational units, and their
work together is achieved and coordinated.
Finally, we need to answer the question of what knowledge a digital expert
should have. Grossman and Siegel (2014) have developed a model that
distinguishes: analytical knowledge, knowledge of the business and the use of
information technology as the primary knowledge (Figure 4).
Figure 4: Required knowledge of digital experts
Source: Grossman RL, Siegel KP, (2014), Organizational Models for Big Data and
Analytics, Journal of Organizational Design, 3 (1) pp.21.
This model supports the hypothesis that it is necessary for the modern experts
to possess much broader knowledge that is not exclusively related to the area of
database management and knowledge of analytical models. Digital experts must,
above all, know how to implement successfully and be familiar with information
infrastructure of organization, and then the company's business, product and
service, as well as the characteristics of organizational parts.
28 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON
The modern business environment is heavily influenced by the increasing
interdependence of the global development and information technology. The most
important creation of the environment of the XXI century is the "Big Data"
phenomenon, which involves the establishment of the comprehensive and
independent data base in the organization that is essential for real-time decision
making.
Under the influence of the creations of the Digitalization Era, modern
companies are changing their strategic orientation, and these changes are reflected
in accelerating the timing of the decision making process, the growing importance
of consumer needs as one of the condition to create value, then, a constant need to
innovate, the creation of complex organizational structures, changing the
characteristics of human resources through emphasizing the new skills and
knowledge necessary to perform new tasks.
Using contemporary and comprehensive databases by modern organizations is
becoming a key challenge for managers. In the future it can be expected that the
role of digital business units are increasingly gaining in importance, creating more
complex forms of organizational design. This function permeates other
organizational units and contributes to more effective job performance and the
creation of new values. Therefore, it is more certain that the next step in the
process of organizational design and strategic orientation will be inclusion of the
"Big Data" phenomenon as the key constructs of the Digital Era in the dimensions
of the matrix model and creating a fifth-dimensional matrix structure. Although no
company has reached this level of complexity, according to the modern trends in
the field of development and use of information-technology, creating the model is
realistic in a relatively short period of time.
Faculty of Business Economics and Entrepreneurship 29
REFERENCES
[1] Berner M., Graupner E., Maedche A., (2014), The information Panopticon in
The Big Data Era, Journal of Organizational Design, 3(1) pp.14-19.
[2] Galbraith J. R., (2012), The Future of Organization Design, Journal of
Organizational Design, 1(1) pp.3-6.
[3] Galbraith J. R., (2014), Organization Design Challenges Resulting from Big
Data, Journal of Organizational Design, 3(1) pp.2-13.
[4] Galbraith J.R., Downey D., Kates A., (2002), Designing Dynamic
Organization: a hands on Guide for Leaders at all Levels, AMACOM
[5] Grossman R. L., Siegel K. P., (2014), Organizational Models for Big Data and
Analytics, Journal of Organizational Design, 3(1) pp.20-25.
[6] Gulati R., Puranam P., Tushman M., (2012), Meta - Organization Design:
Rethinking Design in interorganizational and Community Contexts, Strategic
Management Journal, 33 pp. 571-586.
[7]http://turbotodd.wordpress.com/2013/04/03/big-moves-in-big-data-ibm-new-
data-acceleration-hadoop-capabilities/
[8] McAfee A., Brynjolfsson E., (2012), Big Data: The Management Revolution,
Howard Business Review, October, pp. 60-68.
[9] Miler R. E., Scaringella L., (2012), Designing The Firm to Fit The Future,
Journal of Organizational Design, 1(2) pp.69-74.
[10]Miller S., (2014), Collaborative Approaches Needed to Close The Big Data
Skills Gap, Journal of Organizational Design, 3(1) pp.26-30.
[11]Overholt, Miles H., (1997), Flexibile Organizations: Using Organizational
Design as a Comparative Advantage, Human Resource Planning, March, Vol.
20, No. 1, pp. 22-32.
[12]Petkovi? M., (2011), Organizaciono ponašanje, Univerzitet u Beogradu.
[13]Porter, M.E., (1986), Changing Paterns of International Competition,
California Management Review, Winter, Vol XXVIII, No.2, pp. 9-40.
[14]Tushman. M., Lakhani K., Assaf L. H., (2012), Open Innovation and
Organization Design, Journal of Organizational Design, 1(1) pp. 24-27.
30 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE ROLE OF FREE ZONES, TECHNOLOGY PARKS
AND BUSINESS INCUBATORS IN THE DEVELOPMENT
OF SMALL AND MEDIUM ENTERPRISES
Momcilo Zivkovic, PhD
3
Vuk Bevanda, PhD
4
ABSTRACT
Necessities of contemporary business environment in about past ten years have
created sudden expansion of free zones, technology parks, business incubators and other
modern forms of running business in the world. They could be differentiated by types and
structure, but all have common mission – speeding up of the development of small and
medium sized enterprises and improvement of the entire business environment of the
country where they exist. Experiences of developed economies, as well as countries in
transition, justifiy the fact that the private entrepreneurship is of great importance for the
economic development and that it represents an essential part of the process of economic
reform. In our country these forms of running business are still at the beginning, however
considering the possibilities they offer in the encouragement of local economic
development, their progressive increase will be expected in the following years.
Subject of this research are: entrepreneurs, entrepreneurship, SMEs, local
economic development.
The aim of this research is to analyze the relevant data, processes and relations in
the theory and practice of entrepreneurship, understand the role and importance of
modern instruments of business support to small and medium-sized enterprises - with
special emphasis on the role of free zones, technology parks and business incubators in
encouraging entrepreneurship and entrepreneurial initiatives, development of small and
medium enterprises and local economic development. In the framework of the work will
be considered different modalities to help businesses and entrepreneurs in starting and
realization of new business, during the initial period of operations that are critical for the
survival and further development of the company.
Key words: Entrepreneurship, Entrepreneurs, Business Operations, SMEs,
Local Economic Development.
J EL Classification: M 21
UDK: 334.713(497.11) 005.5:[004:007 339.543.624
332.122:338.45 332.146.2:334.012.64
3
Momcilo Zivkovic, Faculty of Business Studies, Megatrend University, Belgrade, Serbia,
[email protected]
4
Vuk Bevanda, Faculty of Business Studies, Megatrend University, Belgrade, Serbia,
[email protected]
Faculty of Business Economics and Entrepreneurship 31
I NTRODUCTI ON
Small and medium-sized businesses and entrepreneurs are the most efficient
segment of the economy in almost all countries of the world. Individually, these
enterprises make the largest contribution to the increase in employment, gross
value added and turnover therefore considered to be the backbone of the growth
and development of the national economy. Their role is particularly important in
countries in transition that are faced with problems of high unemployment, low
level of economic activity, lack of competition and lack of investment, and with
still present large and inefficient state-owned enterprises. As a reliable source of
job creation, small and medium enterprises make an important social function by
absorbing surplus labor incurred in the process of transition and transformation of
state and socially-owned enterprises (Group of authors, 2012).
Small and Medium Enterprises (SMEs) are also a key factor in the economic
development and innovation. The core of the political and economic transformation of
any country is the creation of the private sector, the development of entrepreneurship
and creation of SMEs. They are considered to be one of the principal driving forces in
economic development. SMEs stimulate private ownership and entrepreneurial skills,
they are flexible and can adapt quickly to changing market demand and supply
situations, they generate employment, help diversify economic activity and make a
significant contribution to exports and trade. SMEs also play an important role in
innovation and the high-tech business, due to their flexibility and creativity many of
them became large businesses (Stiki?, 2008).
These enterprises have a very important role in local and regional development
in a country. They are often the main source of new employment. Small businesses
can also have a significant role in the foreign trade of a country, as subcontractors
of multinational enterprises and companies (Group of authors, 2014).
As companies whose competitive advantage is reflected in the speed,
flexibility and sensitivity to the needs of consumers, small businesses can
contribute significantly to the development of a market economy. New, small
companies are creators of new products and services, which have essentially
changed people's lives, significantly contributing to changes in economic structure.
Nowadays they represent the most flexible forms of business and they are most
sensitive to consumer needs. In this sense, they represent the most sensitive part of
any economy. The development of small enterprises is vital to a healthy economy
of every country and the development of entrepreneurship, because they provide
greater business initiative, employment and income (Bevanda, 2011).
In all sectors where a larger number of participants is involved, their
connection, compliance and coordination are essential. Entrepreneurship, as an
activity of creative combining of entrepreneurial initiative, risk and available
factors in an enterprise, represents the driving force of companies and activities
that arise, grow and develop in the market. In the domestic economy, the focus is
on development of the private sector and entrepreneurial activities of small and
32 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
medium-sized enterprises in order to create a climate and business environment in
which it will be possible to transform existing enterprises according to
requirements of the market economy.
Free zones, technology parks, business incubators and other modern business and
organizational forms, as tools of a local economic development, have expanded in
Europe in the 90s of the 20th century, and that is the reason why we know very little
about them and why we have made poor use of them. This paper represents additional
effort in spreading the information and knowledge about the possibilities of these forms
for stimulating entrepreneur’s initiative, as well as support to small new businesses in
first years of their growth and development. Through the provision of new workspace
or the renewal of older industrial premises, they provide a further contribution to the
development of the local economy. This basic concept has been adopted and applied in
many different countries all over the world.
It has already been recognized that these instruments could make a valuable
contribution to the development of the SME sector. All those currently involved in
exploring the possibilities for the creation of free zones, technology parks and business
incubators, will find the information included in the paper of great help in determining
the approach that would be most relevant in the context of the current stage of
development of the Serbian economy in general, as well as the needs of different
localities.
SME SECTOR I N SERBI A
The economy of Serbia in 2012. has entered a new phase of the recession that
has slowed the reform of the implementation of the new growth model based on
export demand, increasing investment and reducing public consumption,
strengthening the industrial sector in parallel with the development of the service
sector. The consequence of growth based on domestic demand is reported budget
deficit (6.4% of GDP in 2012.), deficit in current account balance (10.5% of GDP),
and high external debt (85.9% of GDP). The economy is still faced with low level
of investment (18.0% share of GDP), inflation risk (inflation of 12.2%) and low
employment (unemployment rate of 23.9%) (Report on SMEs, 2013).
In 2012, from total number of 317.668 companies, the entrepreneurial sector
accounts for 99.8% (317.162 companies). SMEs generate 65.1% of employees
(782.026), 65.4% of turnover (5.690 billion RSD), 55.8% of GDP (977.1 billion RSD)
and engages 45.5% of the investment of non-financial sector. SMEs employ 45.3% of
total employment, 39.1% of total investments, it has realized 49.8% of exports, 58.2%
of imports, generating 70.8% of the trade deficit of the Serbian economy and accounts
for about 33% of the GDP of the Republic of Serbia. Regarding the size, the structure
of the SME sector consists mostly of micro-enterprises (305.321), while small and
medium-sized enterprises (11.841) dominated in all observed indicators (53.8%
employment, 60.7% of turnover, 61.6% of GVA, 77.0% of exports, imports 74.5% of
SMEs). (Report on SMEs, 2013)
Faculty of Business Economics and Entrepreneurship 33
To a weak level of recovery of the SME sector in 2012. decisive influence had
a medium-sized companies. Rather than develop into a driving force in the
development of the entire sector, recessionary crisis in largely affected this
segment of the economy. In comparison to 2011, medium-sized companies have
expressed above average reduction in the number of companies (-3.4% to -0.7 in
the SME sector), employment (-3.5% to -0.6%), investments (-59.8% vs. -29.4%)
and below-average sales growth (0.1% vs. 1.5%). Although medium-sized
enterprises are the largest exporters and importers of the SME sector and have an
above average coverage imports (67.5% versus 51.3% in the SME sector), in 2012.
they formed a ¼ deficit of SME sector (Report on SMEs, 2013).
The main positive business trends in the SME sector compared to 2011
(Report on SMEs, 2013):
? Increase business - turnover in real terms by 1.5%,
? Dynamic growth in exports (15.7%), and take a leading role in the export of
non-financial sector of the economy (share of 51.1%), and held sufficient
coverage of imports by exports above (the rate of 51.3%),
? Achieved above-average growth rates of GDP (3.2%) and profits (6.5%)
compared to the non-financial sector (2.1% and 4.3%, respectively),
? Increased productivity, which in part can be attributed to the decrease in
employment. realized the growth rate of GVA per employee of 3.8%, which
is higher than in the non-financial sector (2.4%) and large companies (0.4%),
? Above-average earnings growth - 6.5% versus 4.3% in the non-financial
sector and 2.1% in large companies, and
? Poor level of reduction of the total number of businesses and shops, the ratio
of established and closed companies is much more favorable than in the
previous year (1.2:1 versus 0.6:1), although it retained unfavorable net effect
of the establishment of new operations (0.9:1).
The most important adverse effects are (Report on SMEs, 2013):
? Reduction of employment in the SME sector by 0.6% (to 4,847 employees),
? Reducing the number of active business entities at the end of 2012. by 1.3%
compared to late 2011. year (for 4,287 companies and shops),
? Above average increase in the trade deficit (20.6%) and imports (18.0%),
which led to increase of the total deficit of the nonfinancial sector from
66.7% to 74.0%, respectively,
? At the end of 2012, the number of active business entities was 1.3% lower
(4.287 for companies and actions),
? Retain the unfavorable trend of sectoral concentration of SMEs with
absolute dominance of manufacturing sector and the wholesale and retail,
? Regional imbalances are still exaggerated - the level of development of the
SME sector as measured indicator of GVA per employee in the City of
Belgrade, in relation to the underdeveloped area P?injska is 2.3:1.
34 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DI FFI CULTI ES I N THE OPERATI ONS OF SMES
The most important difficulty in the operations of small businesses, according
to the study of the economic sector and the OECD are: lack of consumer
purchasing power, increase input costs, lack of working capital, unfavorable credit,
intense competition, high taxes, etc. Entrepreneurs in Serbia and small businesses
are faced with many problems in business, both in the start-up, daily operations,
and in the case of termination. Among the many obstacles to SMEs, there are:
? Unresolved issues: gray economy, still relatively high tax burden, unreliable
and slow legal process of debt collection and bankruptcy,
? Lack of funding - according to the owners of SMEs, it is the main problem
in this sector,
? Credit financing is still the only solution for the vast majority of SMEs (in
addition to personal savings),
? Banks can not provide sufficient resources, even though interest rates and
credit conditions are not favorable for SMEs,
? Other issues: poor functioning of the insurance system and the claims
collection, lack of mortgages and the unsettled state of the land registers,
which limits the possibility of using a mortgage, and so on.
The business of the SME sector, in the opinion of their respective owners
burdens (The working group Small and medium enterprises and entrepreneurship,
2009):
? Advanced payment of taxes, high tax rates, as well as unfavorable costs of
electricity, telephone, etc..,
? Pending legal aspects, the slow process of obtaining the necessary permits
and long legalization procedures,
? Tariff barriers, etc.
To create a higher level of competition among local entrepreneurs, conditions
for the survival of competitive businesses, and to strengthen the entrepreneurial and
creative skills of local businesses, it is necessary to develop modern instruments of
business support and local economic development. Promotion of SMEs primarily
involve creating environments to support SMEs, which includes the provision of
services and lobbying for SMEs. This includes promotion of both existing and new
businesses, providing advice, support and resources of local government. Legal
requirements are often barriers to SMEs, so the activities that a municipality may
take are working to improve procedures and processes that companies must go
through.
Faculty of Business Economics and Entrepreneurship 35
THE ROLE OF FREE ZONES I N THE DEVELOPMENT OF SMES
AND LOCAL ECONOMI C DEVELOPMENT
Free zones are areas or parts of the territory which are especially physically
identified and marked, which perform a variety of activities, and where is applied
incentive regime of business that is primarily reflected in the preferential tariff
treatment, tax exemptions and simplified administrative procedures. In other
words, free zones include the specific area with the special conditions, a special
regime of economy, significant benefits, allowances and incentives to produce
goods, which is primarily intended for export (Law on Free Zones, 2006).
The concept of free zones began to develop in the fifties, as a tool that created
the perfect environment for business, especially for companies who seek low-cost
export base. Free zones are formed from the free ports and port cities, and their
development and the transformation to the legal institute began in the late
nineteenth and early twentieth century. In another half of the last century, their
number in the world is measured in hundreds, and their share in world trade was
around 20% (Serbian Chamber of Commerce, 2012).
Table 1: Free zones in the world
REGION Number of zones
North America + Mexico 320
Central America 41
Caribbean 51
South America 41
Europe 81
Middle East 39
Asia 225
Africa 47
Pacific 2
TOTAL 847
Source: WEPZA and ILO - World Associations of Free Zones: World Export
processings Zones, The National Association of Foreign-Trade Zones, 2012.
In business practice, free zones have proven as prosperous and profitable institutions
with numerous specific businesses. Economic and administrative reasons for the
existence of free zones, that allow their profitability, are reflected in the fact that they
allow savings in different areas: customs (default or deferred payment), fees, taxes and
other measures and decisions of an economic nature. One of the reasons for developing
free zone is a concentration of services and needs in one place. They are logistics center
for shipping, customs, transportation and storage services, transshipment, treatment etc.
Free zones significantly encourage and stimulate investment in the economy of a
36 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
country, thus it faster integrates in international division of labor. Also, within the free
zones, economic activities are taking place in order to encourage export and thus increase
the intensity of foreign exchange of the country, and the realization of positive indirect
effects on the domestic economy. In addition, investment motives of foreign partners in
the free zone must be supported efficiently by the legal framework that ensures the
stability of laws and regulations, and therefore legal security and the role of business
(Serbian Chamber of Commerce, 2012).
The Free zone is a comfortable ground for effective ways of business
development, ie. economic prosperity. It shows statistics of economically
developed countries, due to the fact that the development of business and
entrepreneurial infrastructure is grounded way of overcoming underdevelopment
and poverty. The free zone is the one that provides a number of benefits for the
development of entrepreneurship. On the other hand, entrepreneurship is a
fundamental driving force for economic development and at the same time entering
into a market economy (Su?eska, 2006).
The fundamental starting point of free zones is to create conditions for
development of entrepreneurship, considering free zone as a large and complex
company from which economic development of the country will arise. Designing
the zone should incorporate economic policy with far-reaching views of the future.
This policy allows entrepreneurial infrastructure, proper marketing and financial
policy. Zone creation is based on the investment thinking - to gather an attractive
profit sector with high employment, low capital investment, short period of
activation and return of capital, while preferring manufacturing and service
industries. Most often business in the zone is done with less risk in relation to the
environment, but in fact there is no ideal concept. Behind every success there are
difficulties, requiring perseverance and willingness to take risks. Less risk is
certainly implied in fact that there are greater tax, trade, customs and financial
benefits, all in favor of reducing costs and increasing competitive advantage.
The Free zone is to be arranged legally and practically to encourage business and
controlling action in the direction of developmental effects. Companies that are placed
in the zone are available to choose from programs in several fields of manufacturing
and service businesses, that can comfortably adjust to the possibilities and the available
funds. Doing business in free zones refines entrepreneurial spirit, encourages creative
thinking in the direction of continuous improvement of business performance, and that
intensifies local economic development.
Free zones are guided by owners of capital that have incentives to develop
business, increase profits and property values through reinvestment. Such
motivation can become a decisive factor in the development of the economy on the
principles of increasing and improving performance. It is the lever of faster and
more efficient economic development of the countries flooded with economic and
social problems. This means that the free zone introduces new elements to the
economic development, enhancing the creative process of creating new economic
values, especially in SME sector. This process is driven by invisible force that
reduces the risk of failure that follows each company.
Faculty of Business Economics and Entrepreneurship 37
The most important reason for establishing a free zone is to increase the
employment of the labor force of the host country. It has been shown that free zones
model increases the number of workers, if it is properly implemented. A large part of
the workforce in such areas are women, that provide better income than, for example,
in agriculture or domestic service industries. In some areas female labor force counts
90% of the total number of employees, especially in zones that have implemented
production programs of electronic parts and apparel. In any case, the type of business,
as well as high-tech in zones develops change of the profile of the workforce. Research
shows that one employee in the zone affects/provides employment for up to four
workers outside the free zone (Kosti?, 2008).
Free zones improve the laws and regulations of the host country, giving
contribution to streamlining the process of exchange in the wider context. They
also support the development of infrastructure and human resources development.
Hereby free zone take on the role of flexible development strategy with positive
effects on disturbed economic and social situation in developing countries, and a
catalyst in the mobilization of resources, especially manpower. According to many
researches, zones successfully help in stopping the downward trend of the
development. As a source of growth appears additional energy arising from the
restructuring of business entities in the form of the free zone, offering benefits to
reduce costs and accelerate the revitalization of the economy and overall life.
Practice in the world shows that the free zone, established in any geographic and
economic area, enable fast direct investment and increase the level of employment of
labor. Free zones have contributed to a significant increase in employment of low-
skilled population, thus solving big problems of unemployment in many developing
countries. Statistics show that about 42 million workers are currently directly and
indirectly employed in the free trade zones, of which 30 million in China, 2 million in
Mexico, 700.000 in the Middle East, 300.000 in America and about 250.000 in
countries in transition. In past few years foreign direct investments have recorded a
smaller decline in countries with a developed network of free zones.
A comparative study, carried out between countries of different income, support the
notion that countries that have established free zones in their territories have achieved a
higher growth of exports comparing to the countries of similar rank without free zones.
Export in countries that have established a free zone is tens of percent higher.
Within the European Union, 74 Free Zones are defined under the Community
Customs Code. Exemptions beyond customs arrangements can include services such as
grants offered for research and development and advanced infrastructure. But tax
incentives may also be offered and these may, especially on a regional level, distort
competition. As such, the tax regime applied needs to be compliant with internal
market and State aid rules. As for customs regulation, the Modernised Community
Customs Code, that took effect in June 2013, also have an effect on those Free Zones
in which there is currently no physical control of goods leaving and entering the zone.
A measure mostly meant to streamline customs procedures amongst Member States
but also underlining the importance of sufficient regulatory oversight in such zones to
avoid institutional problems and organised crime (European Parliamentary Research
Service, 2013).
38 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Table 2: Examples of European Free Zones
Source: Regional development companies sites and tax consultancy research,
2013.
The recent development of free zones in Serbia was inadequate and did not
meet expectations. Free zones in the Republic of Serbia based their business on
service warehousing and operated as free trade zones. The exception is a positive
example of the economic effects of the use of regime of free zones in Subotica and
Pirot. Free Zone "Pirot" currently has eight manufacturing programs, one of which
is dominant - section for the production of tires (Michelin), enabling the use of free
zones as export production zone (Export processing zone). This enabled testing of
operating mode with production activities in free zones in the Republic of Serbia,
and thus provide an answer that free zones in function of the production for export
gives good results (Development strategy of free zones in the Republic of Serbia
for the period from 2011th to 2016th year, RS Official Gazette, no. 22/2011).
TECHNOLOGY PARKS AS A MODEL OF I MPROVI NG THE
EFFI CI ENCY OF BUSI NESS AND ECONOMI C DEVELOPMENT
Technology park is the term used to describe a variety of efforts to stimulate
the development of entrepreneurial, knowledge-based small and medium-sized
enterprises (SMEs) within a country. The term has at least 16 synonyms, with the
most common being "science park," "research park," and "technopole." As much
as there is no consistent definition for technology park, there is also no consistent
term for the functions that a technology park provides. While in the United States,
"technology park," "research park" or "research and technology park" are
frequently used, "science park" is popular in Britain and Europe and "technopole"
is widely used in France. New terms are constantly arising as technology parks
attempt to distinguish themselves from the considerable competition of at least 295
technology parks worldwide (Briggs, Watt,http://www.american.edu/).
Faculty of Business Economics and Entrepreneurship 39
Originally, the term technology park had a very limited definition, focusing on
the real estate aspect of the park concept, in which universities typically leased real
estate, office space or research facilities to businesses. Sometimes these
arrangements are referred to as "industrial estates" or "firm hotels." The term,
however, has evolved to include a much broader range of functions, including
economic development and technology transfer.
The most commonly used definition of a technology park (TP) is:
"Technology park is management organization of specialized professionals, whose
main task is to increase the well-being of the community by promoting the culture
of innovation and competitiveness of associated entrepreneurs and research
institutions. To achieve these goals, TP stimulates and manages the flow of
knowledge and technology amongst universities, R&D institutions, SMEs and
markets; It facilitates the creation and growth of the innovation-based companies
through incubation and spin - off processes and provides maintenance services in
order to increase the added value together with high-quality environment and
equipment in TP." (International Association of Science Parks - IASP).
The most important characteristics of the technology park are (Briggs,Watt,http://www.american.edu/):
? It is linked with educational or research institutions,
? It provides infrastructure and support services for businesses, particularly
real estate and office space,
? It performs a technology transfer function,
? It performs an economic development function.
However, not all technology parks will meet all of these characteristics and
some may contain additional functions.
While each country or municipality may have different reasons for creating
technology parks, generally the primary goal of a technology park arrangement is
to increase the number of entrepreneurial, knowledge-based small and medium-
sized enterprises (SMEs) in an economy. SME's have been recognized as a driving
force of the private sector as they help diversify the economy. Developing
countries with no local expertise in technology, may use technology parks to attract
foreign direct investment to create jobs and increase tax revenues. An important
reason, in terms of the Western Balkans, is certainly the retention or return of the
best young professionals in the country, providing the ability to obtain attractive
jobs in their own country. Another important factor is the establishment and
encouragement of so-called transfer of technology from research institutions in the
economy, because research and development are key functions of TP.
Based on practical experiences, TP is inevitably associated with higher
education and research institutions. Companies are adopting new technologies from
its own research and development activities or the work of these educational or
research institutions, that facilitate technology transfer through spin-off companies.
Spin-off is a new company that was created by people who are former employees
of major companies (parent), by transferring the core technology from the parent to
40 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
the company. It is usually created to apply and commercialize technology, which
was created by state, university or other publicly-funded research. In recent years,
many spin-off companies in the European TP have been a result of undergraduate
and graduate research of candidates.
Technology parks and incubators vary in the way they are established and
managed. They can be founded as independent legal organizations by state and
local governments, universities and research institutes, development foundations,
private corporations or any combination of those. Depending on the institutional
character of their founders, parks and incubators can be public or not-for-profit,
private, academic-related, hybrid, and other. This classification is used by the
American National Business Incubation Association in Athens, Ohio, in relation to
incubation facilities, but can be extended, in principle, to include technology parks.
(Petree, Petkov, Spiro)
Establishing the park on the basis of existing facilities is much less costly than
building new premises. As in the case of a university-based science park, those
university institutes and laboratories that are at an advanced stage of developing
commercially suitable products and services can become the first tenants of the
park. A young IT-service firm can also serve as a major attraction to software
development and information technology-related companies. The research
personnel and faculty of the host university (or the Academy of science), as well as
its students will be encouraged to participate in the park as consultants and interns.
Another major component of the park can be a high-technology incubator that will
provide professional and business support to software development and hi-tech
R&D projects (Petree, Petkov, Spiro)
The organisational structure of the technology park can vary in complexity
depending on the size and concept of the park. With the development of the park its
structural parts can be changed, because it is basically a flexible organization.
Figure 1: Example: Organisational structure of Danang Hi-Tech Park, Vietnam
Source: Danang Hi-Tech Park, Vietnam, dhtp.gov.vn, visited 09.06.2014.
Faculty of Business Economics and Entrepreneurship 41
The distribution by sector in technology parks is usually dominated by ICT
companies. Industrial technologies, environmental energy, chemical &
pharmaceutical, and other different types of services also participate in its sectoral
distribution. (Castilla y León, cordis.europa.eu)
Figure 2: Example: Employment distribution by sectors in the Technology Park of
Boecillo, Spain
Source: Technology Parks of Castilla y León, Spain
Numerous studies indicate the fact that technology parks have a number of
advantages that are reflected in the following:
? TP is the fastest and best way of restructuring the regional economies and
towards a more flexible economic activities,
? TP is the engine of growth of SMEs,
? TP is the best place where private entrepreneurs solve their production,
management, design, legal and other problems,
? TP is a place where scientific thought is practically applied and
implemented,
? TP attack weaknesses that characterize an area; In the case of the Western
Balkans that are insufficiently developed market mechanisms of economic
activities and operations, inadequate design and redesign of products, poor
development and the implementation of new technology, undefined
legislation, lack of managerial and marketing skills, non-existence of defined
clusters, undeveloped market, and so on.
42 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Technology park, in the constellation of new organizational forms that
encourage entrepreneurship and appearing at the present time, takes one of the
strategic places. The field of operation is the same as other forms that support the
development of SMEs, but the activities of the TP are much more sophisticated and
complex. The TP is intended to be a place in which will be created:
? Motivation and climate for the development of enterprises,
? Promotion of self-employment and the development of their own business as
a modern social trend,
? Positive image of entrepreneurs,
? Detailed information and solutions for business people,
? New jobs and businesses in the region,
? Support for the conversion of regional potential in commercial enterprises,
? Profile on the market for technology companies in the region and their
clusters by providing foreign partners and international network of contacts.
BUSI NESS I NCUBATORS AS A MODERN I NSTRUMENT OF
SUPPORT FOR SMALL AND MEDI UM-SI ZED ENTERPRI SES
Business incubation is a business support process that accelerates the
successful development of start-up and fledgling companies by providing
entrepreneurs with an array of targeted resources and services. These services are
usually developed or orchestrated by incubator management and offered both in the
business incubator and through its network of contacts. A business incubator’s
main goal is to produce successful firms that will leave the program financially
viable and freestanding. These incubator graduates have the potential to create
jobs, revitalize neighborhoods, commercialize new technologies, and strengthen
local and national economies (www.nbia.org).
Critical to the definition of an incubator is the provision of management
guidance, technical assistance and consulting tailored to young growing
companies. Incubators usually also provide clients access to appropriate rental
space and flexible leases, shared basic business services and equipment, technology
support services and assistance in obtaining the financing necessary for company
growth. (www.nbia.org)
Term incubation involves ensuring good conditions for starting new businesses
and achievement of business ideas, innovation in stimulating the entrepreneurial
spirit, as well as taking concrete steps to preserve such conditions and resources
required for the survival, growth and development. Business incubators are tending
to create favorable conditions to enable interested entrepreneurs starting their own
businesses, establishing, maintaining stable performance in several years, and train
them to leave the incubator and perform independently on the market after few
years (http://www.mrrls.gov.rs/).
Faculty of Business Economics and Entrepreneurship 43
The first step to establish and develop business incubator is to finance
infrastructure by state and local governments, and later continued with entry of
private investment (donors, other economic organizations, profit organizations,
academic institutions). After the construction is done, there comes the phase of
filling incubator with tenants (enerprises) with predefined criteria for their
selection, and defined criteria for getting out of incubation.
The goals of creating a business incubator are: creating jobs, reducing the
number of failed SMEs, strengthen SMEs in the region (local development),
retention of young people in local communities, supporting the process of
privatization and restructuring, connecting enterprises in the region and beyond
with large enterprises. Business incubators provide opportunities for the
development of new services, implement new technologies, and new business,
technical, organizational structures and marketing methods.
The range of services provided by business incubators varies considerably in
different countries depending on the tradition and financing models, as well as the
needs and problems faced by local businesses. The key element is to provide an
environment in which entrepreneurs and enterprises can quickly begin to work and
expand their business. Within the business incubators are usually facilities in which
national or local governments, municipalities or groups of large companies provide
office and administrative services, as well as assistance in various areas, such as
technical support, access to financial resources, advice, marketing services,
equipment and assistance in management, in the key (early) stages of business life.
Usage of incubator space, shared services such as common secretary, office
equipment, networking - commercial space, counseling, mentoring, and so on at
subsidized prices, increases the probability of success of the enterprise that
operates in the incubator, in relation to a company which operates independently.
Figure 3: Services provided inside the incubator
Source: United Nations Industrial Development Organization, Technology
Business Incubators and Technology Parks, www.unido.org, visited january 2014.
44 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
The most important segment of the support that business incubators provide, is
access to start-up capital needed to start and grow new businesses. When a company
finds itself in an incubator, the way to potential investors is more accesible and direct,
due to a fact that free capital looking for profitable investment opportunity, can
recognize new entrepreneurial initiatives more easily. Simply belonging to a business
incubator is a favorable sign for potential investors, as they are considered that
members of the business incubators already passed the conformance test of business
ideas when entering the incubator. With good price lease, joint service service,
providing professional business support and training at subsidized prices, investors get
a sense of security and a sense of equity significantly less risky than would be the case
in a pure market business environment. Statistical reports provide confirmation of this
view, by showing that business incubators increase the degree of success of the
company from 20% to as much as 87% (Avlijaš, 2010).
Figure 4: Comparison of efectivness of the enterprises inside and outside the
incubator
Source: National Business Incubation Association - NBIA, www.nbia.org, visited
January 2014.
Most of the studies dealing with the analysis of the success of business
incubators used as an indicator of the success its impact survival rates in the initial
stages of development of the company, while it is located in the incubator, and
their survival rate after leaving the incubator. Studies show that about 90% of
companies that have started operating in the business incubator, do business 3
years after that. Available data confirm validity of the constitution of business
incubators as a form of organizing social protection of entrepreneurial ventures.
In evaluating the success of the incubator were used various criteria, among
which the following are the most common (Tables 3 and 4) (Stiki?, 2008):
? The number of newly established enterprises - who survived the critical
period of 3 years,
? The number of newly created permanent jobs - where the indicator of
"permanence" take into account the companies that have crossed the limit of
6 years of existence,
Faculty of Business Economics and Entrepreneurship 45
? The economic activity of companies - members (evaluated using a variety of
indicators, depending on the type of activity - usually a total revenue),
? Number of implemented and market-acclaimed innovation,
? Answers of surveyed companies about the impact of business incubators on
their development and competitiveness.
Tables 3 and 4: Performance indicators of business incubators
Performance indicator Total Average
value
Number of start-ups and other entrepreneurial projects
during the year
7891 75
Number of business plans implemented during the year 7468 74.68
Number of start-ups created during the year 2678 26
Companies survivability / 87.55%
Number of companies (tenants) in an incubator 2916 29.76
Number of employees in enterprises tenants 17940 188.84
Number of new jobs 5909 79.85
Number of participants in the various events aimed at
encouraging entrepreneurship
69131 652.18
Number of participants in training programs for the
improvement of business skills
51930 570.66
Process indicator Total
(Network)
Average
value
Number of existing companies 15244 148
Number of projects based on technological innovation
expressed as a percentage
54.01% /
Number of events organized to promote
entrepreneurship
1884 17.61
Number of organized business skills training during the
year
10567 114
Number of employees in a business incubator / 7-9
Source: Stiki?, D., Business incubators as a tool to support the development of
innovative enterprises, 35th National Conference on Quality, Kragujevac, 2008.
Business incubators have a direct impact on the local and wider community. It
is reflected, above all, in increase of employment, restructuring, growth in
production and an increase in GDP. Using the "input-output" method for measuring
the total income and the impact on employment, research has shown that business
incubators increase employment and income in greater amount than the number of
directly employed and paid workforce within the incubator. For example, research
conducted in one region showed that employment and income increase, on average,
46 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
with a coefficient of 1.35 to 1.43, compared to the direct effects produced by
companies within the incubator. This means that in addition to direct effects,
indirect employment and income grow at the rate of 35% to 43%.
(http://www.unece.org/indust/sme/incubator).
Business incubators are associated with the growth of state and local revenues.
Taking into account the increased state and local tax revenues at the same rate as
personal income, can be accomplished by increasing estimates of tax revenue
caused by the existence of a business incubator. There was also evidence that the
social costs of job creation, support for start-up businesses through business
incubators, re much lower than those needed to implement various other programs
to create new jobs. Research, which was conducted within the European Union,
showed that 900 existing business incubator helps in opening productive 40,000
new jobs each year in companies that are more stable than those arising out of
business incubators.
The main income of the local and social community from the business
incubators are healthy companies. The companies that emerge from the business
incubators are often on the leading line of the development of new, innovative
technologies, which will progressively affect the environment, especially the
quality of its products and services. For these reasons, in the last 3-4 years in our
country there is a growing awareness that business incubators can make a
significant contribution to the development of entrepreneurship of small and
medium enterprises. Using already developed models and their adaptation to the
existing conditions in the country, provides us the opportunity to catch up with
developed countries.
Therefore, business incubators appear as an increasingly popular way of
encouraging entrepreneurship and reduce unemployment in Serbia. The purpose of
business incubators as a business association in Serbia is to provide good
conditions for starting new businesses and translating business ideas into practice,
and to prevent the departure of educated young people abroad due to lack of
conditions. There is about ten operational business incubators such as incubator of
engineering faculties in Belgrade, business incubator Knjaževac, Niš, Kruševac,
Užice, Prokuplje, Bor, Senta, Subotica, Zrenjanin, Pan?evo, Beo?in and Ra?a.
Faculty of Business Economics and Entrepreneurship 47
CONCLUSI ON
Many companies and entrepreneurs in the beginning are facing the problem of
lack of capital, lack of experience in managing the company, and the lack of the
market, both in terms of demand for the products offered, as well as in terms of
new, unfamiliar markets. The result is a very small number of newly established
companies and, indirectly, fewer new jobs at a local level. Accordingly, the
possibilities of development of private sector and small companies in the initial
periods of their business, as well as mechanisms to help companies and
entrepreneurs in starting new businesses, are not yet sufficiently developed and
efficient. In this regard, it is necessary first of all to raise awareness about the need
to establish free zones, technology parks, business incubators and other modern
instruments of business support to the creation of new businesses and new jobs.
Free zones, technology parks and business incubators are among the most
important instruments that can help the development of new, sustainable enterprises at
the local level. These instruments are one of the solutions to this problem in the sense
of support start-ups in many aspects of their business, thereby encouraging the
development of entrepreneurship and local economic development.
Free zone programmes should target a wide assortment of economic sectors,
including commercial and manufacturing activities and professional services, such
as warehousing and trans-shipment. To reduce the burden placed on public
resources and increase the efficiency of zones, the private sector should be
encouraged to help develop them and be allowed to operate under market
mechanisms. „Free zones have many merits and have boosted investment in many
countries. More zones are in the pipeline and still more will emerge in the years
ahead. However, bringing in investment is only one, albeit vital, step in a long
journey. The ultimate goal must be to make those investments work to the benefit
of the wider economy“ (Fodor).
With plenty of business hatchlings growing bigger every year via incubators,
it’s clear that technology parks are more than just commercial neighbourhoods.
They can offer small companies resources beyond their wildest imagining or ability
to finance for themselves. Planned settings of development of technology parks in
the regions of the Western Balkans are based on the presented premises and
determinants of research and development. These parks should be a complement to
the planned commercial zones, entrepreneurship centers or business incubators.
They should be a joint effort of all to create a business environment where there are
early-commercial-industrial zones, institutes, universities, teams for local economic
development, regional development agencies, and other governmental and non-
governmental organizations with the same goal. TP create an environment with
suitable conditions for the establishment and management of companies based on
technologies, or products and services that require a little higher knowledge.
48 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Business incubators are effective instruments of helping entrepreneurs and
companies in starting new businesses, supporting start-ups and providing a variety
of assistance in order to survive during the initial operating period. As a flexible
organizational forms, which are able to effectively adapt to the needs and changes
in the environment, business incubators are trying to activate all of the company’s
resources, putting them in the function of the realization of entrepreneur and small
business development. Way of doing business in the business incubator represents
a reform of private businesses, contributing to the strengthening of small and
medium-sized enterprises, but also easier access to modern technology.
Technology parks and incubators are the important bridge between taking existing
knowledge and markets and expanding them, by supporting new businesses that
have the energy and agility to move industries to the next level.
However, one should be kept in mind – these instruments must be viewed in
the broader context of economic development, and must be an integral part of the
overall strategy for economic development. As such, they can not afford to
contribute to local economic development itself, and can only support the
development of entrepreneurship and job creation in a particular union, by
systematic provision of the stimulating environment that will enable the faster
development of the SME sector.
REFERENCES
[1] Avlijaš, R.(2010)Entrepreneurship, Singidunum University, Belgrade
[2] Briggs, A., T., Watt, Technology and research parks, report that was created in
Impacts of National Information Technology Environments on Business, an
MBA class of American University, Washington, D.C.,http://www.american.edu/, visited 05.06.2014.
[3] Bevanda, V. (2011), The establishment of business incubators in the function of
stimulating entrepreneurial activities and local economic development in the
Republic of Serbia, PhD thesis, Faculty of Business Studies, Megatrend
university, Belgrade
[4] Castilla y León, Regional Research & Innovation Service, cordis.europa.eu,
visited 07.06.2014.
[5] Danang Hi-Tech Park, Vietnam, dhtp.gov.vn, visited 09.06.2014.
[6] Development strategy of free zones in the Republic of Serbia for the period
from 2011th to 2016th year, RS Official Gazette, no. 22/2011.
[7] European Parliamentary Research Service (2013), Establishing Free Zones for
regional development,http://epthinktank.eu, visited april 2014.
[8] Free Zones (2012), Serbian Chamber of Commerce, Belgrade, Serbia
[9] Group of authors (2012), Financing small and medium enterprises in Serbia,
Serbian Chamber of Commerce, Belgrade: ?ugura print
[10] Group of authors (2014), Business economics, Belgrade: Megatrend university
Faculty of Business Economics and Entrepreneurship 49
[11] International Association of Science Parks, IASP,http://www.iasp.ws/, visited
may 2014.
[12] Kosti?, D. (2008), Free production zones and industrial parks, Faculty of
Management, Megatrend University, Zaje?ar
[13] Law on Free Zones (2006), RS Official Gazette No.62/2006
[14] Ministry of Regional Development and the local government, Republic of
Serbia,http://www.mrrls.gov.rs/, visited april 2014.
[15] National Business Incubation Association - NBIA, www.nbia.org, visited
January 2014.
[16] Petree, R., Petkov, R., Spiro, E., Technology Parks – Concept and
Organization, Summary Report, Institute for EastWest Studies
[17] Report on SMEs (december 2013), the Ministry of Economy and Regional
Development, Institute for Development, the National Agency for Regional
Development, Belgrade
[18] Stiki?, D. (2008), Business incubators as a tool to support the development of
innovative enterprises, 35th National Conference on Quality, Kragujevac
[19] Su?eska, M. (2006), Free Zone and Economic Development, Faculty of
Criminal Justice Sciences, Sarajevo
[20] The working group Small and medium enterprises and entrepreneurship
(february 2009), Implementation of the European Charter for Small Enterprises
in the Western Balkans, Belgrade
[21] United Nations Industrial Development Organization, Technology Business
Incubators and Technology Parks, www.unido.org, visited january 2014.
[22] United Nations Economic Commission for Europe – UNECE,http://www.unece.org/indust/sme/incubator, visited december 2013.
[23] World Associations of Free Zones (2012): World Export processings Zones,
The National Association of Foreign-Trade Zones
50 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DOWNSIZING AS A MEASURE FOR THE INCREASE OF
EFFICIENCY AND FLEXIBILITY OF AN ENTREPRISE
Nenad Ravic, MA
5
Vlado Radic, PhD
6
ABSTRACT
The growth of an enterprise (size wise) leads to lowering of flexibility,
innovations and creativity of an organization because of standardization and
introducing the formal organizational structure. The consequences can be seen in
the fact that the large enterprises become slow, too large and slowly adjust
themselves to changes. One of the possible solutions is downsizing, which
represents organizational reconstruction whose result is the decrease of the size of
an organization with the purpose of attaining greater flexibility and efficiency. This
can be realized through the following methods: narrowing of the management
level, programs and output, eliminating specialized functions, decrease in the
number of employees etc. In the modern business practice it is often the case that
downsizing removes the middle level of management which provides greater
flexibility and “flatter“organizational structure.
Hypothesis of this paper is the following: Downsizing represents an effective
measure for increase in efficiency and flexibility of an enterprise.
This paper applies the method of analysis of contents of documents in printed
and electronic form, which deal with this topic. The purpose of the research is to
prove or disprove the hypothesis. Based upon the research results, we can
conclude that the hypothesis is confirmed, that downsizing does represent an
efficient measure for increase in efficiency and flexibility of an enterprise, but only
if it is done in a planned and systematic way. The recommendation to the managers
is to use this measure very carefully and thoughtfully, because in another case it
can cause various counter effects and deepen the crisis in an enterprise.
Key words: Organization, Efficiency, Flexibility
J EL Classification: M 21
UDK: 005.591.47 005.336.1
5
Nenad Ravic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
6
Vlado Radic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
Faculty of Business Economics and Entrepreneurship 51
I NTRODUCTI ON
By enlarging the size of an enterprise the advantage is given to the control of
the business activities over creativity and new ideas, this decreases the
entrepreneurial spirit of an enterprise and flexibility to adapt to the changes.
Instead of focusing on the further development of their competencies, large
enterprises focus more on the control of their business activities. Formalization of
the process limits the creativity and innovations in the organization. This is why
large organizations become rigid, slow and slowly adapt to changes. Such
organization finds it difficult to answer to the demands and the needs of the
consumers. On the other hand, the expenses of doing business grow, because the
growth of an enterprise demands greater investments in supply, so management has
to find a way to make an enterprise flexible and efficient again. One of the ways is
to solve that issue is to change the organizational structure of an enterprise, like for
example, switching to division organizational structure. If that measure does not
give the adequate results, management of an enterprise can think about conducting
downsizing, which represents organized reduction of the size of an enterprise.
The subject of the research is planned and organized reduction of the size of a
large enterprise at the level of SME, which is called downsizing in literature.
The goal of this paper is to prove that downsizing can be an effective way to
increase flexibility and efficiency of an enterprise, but only if implemented in a
planned and systematic way.
Authors have found the motive for writing this paper in the fact that in Serbia
downsizing is done in a completely wrong way, unsystematically and without
previously done thorough analyses. Employees are let go in a linear way, through
the entire organizational structure and there is no care for the ones that are let go,
which creates numerous negative consequences for the enterprise. Another motive
for writing this paper is the fact that downsizing is not present enough in domestic
literature, so the wish of the authors is to contribute to the research of downsizing
in domestic framework and to encourage other authors to deal with this sensitive
topic.
This paper will use the methods of deduction and content analysis of relevant
professional literature in printed and electronic form.
The hypothesis of the research is the following: Downsizing represents an
effective measure for increase in efficiency and flexibility of an enterprise.
52 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DOWNSI ZI NG
In professional literature there are various definitions and interpretations of
downsizing. One of the most precise definitions is the following: “organized
reduction of the size of an enterprise with the goal of achieving greater level of
efficiency” (Miloševi?, Vuji?i?, 2013, p. 107). We are talking about the
organizational reconstruction which results in reduction of the size of an enterprise
with the goal of achieving greater flexibility and efficiency. Through realization of
downsizing the reduction of an enterprise to the level of SME is done, which
facilitates its functioning. In modern practice, downsizing usually includes
eliminating of the middle level of management which leads to “flatter
organization”.
Many large organizations in the period of stable growth, when the
organizations dominated their environment and changed the bureaucratic
organizational structure (Xerox, Exxom, IBM, GM, GE, etc.), have become slow,
too large and inefficient, so they had to think about how to once again become
efficient and flexible and to react to the changes in the environment at the adequate
speed. Downsizing has become the strategy of choice of many large organizations.
Almost all organizations from the list of the magazine “Fortune”, in the period of
1985-1990 opted for downsizing, and in those processes thousands of people were
left unemployed.
There are numerous reasons for conducting downsizing. The most often are
the following (Miloševi?, Vuji?i?, 2013, p. 107):
? Inability to use enough the entre number of employees,
? Insufficient competences of employees related to new technologies,
? Purchase of modern technologies that make the existing number of
employees obsolete,
? Large expenses of labor force,
? Stagnation of economic branch that organization belongs to,
? Recession of the overall economy.
Inability to use enough the entre number of employees is present when in an
enterprise it is not possible to use all employees, so certain employees do not work
effectively during the entire working hours. The cause of this can be large number
of employees, so one of the possible solutions is letting go certain number of
employees.
Insufficient competences of employees related to the new technologies. In the
modern age the technologies are developed in high speed, so the employees are
forced to follow technological innovations in their professions and to acquire new
knowledge. Those employees who do not do this, become useless for the
organization in which they work, so this can be the reason why the management
has to let them go and to bring new competent employees.
Faculty of Business Economics and Entrepreneurship 53
Purchase of modern technologies that make the existing number of employees
obsolete. If an enterprise gets the modern technology that can successfully replace a
certain number of employees, there will no longer be any need for those employees, so
they will be let go. In practice there are a large number of machines in various branches
of industry that replace people in their jobs, because they realize much more productive
results than humans (e.g. difficult, dangerous or monotonous jobs).
Large expenses of labor force. If the expenses of the labor force burden the
budget of an enterprise, management can reach a decision to let go a certain
number of employees, save the money and liberate the budget. The alternative is to
lower the wages to the employees if they agree. If not, the termination of
employment is inevitable.
Stagnation of economic branch that organization belongs to. Stagnation in the
branch leads to decrease of demand. In order to attract the consumers, the
companies are forced to lower the prices of their products, which leads to the
decrease of the sales income. In order for the enterprise to keep the lower prices in
the long run, it is necessary for the management to react and find the way to lower
the expenses. One of the ways to accomplish that is to let a certain number of
employees go.
Recession of the overall economy. If the entire economy of a country is in
crisis, the enterprises must try to lower the expenses wherever it is possible to keep
the liquidity and to do business profitably. In this sense, one of the most common
measures is letting employees go based on the thorough analysis.
KEY CHARACTERI STI CS OF DOWNSI ZI NG
Key characteristics of the concept of downsizing are (Cameron et al.,1995,
p.25):
? Downsizing is done intentionally. That is not something that is happening in
the organization, but it is planned and organized reduction of the size of an
enterprise. That is the difference between downsizing and the loss of market
share or unintentional loss of employees because of the poor labor
organization or poor results.
? Downsizing is usually realized through reduction of the number of
employees, although that is not the only method. The reduction of the
number of employees can be realized through allocations, transfers, early
retirement etc.
? Downsizing is focused on improvement of the efficiency of an organization.
It can arise as reactive (as the consequence of poorer performance of en
enterprise) or proactive (wishing to improve the performances of an
enterprise, even though there has not been any drop in it).
? Downsizing influences the work relations, consciously and unconsciously.
Measures of downsizing result in specific form of redesign.
54 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
APPROACHES TO DOWNSI ZI NG
There are two typical approaches to downsizing: reinforcement and
reorientation. These approaches are developed by Freemen (1992) in his doctoral
dissertation. These principles represent the reflection of management’s relation to
changes.
Enhancement comprises the group of activities that manager does and directs
towards the proceeding the existing mission, strategy and system. The essential
thing is adapting to the existing economic conditions. Changes in business
operations are introduced gradually and in the incremental form – little by little.
Reorientation implies the perseverance of the management to bring in the
radical changes into the business operations of an enterprise in the form of change
of mission, strategy and system. This makes the discontinuity, that is, the
termination of current business activities.
In the first case, the management introduces the incremental changes in the
business activities. The goal is to make the enterprise continue to do business in the
existing way, with gradual improvements.
In the second case, management introduces the radical changes that realize the
turning point in business activities. In order for the management to opt for
reorientation, the existence of important reasons is essential, as proofs that an
enterprise can no longer do business successfully in the existing way and that it
needs to introduce the radical changes.
The characteristics of the mentioned approaches to downsizing are shown in
the chart 1:
Table 1: Overview of the characteristics of the approaches of reinforcement and
reorientation
Reinforcement approach Reorientation approach
Incremental downsizing Discontinuous downsizing and redesign
Lower level of encouragement (less radical
downsizing approach)
Higher level encouragement, more radical
downsizing approach
Stability of TOP management, technology
and systems.
Changes in TOP management, technology and
systems.
Changes in work instead of structure Changes in structure instead of work
Reinforced mission and strategy Redefining of mission and strategy
Downsizing comes before redesign Redesign comes before downsizing
Less extensive communication needed Demands more extensive communication
Less usage of internal relations of an
organization
More usage of internal relations of an organization
Orientation towards internal constituents Orientation towards external constituents
Emphasizing of efficiency Emphasizing of effectiveness
Focus on „do things better“ Focus on do various things
Source: Mašic, 2009
Faculty of Business Economics and Entrepreneurship 55
Some organizations apply downsizing reactively, as a reaction to the decrease
of market share and profitability. That is when downsizing represents defense
strategy. This approach is known in theory as convergence. Downsizing of labor
force is used as lowering of expenses. In this way management is trying to keep
profitability as a defense from the share prices’ fall and eventual “hostile”
acquisition. However the problem with this approach is that it is often the case that
management does not count the expenses that follow the downsizing of labor force,
which significantly decreases the savings on the account of smaller number of
employees (e.g. severance pay or early retirement). Also, the significant problem of
this approach is the lack of wider redesign of an enterprise. One should also take
into consideration that the crisis can last for a while, especially if it is caused by
extreme factors and leads to new cut backs on the number of employees. This is
how an organization falls into the “downsizing spiral” that most certainly leads to
bankruptcy (Slavkovi?, 2006, p.5).
On the other hand, some organizations consider downsizing to be an
opportunity for improvement of performance so they react proactively, they
implement downsizing even though there is no crisis. Compared to the previous
approach, the downsizing of labor force is a planned activity and an integral part of
the general strategy of an organization. Downsizing is in the function of balancing
the structure of an organization with the expected changes in the future, with the
goal of keeping the existing profitability. Proactive approach offers to the managers
much more of the manoeuvre space for realizing their decisions about the reduction
of labor force. By doing this, the mistakes are minimized and the pressure of
having to reach a decision in the short period of time, removed of the managers.
METHODS OF DOWNSI ZI NG
There are the following methods of downsizing (Miloševi?, Vuji?i?, 2013, p.
108):
? Decrease in management level;
? Decrease of programs and the scope of production;
? Reduction of the number of employees;
? Eliminating the specialized functions;
? Linear letting go of the employees;
? Early retirement and voluntary leavings.
Decrease in management level. By this method the activities, accountability
and responsibility of managers of middle level are transferred on other managers.
There are two options here:
? activities, accountabilities and responsibilities of the managers of middle
level are taken by the higher managers. This decreases the specialization at
56 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
higher levels of organization, the centralization and range of control is
increased, which can burden the higher managers;
? activities, accountabilities and responsibilities of the managers of middle
level are taken by the lower executives, which brings decentralization.
Having this goal in mind, managers of the lower level get additional
trainings, in order for them to be capable to efficiently do the additional
activities.
Decrease of programs and the scope of production. This implies that the
enterprise decreases its production capacities and the scope of production. Before
that, it is necessary for the management to analyze the production program and to
identify which products are profitable enough in order to keep them in the
production range, and which should be withdrawn from that range. The result can
be the closure or selling certain parts of an enterprise.
Reduction of the number of employees. This is present in the situations when
the management decides to leave a certain market, so it lets all employees, whose
business activities are connected to that market, go or transfers them to other
positions.
Eliminating the specialized functions. This implies that an enterprise will
terminate certain number of business functions in order to save money. These can
include legal department or accounting department or cleaning etc. For doing these
jobs an enterprise can hire special organizations as external associates
(outsourcing) like for example the accounting agency which will take over keeping
of the books of an enterprise. In this way an enterprise saves means because it is
not paying for employees at the positions that are eliminated. Savings is also
realized through the economy of scope of special organizations that cooperate with
multiple enterprises, so in this way they invest more money in equipment.
Management of an enterprise should assess which businesses an enterprise can do
on its own efficiently and to keep them. The jobs which cannot be done in an
efficient way by an enterprise should be given to special organizations.
Linear letting go of the employees. This is all about the reduction of the
number of employees because of the decreased demand at the market or because of
high personal income. Letting go is realized through the entire organizational
structure of an enterprise and every department lets several people go.
Early retirement and voluntary leavings. This implies the stimulating of
employees to go to an early retirement, which is the first phase in letting employees
go. Some of employees can be motivated to take this step by stimuli that are not of
financial nature, and others can be offered financial means in the form of severance
package. The kind of severance package depends upon the years of their service. In
any case the employees are not forced to take this step. Those employees that reject
the early retirement with the severance package, risk to be let go in the future
without any compensation.
According to Cameron,Freemen, Mishra, there are three downsizing strategies:
1. strategy of the reduction of labor force;
Faculty of Business Economics and Entrepreneurship 57
2. strategy of organizational redesign;
3. system strategy.
Strategy of the reduction of labor force that the management will offer certain
benefits to a certain number of employees in order for them to leave the enterprise.
This can be in the form of early retirement, severance packages, transfers,
allocations etc. Management has to think very carefully who to let go because of
the employees’ experience. Because if they do not, the damage could be far greater
than the benefit. The main point of this strategy is to “shake” an organization (as a
positive shock therapy), for employees to realize in what kind of situation an
enterprise is, to motivate them to work more productively and to encourage the
measures of saving. This can be seen as a short-term strategy, because it can be
realized very quickly and because the effects are visible right after the
implementation.
Strategy of organizational redesign implies the tendency of the management to
eliminate the work before they let people go. Most often measures of this strategy
are: eliminating of positions, decrease in number of hierarchical levels, terminating
of certain parts, withdrawal of certain products from the product range etc.
Implementation of this strategy demands extensive analysis of an organization with
the identification of process or entity that should be eliminated. The benefits of this
measure are: simpler organizational structure, higher efficiency, lower expenses,
less burdened labor force etc. We can say that this is a middle-term strategy when
we think about the time necessary for its implementation and the appearance of
first results.
System strategy is fundamentally different from the previous two. It implies
the change of organizational culture of an enterprise, the change of core corporate
values and attitudes. This is a radical and long-term strategy, so it usually takes a
longer period of time for the positive effects to be seen. Implementation of this
strategy is very slow, because a lot of time is required to change the core values of
the company. Application of system strategy is possible in situations in which,
there is no time pressure, when the structure of labor force is dominated by older
staff and when decrease in the number of employees is not great. This strategy is
consistent with the reorientation approach to downsizing. The tactic of “freezing”
the admission of new staff and retiring the existing enables the realization of this
strategy. Continuous improvement is the imperative.
From the three mentioned strategies, in Serbia the strategy of the reduction of
the labor force is most often used. Managers in the domestic enterprises
(organizations) rarely take care of the fact that they should treat the employees,
who are let go, in a humane and just way. The letting go is not done systematically
and it is done without previous analysis or planning. Such relation is detrimental
for the employees and for the companies.
The table 2 gives the overview of the basic characteristics of the three
downsizing strategies:
58 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Table 2: Basic characteristics of the three downsizing strategies
Reduction of labor
force
Organizational
redesign
System strategy
Focus: employees jobs and units
organizational
culture
Time needed for
implementation:
short medium long
Disadvantages:
Does not solve the
problem in the long
run
Lack of short-term
result
Lack of short-
term reduction of
expenses
Measures:
No new
employments, early
retirements, leaving,
letting go.
Decrease of the
number of business
functions, merging
of units’ redesign
of jobs.
Including all
employees in the
change of
organizational
culture and basic
values.
Source: Gandolfi, Neck, 2003.
EFFECTS OF DOWNSI ZI NG
Planned and systematically done downsizing realizes numerous positive
effects. Benefits of downsizing for the organization are the following (Dulanovi?,
Ondrej, 2005.):
? increase in efficiency and flexibility,
? increase in the ability of an enterprise to respond to the market demands,
? decrease of fixed expenses,
? more efficient usage of the remaining staff,
? simplification of the systems of communication and control.
The researches have shown that the majority of profitable organizations (81%) that
realized downsizing in a planned way accentuate the significance of the strategic
motive (Dewettinck, Buyens, 2002). The absence of profitability can be explained by
the usage of convergent approach or unplanned conducting of the entire process.
Large enterprises, because of their largeness, often have a problem with the lack of
flexibility and innovation. The formal procedures and strict rules of behavior are defined
and all employees as well as the management have to obey them. Without these
procedures, large enterprise would soon turn into a chaotic system. Negative side of the
formal procedures is that they decrease entrepreneurial spirit and the flexibility of an
organization. Because of these reasons, large systems find it more difficult to adapt to the
changes in environment. Internal and external factors usually force an organization to
move to other markets, change its structure and the way of doing business in order to
Faculty of Business Economics and Entrepreneurship 59
survive and provide to their owners the return of the invested capital. The life of an
organization constantly moves and changes. The ability of changing and adapting to
changes is the precondition for survival and the success of an organization (Stojanovi? et
al., 2013, p. 71). SMEs and entrepreneurs have a much greater ability to adapt. There are
two kinds of entrepreneurs: social and commercial. The difference is seen in the value
that they create and whether it is social or commercial, while the entrepreneurial
characteristic is common for both categories (Zare, 2013, p. 90).
The ability to adapt to changes influences whether the management of an
enterprise defined an adequate organizational structure. Organizational structure is
hierarchical organization of the levels of authority, lines of communication and
responsibility of an organization. Organizational structure of an enterprise is seen
in the way the roles, power and responsibility are allocated, controlled and
coordinated, as well as the way an information flows among the levels of
management (Milos, 2013, p. 84).
For the increase in flexibility the strategy of organizational redesign is
especially useful. It “flattens” the organization by decreasing the number of
organizational levels. You get a “shallow” organization in which the information is
distributed faster. The connection of the strategic top and the first line of an
organization are direct. Lower hierarchical levels get authority to decide, which
increases the speed of decision making. For debureaucratisation of the structure the
best strategy is system strategy. In debureaucratic structures there is a promotion of
team work, which increases the productivity and efficiency.
Large number of organizations in the world that did the downsizing leaves to
other organizations the possibility of learning at their mistakes. It is real to expect
that the organizations have become “more intelligent” in conducting the
downsizing and bad practice will repeat rarely.
LI MI TATI ONS OF DOWNSI ZI NG
Besides positive, downsizing has negative effects like:
? decrease of the number of employees represents a socially unpopular
measure;
? creating the negative atmosphere in the company ( the rest of the employees
feel fear and insecurity, which can result in the fall of productivity);
? when because of the crisis the management starts to let go the employees,
the most experienced and skilled employees can choose to leave the
company, because they do not want to work in an unstable environment;
? possible decrease in developmental potential of an enterprise because of staff
leaving;
? besides the savings, downsizing creates certain expenses, like severance
packages;
60 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? because of the letting go certain number of employees, there is an increased
intensity and the scope of work for the rest of employees, with possible
longer work hours, in order to make up for the lower number of employees.
Decrease of the number of employees is opted for with the goal of the
decrease of expenses of employees’ wages. First step in the decrease of the number
of employees is usually the termination of cooperation with the employees
employed for a specified period of time by not prolonging their contracts. Then the
decision not to hire new staff instead of those who are at sick-leave or are retiring
is reached (Jaško, 2001).
From the aspect of system approach, one can say that these beginning steps are
correct. However it is usually the case that the decrease in the number of
employees is not realized in a systematic way. For example, it is usually the case
that the employers terminate the contract on their own, with a certain number of
employees and give them a severance package. These actions can result in long-
term negative consequences for an enterprise, and is usually in the form of leaving
of the most skilled and most hard-working employees. They will find another job
more easily than others, so that is why they are prone to leaving an organization
that is having problems (Miloševi?, Vuji?i?, 2012, p. 110).
With the goal of the decrease of employees the often decision is to enable
early retirement for older staff, which leads to not being able to change the
employees with the valuable long-term working experience. Another popular
measure is the decrease of the number of business functions, which can lead to
destabilization of an organization if it is not done in a planned way. Linear letting
go, which is an even dismissal of employees in the entire organization, can
decrease the developmental potential of an enterprise if this measure is not based
upon thorough analysis of staff (Miloševi?, Vuji?i?, 2013, p. 107).
In order for the process of decreasing the number of employees to be
considered justified, it is necessary to fulfil several terms (Jaško, 2001, pp. 29-34):
? not to be done in a linear way throughout an entire organization;
? not to be done without previous considering of the consequences for the
keeping the employees with the key competencies;
? not to make decisions of letting go generally, according to general criteria,
but individually;
? for the criteria and the flow (depth and dynamics) of letting go to be public
even before the letting go begins;
? that the economic feasibility analysis takes into consideration the cost of
letting go and the cost of redistribution of jobs;
? that there is a cooperation of middle and lower management during this
process and in the period of adjusting to the lower number of employees;
? that there is cooperation with the trade unions or at least the exchanging of
information etc.
Organizational crises during downsizing are underestimated. We should have
in mind that downsizing can be the way into a crisis, and not a way out of it.
Faculty of Business Economics and Entrepreneurship 61
Direct expenses of letting go are the following htt (//proorg.fon.rs/Files/
MuksDown.pdf):
? separate payrolls for the currently let go;
? remaining vacations and sick leaves;
? additional severance payments;
? assistance in finding a new job;
? pension payments and premiums;
? administrative costs of processing;
? the costs of re-employment of laid-off workers.
Indirect expenses of letting go are the following
(http://www.proorg.fon.rs/Files/ MuksDown.pdf):
? the costs of seeking and hiring new people;
? low morale and insecurity among remaining employees;
? lack of staff when the company recovers;
? possible claims of employees;
? reduction in productivity due to fear and uncertainty of the remaining
employees;
? loss of organizational knowledge and confidence in management.
Impacts for the organization during downsizing
(http://www.proorg.fon.rs/Files/ MuksDown.pdf):
? over burn of the employees (reduction of the commitment at work, reducing
the positive feelings towards the job, fitting the crisis of the individual and
his work);
? increase of cases of domestic violence;
? a significant number of companies have shown that after the layoffs they did
not increase profit;
? according to one research, employees worried about their family finance
spend 13% of working hours telephoning to bank concerning loans or other
business.
J OB I NSECURI TY AS A RESULT OF DOWNSI ZI NG
Application of downsizing strategies in practice, has led to changes in the field
of employment. Model of life employment in one company is outdated. Earlier, in
practice it was popular to have the so-called silent agreement of employees and the
management, which basically meant that the employees were spending entire
careers in one organization (“from the internship to retirement”), but they were
obliged to be loyal and dedicated to the company. However wide usage of
downsizing strategies changed this practice. Mass letting go have created the
climate of general job insecurity.
62 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Old model of employment is substituted by a new model that does not offer to
employees “life employment” in one enterprise in exchange for their loyalty and
dedication to an enterprise, but they are offered to learn and develop their skills in
an enterprise for a while. In return employees are expected to be completely
dedicated to their job. It is no longer expected for employees to be dedicated to an
enterprise as a whole but only to the job (Stojani?, 2012, p. 39). Employees are
interested in being completely dedicated to the job while they have the possibility
to learn and develop in that company. As soon as that is no longer an option, they
will try to change an employer and to find a job at some other enterprise where
they will be able to continue learning and developing professionally. This model of
employment is useful to employers and employees. Employers have workers who
are productive and devoted, and employees get the opportunity to acquire new
knowledge, which increases their chances for future employment. In developed
countries this model of employment is so developed that the “situational”
employment arose. This implies that employees realize short-term employment in
some company, e.g. while a certain project is realized. After that their employment
at that company stops and they are looking for another job.
Job insecurity in an enterprise exists only if in the past there have been letting
go that had nothing to do with the work performance of employees. In that case,
employees have no possibility of controlling their employment in the company.
They feel powerless, because it is not up to them whether they will keep their job.
If the management decides to proactively realize downsizing with the goal of
improving of performances of an organization, some employees can be let go, even
though they have realized satisfactory work results and had a good relationship
with the colleagues and superiors. Every employee can make his own subjective
assessment of job security based on various sources of information.
The most important sources of information about the loss of jobs are (Same, p. 38):
? official notification that employees receive from management;
? Unpublished information that are highly presumed to be true (e.g.,
assumption on the closure of certain parts of the company);
? rumors that occur when the official notifications are scarce.
? Lack of possibility of control of employment especially increases in the case
of (Same, p. 39):
? lack of protection (e.g., in case of contract breach, disobeyance of unions’
demands etc.);
? vague expectations (employees do not always know exactly what is expected
of them in order to keep their jobs );
? authoritarian organizational culture ( authoritarian cultures increase the
awareness of the inability to influence and control the job security);
? lack of objectivity of management while solving the issue of excess
employees.
? The researches have shown that the following reactions to job security are
the most common:
? tendency to leave the company;
Faculty of Business Economics and Entrepreneurship 63
? resistance to change and
? reduced work engagement.
The results of empirical research done by J. Brockner have shown that with the
increase of job insecurity to a certain level, work efforts and engagement of
employees are increased. After that, further increase in job insecurity, the work
efforts and engagement of employees is reduced.
EXAMPLES OF WELL-DONE DOWNSI ZI NG
Example 1: Consulting company „Charles Schwab&Company“
This company had a crisis in 2001. At the end of the second quarter of 2001
they had the following negative indicators:
? Turnover fell by 57% in relation to the period from 15 months ago;
? Loss was 19 million dollars, and the value of shares fell by 75%
The situation was critical. The company was shaken to the core and was about
to go bankrupt. Managers realized that it is necessary to take radical measures in
order to save the company, so downsizing was a logical solution. Management of
the company had in mind that the measures have to be done in a systematic and
planned way, and that this was the only way that this consulting company will
survive. Before letting the employees go, management took the following five
steps:
1.Frozen projects and drastically reduced costs, such as delivery of lunch for
staff, travel and recreation etc.;
2.The wages of senior management were reduced (top managers by 50%,
executive vice presidents by 20%, senior vice presidents by 10% and by 5% to vice
presidents);
3.Employees were encouraged to use their time off and take unpaid leave for
up to 20 days;
4.Management decided that some of the Fridays would count as willingly free
days, unpaid, if employees do not have clients;
5.Only after all of this they let go 2,000 employees from 25,000 employed, with the
following benefits: from 500 to 1,000 shares to every employee that was let go, payment
in cash because of the increased health insurance costs and all services for re-
employment and a voucher for a scholarship in the amount of 20,000 dollars.
After these measures, the remaining employees introduced an innovation in
doing business: Internet trade system that charges for variable provisions
depending on the usage of services. Company changed the name into CEO. The
price of shares was increased ten times.
64 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 1: Logo of the company „CHARLES SCHWAB“
Source: Google Images
Example 2: company „Compaq computers“
In the beginning of 90s of the last century this company, that produced
computers, was faced with fierce competition that produced and sold cheaper
products. After conducting thorough analyses, the company’s management decided
that it should implement downsizing in order for the company to become more
competitive. Having that goal in mind, they thought and planned the way to let go
15% of employees. Before letting go of employees they did the following:
? Managers went through training whose goal was to make them capable and
prepared to provide support for the let go and help remaining employees;
? The list of possible questions of employees was put together along with the
instructions how to answer them;
? The let go were treated with maximum dignity;
After letting go of the employees, sales were tripled in relation to the period
before the letting go of employees.
Figure 2: Logo of the company „COMPAQ“
Source: Google Images
Besides the mentioned, there are also other examples of proper implementation
of downsizing, like the example of American company „Cisco” that deals with the
development of Internet technologies. While it was letting go the employees in the
process of downsizing, this company paid one third of wages to the employees.
Because of the human treatment of the employees „Cisco”, even though it let go
5,500 people, remained at the 15th place on the Fortune magazine list of 100
companies that are best to work for.
Famous multinational company „Procter and Gamble“, which deals with
production of cosmetic products, beauty products, detergents etc., had a big crisis
in 2001 when they had to close down 5.600 positions in the USA. The company’s
management took the following steps:
Faculty of Business Economics and Entrepreneurship 65
? 20,000 employees got offered a package of measures (severance package,
specialization, health care);
? Employees had 20 days to decide and 7 more to eventually change their
mind;
? There were meetings held daily with the best employees in order for the
manager to convince them that they do have a future in „Procter and
Gamble“.
Mutual termination of employment gave to the workers the sense of personal
control. Although the direct expenses were higher and the program lasted for
several months, organization remained stable, and the productivity did not fall.
Another positive example is a multinational company „Accenture” that deals
with consulting, technology and outsourcing. The company was facing high
expenses, so through the thorough analysis, management came to a conclusion that
the best thing would be to decrease the number of employees. In June 2001 the
company let go 600 employees. From that number, 100 highly educated employees
got 20% of their wage in the following 6-12 months, they kept their benefits like
business number, lap-top and e-mail. In this way they succeeded in reducing the
costs and to keep the employees in which they have invested a lot of time, effort
and money through various trainings and education.
The famous company „Motorola” was in a crisis in 2001, so it was forced to
dismiss 30,000 employees out of 147,000, which it did in January that same year.
Every employee that was let go got a minimal wage for eight months. The
company actively sponsored the employment fairs. When the company got to its
feet again and gained financial stability, it began hiring the same people that it had
let go.
The mentioned examples show how a company should behave while realizing
downsizing. By a humane relation to the employees that are let go, the company is
being socially responsible, it protects its reputation and sends the message to the
employees and the public that it is the company that is serious and responsible,
despite the crisis. Also it prevents the leaving of the best experts in this way.
CONCLUSI ON
Based on the used methods of deduction and research of relevant literature in
printed and electronic form, it can be concluded that the hypothesis: Downsizing
represents an effective measure for increase in efficiency and flexibility of an
enterprise is confirmed.
Managers are advised, in the case that their company gets into crisis, to
consider the application of downsizing, but to approach it in a planned and
systematic way and to make decisions based on the conducted relevant analyses.
Otherwise, they will only deepen the crisis in the company.
66 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Cameron,K:S:, Freemen,S.J.,Mishra, A.K. (1995), Downsizing and redesigning
Organizations, in edited by George P. Huber and William H. Glick,
Organizational Change and Redesign: Ideas and Insights for Improving
Performance, Oxford University Press.
[2] Dewettinck, K.,Buyens D. (2002),Employment implications of downsizing
strategies and reorientation practices: an empirical exploration, Working Paper,
Faculteit Economie, Gent.
[3] Dulanovic, Ž., Jaško, O.(2005),Organizational structure and changes. Belgrade:
Faculty of organizational sciences.
[4] Gandolfi, F., Neck, P.A. (2003),Organizational downsizing: a review of the
background, its developments and current status, Australian Journal of
Business & Social Inquiry, Vol. 1.
[5] Maši?, B. (2009), Strategic management. Bijeljina: University Synergy.
[6] Miloševi?,D.,Vuji?i?, S. (2013), Management of small and medium enterprises.
Belgrade: Faculty of Business Economics and Entrepreneurship.
[7] Milos, R. (2013), Influence of organizational structure and management style
on the business success: example Nike Inc. International Review (2013 No.1-
2). Belgrade: Faculty of Business Economics and Entrepreneurship. p. 84
[8] Ondrej, J. (2001), Downsizing and changes in organizational structure.
[9]Strategic management, vol. 5, no.3Slavkovi?, M., (2006) Downsizing –
organizations’ response to global trends. Faculty of Economy, University in
Kragujevac.,http://markoslavkovic.com/uploads/ media/ Downsizing_01.pdf
[10]Stojani?, M., (2012), The role of leadership in the strategy of reconstruction of
the company with a short overview on business operations of company Simpo
(Master thesis) Belgrade: University Singidunum.
[11]Stojanovi?, T., ?oki?, A., ?oki?, S., (2013), Organizational behavior – creative
tool for creating the value. International Review (2013 No.1-2). Belgrade:
Faculty of Business Economics and Entrepreneurship. p. 71.
[12]Zare, B., S., (2013), Measuring of performance of social entrepreneurial
institutions: case of Iranian company UNESCO. International Review (2013 No.1-
2). Belgrade: Faculty of Business Economics and Entrepreneurship. p. 90.
[13]http://www.proorg.fon.rs/Files/ MuksDown.pdf
[14]http://www.Google Images.
Faculty of Business Economics and Entrepreneurship 67
MARKET ORIENTATION AND BUSINESS
PERFORMANCE
Vlado Radic, PhD
7
,
Jovanka Popovic, PhD
8
ABSTRACT
The global market environment is growing in complexity. The recent past has
been characterised as technologically turbulent. The accelerated rate of
technological innovations is affecting all business activities from the development
of new product concepts to marketing communication and the rate of new product
introductions has increased. The availability of large quantities of data has made it
difficult for a business manager to conveniently convert the data into action-
oriented information in order to make appropriate key marketing decisions. The
level of corporate failures has increased, time for making decisions has become
shorter, and the negative results of wrong business decisions have become more
severe. The competition in some industries has become more intense and
sophisticated.
In this market environment, that can be characterised as growing in
uncertainty and risk, organizations that are unprepared to change in reaction to
market dynamics will have little opportunity to survive.
The importance of market orientation is in its potential contribution in
influencing the achievement of organizational objectives. The literature on market
orientation reflects findings by many researchers that being market orientation,
potentially, improves organizational long-term business performance. The market-
orientation firms with concentration on the entire customer experience are better
positioned to achieve a higher rate of business success.
Key words: Market Orientation, Business Performance, Competition,
Organizational Objectives
J EL Classification: D24, L11, L25
UDK: 005.21:339.137.2
7
Vlado Radic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
8
Jovanka Popovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
68 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
In a time characterized by increasingly rapid change in consumer preferences,
even faster technological progress, and growing competitive rivalry, it becomes
essential for companies to develop mechanisms within their organizations to
generate market information, analyze it, and respond accordingly. The set of
activities developed by companies permanently to monitor, analyze and respond to
these market changes is referred to in the marketing literature as "market
orientation".
Over the last decade there has been a growing interest in the construct of
market orientation and its usefulness in increasing companies’ economic
performance. However, it is still not well understood why there is such an effect
and – particularly – how it operates. More research is clearly needed in this area.
Two streams of research have developed aimed at filling this gap. One stream of
research has focused on the effects of market orientation on innovation. The other
has investigated the links between market orientation and relationship marketing.
Marketing theorists such as Kohli, Jaworski (1990), Narver, Slater (1990),
Carr and Lopez (2007) have argued that market orientation traces its origins from
the market concept (also labeled marketing concept) and has noteworthy
consequences to overall business strategy. The market concept is concerned with
customer-orientation, innovation and profit as an inducement for creating satisfied
customers (Narver, Slater, 1990, 1994; Kohli, Jaworski, 1990).
Theories on market orientation have been widely accepted by scholars and
academics either as the implementation of the market(ing) concept, as an
organizational culture, or as a mix of those two (Greenley, 1995). Through the
years, numerous scholars have found that market oriented behavior in marketing
new products or services leads to better performance, has positive effects on
customer satisfaction and loyalty as well as innovation, employee satisfaction and
cooperation (Deshpandé et al.,1993; Rapp et al., 2008).
Naturally, the many definitions given to the marketing concept have common
trends such as the customer orientation, the implication of all functional areas of a
firm, and being a means to achieve long term corporate goals and objectives. On
these grounds, we can now deduce that the market orientation is an organizational
culture that places the customer in the center of the strategies or even at the top of
the company’s considerations.
HI STORI CAL BACKGROUND AND DEFI NI TI ON OF MARKET
ORI ENTATI ON
Market orientation is not a new concept in the marketing and management
literature. Scholars argued that the postulation by Drucker (1954) that the customer
Faculty of Business Economics and Entrepreneurship 69
must be the focus of organization’s operations and the subsequent support given to this
idea by Levitt (1960) that the customer is the reason for the organization’s existence
were all pointing to the fact that market orientation behavior was necessary at that time.
This idea was extended to become known as the marketing concept.
Following these developments, the subject market orientation has received a great
deal of attention from marketing scholars who have developed, tested and refined market
orientation scales for measuring the degree of market orientation that organizations
exhibit (Kohli, Jaworski, 1990; Narver, Slater, 1990; Hooley et al., 2005).
Businesses aim to maximize their profit to shareholders by creating a sustainable
competitive advantage over rivals on the market. But where competitive advantage was
once based on structural characteristics such as market power, economies of scale, or a
broad product line, the emphasis today has shifted to capabilities that enable a business
to consistently deliver superior value to its customers. After all, this is the meaning of
competitive advantage. Research shows that a market-oriented culture provides a solid
foundation for these value-creating capabilities.
We can reason that market orientation builds on the same foundations as the
market concept, as that concept is believed to have three facets that are customer
focus, coordinated marketing focus and profit focus (Kohli, Jaworski, 1990;
Wrenn, 1997). Customer focus implies that companies need to have intensive
knowledge and understanding of customer needs, demands and expectations. In
order to be able to fulfill those demands and expectations with goods and services
those must be carefully charted. This is done with marketing planning, surveys,
market intelligence dissemination and generation. Focus on integrated marketing
means that all marketing efforts of the company are in sync and support each other.
Profit focus is an important measurement in all strategy-making and management.
The marketing concept can be classified into two parts, being the "old"
marketing concept and the "new" marketing concept. According to Gunay (2002)
the "old" marketing concept is concerned with customer-orientation, innovation
and profit as an inducement for creating satisfied customers. The "new" marketing
concept is more a business culture than a philosophy. Philosophic questions cannot
be answered empirically by observation or experiment, while it is possible to
measure the level of culture, and then describe its characteristics.
Market orientation can be defined as a form of organizational culture where
employees throughout the organization are systematically and entirely committed
to the continuous creation of superior customer value (Narver,Slater, 1990;
Kohli,Jaworski, 1990; Desphandé et al.,1993; Day, 1994).
Kohli and Jaworski (1990) argued that the market orientation of an
organization is one of degree rather than one of presence or absence. Narver and
Slater (1990) confirm the view that market orientation cannot be turned on or off.
Being marketing orientated is more than just being customer-led. It requires the full
support of the organization to be fully implemented in the long term and, in most
cases, may need a complete change in an organization’s culture.
Narver, Slater and Tietje (1998) state that market orientation is an
organizational culture where culture, management and market orientation are
70 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
interwoven. For an organization to be market oriented, leaders within that company
must have a clear vision that is continuously mediated to employees. Market
oriented companies must communicate their mission, vision and values in such a
way that every employee knows his/her role. Companies must be able to change
and adapt to new market situations such as increased competition, needs and
expectations of customers and new technologies.
Bisp (1999) defines market orientation as a series of actions to obtain, analyze
and apply information about current and new customers, consumers and
competitors. According to Bisp, the form and intensity of market oriented activity
is a behavioral manifestation of elements of corporate culture and strategy. He
emphasizes the importance of organizational learning and states that the ability to
attract and develop staff with the needed knowledge and skills drives market
orientation.
Farrell (2000) also emphasizes that organizational learning is of great
importance when installing a market orientation. Other scholars prefer to view
market orientation as proactive business actions that take place in a certain
sequence.
Kotler (2001) points out that market oriented companies must balance between
customer orientation and competitor orientation when installing a market oriented
culture in the company. Logically, a company that only focuses on either the
customer or the competition will end up performing poorly.
The last decade the field of marketing has grown tremendously and many
books and articles about the subject have educated business people across the
globe. Before market orientation became the general term for this a well-known
concept within marketing, many scholars had described the concept in different
ways.
Terms such as market-oriented, market-driven and customer-focused have
become synonymous with proactive business strategy in organizations all over the
world. The notion that the customer needs to be at the origin of business planning
processes seems a very contemporary one, as is the idea of organizing the firm´s
activities around a thorough understanding of customer needs and demands
(Desphandé, 1999).
The first books on marketing were printed in the years 1911 to 1915 and they
were mainly based on basic economic theory. The first empirical research papers
on marketing and connected issues were printed around 1920 (Converse, 1945 and
1951). The first academic journal about marketing was published in 1936 in the
USA as "Journal of Marketing". In 1948, The American Marketing Association put
forward the following definition of marketing: "The performance of business
activities directed toward, and incident to, the flow of goods and services from
producer to consumer."
Paul Converse was one of the first academics that created a comprehensive
overview of the concepts of marketing in 1945. He made a list of text books and
articles about marketing, reviewed the offer of marketing courses taught in
American universities and lectures about the subject until the forties.
Faculty of Business Economics and Entrepreneurship 71
Many management theorists cite Peter Ducker’s statement from 1954 that
marketing is not a specialized functional activity but rather "the whole business
seen from the point of view of its final result, that is, from the customer´s point of
view."
The market orientation concept builds on the marketing concept which is a
relatively new academic. A definition of the marketing concept from the American
Marketing Association website (AMA, 2008) is: "Marketing is the activity, set of
institutions, and processes for creating, communicating, delivering, and exchanging
offerings that have value for customers, clients, partners, and society at large."
According to both the old and the new definition, marketing is considered a
specialist function managing certain decision-making areas to create exchanges
that satisfy the customers´ and the firm´s goals alike (Grönroos, 2006).
Several studies have found a consistent positive relationship between
businesses’ degree of market orientation and their economic performance
(Greenley, 1995; Jaworski, Kohli, 1993; Narver, Slater, 1990; Selnes et al., 1996;
Slater,Narver, 1994). As stated previously, many studies have been conducted to
assess the market orientation and its relation to performance. Gounaris and
Avlonitis (1997) compiled a summary of empirical studies done in this field and
their relation to performance (Table 1). From this table, we can safely say that
market orientation has a positive influence on performance.
Table 1: Summary of empirical studies
Empirical study Marketing orientation/ performance
association
Narver and Slater (1990) Positive
Hooley, Lynch and Shepherd (1990) Weak positive
Kohli and Jaworski (1990) Positive
Kohli and Jaworski (1992) Positive
Slater and Narver (1992) Positive
Diamantopoulos and Hart (1993) Weak positive
Wong and Saunders (1993) Positive
Greenley (1995) None
Source: Avlonitis, Gounaris, 1997, p. 388
In 1987, the Marketing Science Institute (MSI) in the USA organized a
conference on the topic "Developing a Market Orientation". According to
Desphandé (1999) the main purpose of this forum was both to showcase some
early learning from market orientation implementation and, more importantly, to
articulate the need for strong, scholarly research to better define, measure, and
model the construct. This conference marks a major development in market
orientation research. In 1990, a second conference was organized, this time it
featured both academic speakers and practitioners that summarized their
72 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
companies´ experiences with instilling a market orientation. In 1994, market
orientation was anointed to be a capital research topic by MSI. After that, market
orientation became a very popular area for research.
Two research papers, both published in 1990, have established the concept of
market orientation firmly into the academic of business research. The first paper by
Kohli and Jaworski (1990) put forward antecedents to and moderator effects of
market orientation and the second one that came later in 1990 by Narver and Slater
proposed a market orientation framework with three dimensions. Most studies on
market orientation revolve around three components that were first defined by
Kohli and Jaworski (1990) and later established by Narver and Slater (1990).
KOHLI 'S AND J AWORSKI 'S VI EW ON MARKET ORI ENTATI ON
The scholars Ajay K. Kohli and Bernard J. Jaworski published their article
"Market orientation: The construct, research propositions and managerial
implications" in July 1990. They viewed market orientation as the implementation
of the marketing concept. The model they propose emphasizes the collection of
marketing data, dissemination of this data across functions within the organization
and the action that is taken based on this intelligence. The model is built on the
results of interviews with 62 managers in both marketing and nonmarketing
positions in US companies. A main finding was that profitability is a consequence
of market orientation, and not a component of it. Kohli and Jaworski did not
suggest that market orientation is an aspect of organizational culture.
Their definition of market orientation: "Market orientation is the organization-
wide generation of market intelligence pertaining to current and future customer
needs, dissemination of the intelligence across departments, and organization-wide
responsiveness to it."
In other words: Market orientation is the implementation of the market concept
and a firm with a high degree of market orientation is one whose actions are
consistent with this concept. Market intelligence is said to be the starting point of
market orientation, and refers to the collection and assessment of data on
customer´s current and future needs plus competitor data and government
regulations that could influence those needs.
Organizational learning plays a major role in the creation of a market
orientation: managers/employees must continually gather, disseminate and
communicate information around all departments of the company in both a formal
and informal manner. It is important to acknowledge that this vital function is not
the exclusive responsibility of the marketing or sales departments.
Kohli and Jaworski propose three sets of antecedents for market orientation
and they are senior management factors, interdepartmental dynamics and
organizational systems.
Faculty of Business Economics and Entrepreneurship 73
Senior management has an important role to foster market orientation. Kohli
and Jaworski state explicitly that the commitment of top managers is an essential
prerequisite to a market orientation. Their job is to facilitate communication and
data flows between organizational levels. Important characteristics that senior
managers should have are a positive attitude towards change and organizational
learning.
Kohli and Jaworski define interdepartmental dynamics as the formal and
informal interactions and relationships among an organization's departments. Their
study findings suggested that departments that have conflicts are not likely to be
willing to share information and as such endanger a high market orientation.
Connected departments on the contrary cooperate and create an atmosphere leading
to a higher degree of market orientation. As such, they are an important antecedent
to market orientation.
The third set of antecedents to a market orientation relate to organization-wide
characteristics. Expectedly, high formality and centralization levels create a barrier
for market orientation because it obstructs information dissemination and
knowledge sharing. Important customer messages or market knowledge that must
travel a long way before they can be acted upon become irrelevant and obstruct
market oriented behavior.
In terms of employee response, Kohli and Jaworski conclude that market
orientation leads to a cohesive product focus, clear leadership, better coordination
of sales activities, a much better job of reviewing products from a worldwide basis
and better differentiation. A market orientation provides psychological and social
benefits to employees. The greater the level of market orientation is, the greater the
esprit de corps, job satisfaction, and organizational commitment of employees.
In terms of customer response Kohli and Jaworski find that that a market
orientation leads to more satisfied customers who spread the good word to other
potential customers and keep coming back to the organization.
In terms of performance, the study suggests that though a market orientation is
likely to be related to business performance in general, it may not be critical under
certain conditions. A greater market orientation is likely to lead to increased
demand and sales, better margins, more market share and increased profits.
In 1993, Kohli and Jaworski published yet another research paper "Market
orientation: Antecedents and Consequences". The goal of this paper was to review
and measure the antecedents that lead to market orientation and the consequences
of it for the company. The hypotheses proposed in the 1990 construct were tested
and results concluded that market orientation builds on three equally important
pillars: Customer focus, coordinated marketing and profitability.
Figure 1 shows the interaction between intelligence generation, dissemination
and responsiveness. Intelligence gathering is just what the name implies: Gathering
intelligence about customers, competitors and the marketplace. Intelligence
dissemination, however, is what a department, manager or employee chooses to do
with the information after they have it.
74 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 1: Kohli and Jaworski´s view on market orientation
Source: Kohli, Jaworski, 1990
Responsiveness only happens if the formalized process for sharing business
intelligence is not too burdensome. If management emphasized sharing, and if the
organizational system’s reward system provides an incentive to do so or there is no
penalty for doing so. In other words, a department, manager or employee is only
willing to share information if it implies no costs.
NARVER'S AND SLATER'S VI EW ON MARKET ORI ENTATI ON
The renowned scholars John C. Narver and Stanley F. Slater published their now
famous article about market orientation in October 1990, several months after their
colleagues Kohli and Jaworski. Narver´s and Slater´s goal was to shed light on the
components that build a market orientation and propose a useable definition of the
concept. They interviewed managers in 113 strategic business units in one corporation.
Narver and Slater (1990) were the first to highlight and prove the relationship between
market orientation and performance. For the authors, market orientation is one way to
achieve a greater performance. Figure 2 illustrates this relationship.
Faculty of Business Economics and Entrepreneurship 75
Figure 2: Relationship between market orientation, business specific factors,
market-level factors and performance
Source: Narver, Slater, 1990, p.29
Narver and Slater viewed market orientation as an organization culture, just
like Desphandé and Webster (1987). However, they took the definition further and
argued that market-oriented firms focus not only on customers but equally much on
competitors. Additionally, they placed emphasis on inter-functional coordination
that is meant to create unison between all functions in the organization and become
part of the organizational culture. So they developed this definition: "Market
orientation consists of three behavioral components – customer orientation,
competitor orientation, and inter-functional coordination- and two decision criteria
– long-term focus and profitability."
Narver and Slater define three equally important behavioral dimensions of
market orientation, them being customer orientation, competitor orientation and
inter-functional coordination. They add two decision criteria that are long-term
focus and profitability to their model.
Research shows that the consequence of market orientation materializes in all
tasks performed by a firm. The degree of market orientation shows through
employee- and customer satisfaction, as well as content shareholders. Customers of
a company with a high degree of market orientation experience great value for
money and excellent service that is gladly delivered by skilled and professional
employees of that company.
Competitor orientation is the second component of market orientation and
states that organizations should identify, analyze and use the strengths, weaknesses,
opportunities and capabilities of both current and future competitors. This is very
logical although not entirely new. Levitt (1960) said that parallel to customer
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analysis, companies must do competitor analyses and contemplate possible
solutions that might fulfill current and future customer needs and expectations.
Inter-functional coordination or integrated marketing means that all
departments within the company play a critical role in satisfying customers.
According to Narver and Slater, competitor and customer orientation include
all activities that involve generating market intelligence about customers and
competitors, analyzing it and distributing that knowledge throughout the
organization. This means that the market oriented company must provide adequate
business processes and systems for data input and coordinate the communication of
disseminated business info in order to create superior value for customers.
Market oriented organizations typically have a long term focus related to
profits and to implementing a high degree of market orientation. A short-run focus
on profits is not inconsistent with long-run profit performance. According to Levitt
(1960), the relationship between them is as follows: At all times a business
attempts to create superior value for buyers. As competitors respond and diminish
business´s buyer-value superiority, the business discovers and implements
additional value for its customers (i.e. it augments its product). To grow and
survive in a competitive environment they must focus on long term investment
strategies that are important for building the market orientation. Market orientation
is not a business mode that can be switched on or off, which also implies a long
term focus.
As discussed earlier, the first rigorous study of the effect of a market
orientation on business performance done by Narver and Slater (1990) found a
significant relationship between market orientation and return on investment in a
sample of business units belonging to one corporation operating in the forest
products industry. However, another study did not show the same results. In two
broad samples of businesses, Jaworski and Kohli (1993) found no significant
relationship between their measure of market orientation and managers’
assessments of either return on equity or market share. These finding of "no
results" in a broad sample were found troubling, because it raised concerns about
the generalizability of Narver and Slater’s (1990) result. It is possible, based on the
Narver and Slater study from 1990 that the market orientation – profitability
relationship does not apply in all organizations or business sectors.
Therefore, in 2000 Narver and Slater decided to repeat their research from
1990 and retested the hypothesis "market orientation and business profitability are
positively related". To address the limitations of the original study, this time they
used a broad sample of businesses and different respondents’ assessment of market
orientation and business performance in a business unit. Again, they found a
positive relation between market orientation measures and performance. Actually,
the positive relationship was even stronger in 2000. However, market orientation is
said to be influenced by the business environment and competition levels. Paul D.
Ellis (2005) say that the strong relationship between market orientation and
performance materializes in strong economies like the United States (Kohli,
Faculty of Business Economics and Entrepreneurship 77
Jaworski, 1993; Slater, Narver, 1994) but not at all in weaker economies with less
knowledgeable consumers, less competition and less capitalism.
Figure 3 below shows the interaction between the three behavioral components
customer orientation, competitor orientation and inter-functional coordination.
According to Narver and Slater, continuous innovation is implicit in each of
these components. If there is no innovation and continuous data generation,
employees will not have the right prerequisites to offer that extra service to the
customer.
The two decision criteria shown in the figure are a long term profit focus and
profitability. It is through the continuous creation of superior customer value that a
business creates its long-run profit performance. A short period marketing
campaign or sales action might boost sales, but the organizational image and
generation of repeat-customers only evolves over time along with reputation and
"good word of mouth".
Figure 3: Narver and Slater´s view on market orientation
Source: Narver, Slater, 1990
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SI MI LARI TI ES AND DI FFERENCES OF VI EWS
On the whole, the two views on market orientation are quite similar and
complementary and very useful to anyone seeking to learn the meaning of the
market orientation concept. Both research papers view market orientation as a
concept that (if well implemented) leads to a greater competitive advantage for the
company. Both duo´s agree that business intelligence about customers and
competitors is a key prerequisite to build market orientation; that all managers and
staff must participate in creating and maintaining the market orientation; that
market orientation is a construct with three equally important components.
However, the two views have important differences. Kohli and Jaworski do lay
a bit more emphasize on customers than Narver and Slater do. They viewed market
orientation more like the implementation of the market concept as discussed
earlier. Narver and Slater emphasize the human role and explain market orientation
as a corporate culture, which leads to certain custo-mer/competitor oriented
behavior throughout the organization creating this specific atmosphere that leads to
better performance.
It is not possible to prefer any of these theories above the other, but it is
advisable to critically review both of them and use the best from both when
building a market orientation. A mix of the theories might lead to the optimal
degree of market orientation.
The enhanced model (Figure 4) is divided into four layers: 1) antecedents (as
defined by Kohli and Jaworski, 1990), 2) moderators of market orientation (as
defined by Narver, Slater, 1990; 3) Kohli, Jaworski, 1990) and 4) consequences (as
defined by Narver, Slater, 1990; Kohli, Jaworski, 1990).
Until recently, scholars either followed Narver and Slater´s view, or Kohli and
Jaworski´s view on market orientation leading to rather imperfect studies.
Faculty of Business Economics and Entrepreneurship 79
Figure 4: The enhanced model of market orientation
Source: Kohli, Jaworski, 1990; Narver, Slater, 1990
With the new millennium came a new awareness that the two concepts are not
exclusive but rather complementary. Evidence shows that both the market concept
view and culture view are equally important pillars when building a market orientation.
Cervera, Molla and Sanchez (2002) agree to this and state that the two views are not
mutually exclusive and in fact show different facets of the same concept. When
combining the Kohli and Jaworski framework with that proposed by Narver and Slater,
a two-dimensional model appears. Figure 5 visualizes this model.
80 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 5: Two-dimensional approach to market orientation
Source: Kohli, Jaworski, 1990; Narver, Slater, 1990
As shown in the outer circle of figure 5, customer orientation, competitor
orientation and integrated marketing must exist in all company operations. To
empower management and staff with business intelligence, companies must also
have systems in place for intelligence generation, dissemination and distribution of
this information. This is shown in the inner circle in figure 5. Obviously,
management and staff must act upon the intelligence that they have access to. The
task of top management is to install the market oriented culture through strategy
making and implementation on all levels (Kohli, Jaworski, 1990; Narver, Slater,
1990). The integrated model showing two views suit the definition that a market
orientation is the implementation of the marketing concept; a form of
organizational culture.
Cultural differences and opinion forming might have effect on the link
between market orientation and performance measures. A relevant question is
whether the relationship between the two can be strengthened or weakened by
changes in the geographic situation, economic situation and business environment
of a firm. Research shows that market orientation is less likely to have impact on
performance in some environmental conditions such as a very strong demand (Day,
Wensley, 1988; Bisp, 1999). In such an environment, companies can get away with
not being market oriented at all. In a market with scarcity where products are
rationed to consumers, market orientation also does not matter at all. Kohli and
Jaworski (1990) concluded that market turbulence and competition turbulence will
Faculty of Business Economics and Entrepreneurship 81
strengthen the relationship between market orientation and performance, while
technology turbulence will weaken this relationship.
The effects of market orientation on business performance might be moderated
by the turbulence in the environment (Kohli,Jaworski, 1990, Slater, Narver, 1994).
In more turbulent environments, a high level of market orientation will be more
beneficial as firms can better follow, sense, and use changes in the environment.
Kumar, Subramania and Yauger (1998) found that in a high market turbulence
companies need a higher level of market orientation in order to perform well. This
relationship worked both ways and therefore we could say that in an easy market
with little change the level of market orientation is not relevant. Slater and Narver
(1994) found limited support that the competitive environment influenced the
relationship between market orientation and performance in any way. They found
that market turbulence does have impact on the rate of return on assets, whilst
technological change has impact on the success of newly marketed products. Hence
they conclude that companies should not adjust their level of market orientation to
match environmental conditions. Being market oriented is never harmful in their
opinion.
CONSEQUENCES OF MARKET ORI ENTATI ON
Having read different definitions and opinions about the market orientation
concept we have a good idea of what it means to be market oriented. We have
learned that it is both a business culture and an implementation of the market
concept. That being clear, we can now move on and discuss what the consequences
of market orientation can be, and how they can be influenced. Main consequences
of market orientation derived from literature are great esprit de corps (team spirit),
greater organizational commitment, greater competitive advantage and better
performance. Other (indirect) consequences include clarity of focus, more
innovation and increased organizational learning.
Kohli and Jaworski (1990) discussed the organizational consequences of
market orientation. They stated that greater market orientation should lead directly
to one consequence in particular, more esprit de corps (later supported by Jaworski,
Kohli, 1993; Rose, Shoham, 2005), and to another consequence, greater
organizational commitment. They suggested that marketing orientation’s positive
impact on performance might be greater than previously assumed because of its
indirect impact on performance through organizational commitment and esprit de
corps. The word "through" suggests that organizational commitment and esprit de
corps could both be causal antecedent variables and consequences of a market
orientation. The management literature has a rich collection of research suggesting
that organizational commitment develops from many other aspects of the firm’s
environment and culture other than market orientation. Kohli’s and Jaworski’s
(1990) supposition was that marketing orientation fosters company spirit and
employee commitment, when, in fact, the exact reverse may be the case.
82 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Many scholars that have researched market orientation and its consequences as
well as its effects on performance and have concluded that it leads to a competitive
advantage, if well implemented (Narver, Slater, 1990; Slater, Narver, 1993; Kohli,
Jaworski, 1990, Martín-Consuegra, Esteban, 2007). Respected economics and
business authors also state that market oriented companies perform better and gain
competitive advantage that is sustainable (Desphandé, 1999; Webster, 1988). The
positive link between the degree of market orientation and organizational
performance has been found in many countries and business sectors disregarding
company size, culture or product/service (Kohli, Jaworski, 1990; Narver, Slater,
1990; Ruekert, 1992; Jaworski, Kohli, 1993, 2000; Slater, Narver, 1994;
Desphandé, Farley, 1999, Slater, Narver, 2000).
Market oriented business culture facilitates clarity of focus. This focus
becomes evident through the mission statement, the common vision of
management and staff and the overall attitude of the company towards the
customer. This creates a high degree of employee satisfaction, better morale, and
greater commitment to the job and loyalty to the organization.
The relationship between market orientation and performance is a cornerstone
in the market orientation literature. A positive relationship between the level of
market orientation and diverse performance measures was found by Narver,Slater
(1990), Kohli, Jaworski (1990), Ruekert (1992), Deshpandé,Farley (1999); Rose,
Shoham, (2005); Martín-Consuegra,Esteban, 2007; Skerlavaj, et al.,(2007). A few
empirical studies do not measure this positive relationship, which raises concerns
about whether or not the most market-oriented firms are the best performers
(Diamantopoulos and Hart (1993), Greenley (1995), Appiah-Adu (1998). Greenley
(1995) developed an empirical study of 240 firms in the United Kingdom to test the
relationship between level of market orientation and performance. His findings
showed no significant effects on return on investment, sales growth or new product
success.
Scholars have mixed opinions on the relationship between market orientation
and business performance. Is it moderated by other environmental factors such as
economic situation, market turbulence, technology and competition, or does
geographical situation matter the most?
The consequences of market orientation seem not to be sector specific. A high
extend of market orientation not only benefits companies that sell to consumers,
but also to service companies that exclusively sell business-to-business and even
not for profit organizations and the public sector.
The most common measure for performance is business profitability. Slater
and Narver (2000) found that market orientation is indeed positively related to
business profitability, measured by return on investment. Other measures include
sales growth and new product success and those were used in Narver´s and Slater´s
research of 1994 and also showed a positive relationship. Castro et al., (2005)
found that market orientation links with customer- and employee satisfaction.
Market orientation has several indirect effects on performance. Research
provides evidence that a high level of market orientation will lead to increased
Faculty of Business Economics and Entrepreneurship 83
innovation and organizational learning that in turn lead to better performance, as
the company obtains more knowledgeable employees that make better products and
provide better service (Rapp et al.,2008; Shepstone, Currie, 2008; Laforet, 2008).
Jaworski and Kohli (1993) connected innovation with market orientation because
they believed that the concept was driven by creating change and introducing new
ways of doing business in order to differentiate and build a competitive advantage.
Skerlavaj et al (2007) propose that organizational learning culture might be the
missing link between business process change and organizational performance.
Results from Laforet (2008) show that medium-sized and small companies are
more innovative and market-oriented than larger companies.
The majority of research on market orientation is conducted in the Unites
States of America. In general, American researchers conclude a positive link
between market orientation and performance. When the same studies are replicated
in non-US countries however, they yield mixed results. Often a weak or non-
significant relationship between market orientation and business performance is
found (Diamantopoulos and Hart, 1993; Greenley, 1995; Appiah-Adu, 1998). In
their study of the effects of market orientation in the United States of America,
Denmark, Sweden and Norway, Selnes, Kohli and Jaworski (1996) say that the
findings indicate that (1) organizational antecedents are affected by national
context; (2) the effects of the antecedents of market orientation are similar in U.S.
and Scandinavia; (3) market orientation affects overall performance in both the
U.S. and Scandinavia; and (4) strong effects of market orientation on esprit de
corps are evident in both cultures.
SCOPE AND STATUS OF MARKET ORI ENTATI ON
The marketing concept can be classified into an "old" marketing concept and a
"new" one (Gunay, 2002). The shift in focus becomes clear with the new
millennium. Before 2000, scholars mainly focused on the direct effects of market
orientation that were found to be diverse business performance measures, while
after 2000, the focus shifted to the numerous indirect effects of it such as the effect
on learning, employees satisfaction, and innovation. For example, Farell (2000)
was one of the first to come with new evidence that the level of marketing
orientation goes hand in hand with organizational learning. The "old" marketing
concept emphasized customer-orientation, product innovation and profit as drivers
to creating happy customers while the "new" one emphasizes culture, innovation
and the importance of organizational learning. Today´s marketing concept
comprises customer orientation, distinctive advantages, market intelligence, value
or quality delivery, continuous improvement in goods and services, customer-
oriented business culture, and coordinated and integrated business activities in the
whole organization creating a competitive advantage.
In order to get this job done, organizations must gather and analyze market
knowledge and empower their people with it. Market orientation involves an outward-
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looking perspective from a firm, meaning that it should not only focus on customers
but also on competitors, the development of their business sector and the work
environment as a whole (Narver, Slater, 1990). As the definitions of market orientation
suggests, there is quit a strong market-related information aspect to market orientation.
Hence, its fit within an organization is related to the ability of that organization to
effectively manage its business information systems and make sure that all data is
analyzed and developed into useable knowledge. Desphandé (1990) poses that the fit
of market orientation within a firm is threefold: as part the development of strategic
competence as a learning organization; as part of a market knowledge management
system and as a foundation for corporate strategy.
It has become clear that the traditional perspective of market orientation sees
the concept as a business philosophy. However, contemporary approaches to
market orientation see it as a dimension of a firm’s culture; a guiding
representation to a firm’s tendencies; a differentiating capability; and an array of
business behaviors (Varela, Rio, 2003). Market orientation has, also, been seen as
both a behavioral and cultural business philosophy (Gounaris, Avlonitis, 2001).
Figure 6 visualizes the nature and scope of the marketing over time.
Figure 6: Scope of marketing and its focus over time
Source: Hunt, 1995
From literature we learn that market orientation is not an operating mode that
can be turned on or off but rather a state of being that evolves over time (Narver,
Slater, 1990). It will manifest itself through the organizational culture where
employees strive to continuously provide outstanding service to internal and
external customers. The higher the degree of market orientation, the more skilled
employees become to integrate all processes in order to maximize performance for
the company as a whole (Laforet, 2008).
Faculty of Business Economics and Entrepreneurship 85
There are a number of steps that must be taken in order to install a market
orientation. What follows is a rough road-map that is grounded in theory. To install
the market orientation process, one should start with thorough analysis of the
company and its environment, the markets on which it operates, competition,
customer demands and expectation and the satisfaction level of customers and
employees to name a few. Kohli and Jaworski (1990) write about the antecedents
in this context.
Marketing theorist have provided a number of simple tools such as SWOT
(analysis of strengths, weaknesses, opportunities and threats), PESTEL (analysis of
political, economical, social, technological, environmental, legal issues) to do this
analysis. The next step is to systematically and continuously mediate the obtained
knowledge and information to all employees (Kotler et al, 2001). This
organizational learning process will mix with the corporate culture and as such
create market oriented behavior that will have a positive effect on employees and
customers and lead to better overall performance. The third step is continuous
learning and adapting.
MARKET ORI ENTATI ON AND ORGANI ZATI ONAL CULTURE
Having reviewed relevant literature about market orientation, its ins and outs,
models and effects, we now discuss how organizational culture and market
orientation interact. To begin with, literature concerning organizational culture is
reviewed. Next, the cultural model by Denison is explained in more detail and
linked to the theories of Narver and Slater and Kohli and Jaworski. Furthermore,
this chapter explains why organizational culture can be an effective way to measure
market orientation.
Organizational culture is a concept that is hard to describe distinctly. One
could say that organizational culture is the personality of the organization (Schein,
2004). In that perspective, culture is viewed as a set of shared beliefs and values
that are reflected in habits and traditions as well as in more tangible manifestations-
stories, symbols, or even buildings, brands and products. It is an organization's
self-identity: What members really think about what the company is and where it is
going. Another perspective poses that companies are comparable to ethnical
societies with respect to culture, where different people have different opinions of
what norms and values are perceived prudent.
Deal and Kennedy (2000) introduced the concept of organizational culture.
They say that organizational culture, broadly defined, is a collective understanding,
a shared and integrated set of perceptions, memories, values, attitudes and
definitions that have been learned over time and that determine expectations
(implicit and explicit) of behavior that are taught to new members in their
socialization into the organization. Culture is comprised of the assumptions, values,
norms and tangible signs or artifacts of organization members and their behaviors
(Mobely et al., 2005).
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Culture is particularly important when attempting to manage organization-
wide change, which is often necessary when implementing a market orientation.
Practitioners realize that, despite the best-laid plans, organizational change must
include not only changing structures and processes, but changing the corporate
culture as well. Despandé, Farley and Webster (1993) recognized this fact and were
the first scholars to connect market orientation with company culture. O' Regan et
al. (2006) propose that innovation is driven by a company's culture, leadership and
strategic planning. They conclude that high performing firms have stronger and
more defined leadership and culture styles compared with low performing firms.
This is in line with the findings of Narver and Slater (1990) that suggest a strong
relationship between organizational culture and market orientation. So, an
empowerment culture where all employees encourage and assist each other
associates with successful innovation, leading to a stronger market orientation and
better performance.
There has been a great deal of literature generated over the past decade about
organizational culture, particularly in regard to learning how to change
organizational culture. Organizational change efforts are rumored to fail the vast
majority of the time. Usually, this failure is due to lack of understanding about the
strong role of culture and the role it plays in organizations (Laforet, 2008). That is
one of the reasons that many strategic planners that want to install a market
orientation now place as much emphasis on identifying strategic values as they do
mission and vision. A market orientation can only build upon a strong
organizational culture, and has to become a part of that culture (Desphandé et
al,1993).
There is much evidence that links organizational culture with market
orientation (Denison, 1990; Denison et al., 2004; Gainer, Pandanyi, 2005;
Skerlavaj et al., 2007; Laforet, 2008). The first scholars that connected market
orientation with organizational culture were Desphandé, Farley and Webster
(1993). Their study found that corporate culture is positively related to business
performance through the market culture, which is the organizational culture that
includes a high goal achievement orientation stressing competitive advantage. In
such a culture, managers and staff are aware of the fact that the company exists to
continuously produce great service and therefore they behave in a customer
oriented way. A strong organizational culture that empowers employees is one of
the most valuable resources to be found within a company (Denison, 1984).
Organizational culture plays a critical role in creating a work environment
where employees are committed and contribute to the success of the organization
(Shepstone, Currie, 2008). So this is where the implementation of a market
orientation should start.
One of the most frequently cited studies of culture and performance is
Denison's research (1990). It showed that organizations with a participative culture
experience better performance than organizations that have a more formal culture
with less room for employee participation in decision- and strategy making.
Denison suggests that studying organizational culture provides a way to capture the
Faculty of Business Economics and Entrepreneurship 87
impact that culture has on organizational performance. In other words, Denison's
study provides hard evidence that the cultural and behavioral aspects of
organizations are closely linked to both short-term and long-term survival. In
further research, Denison and his colleagues (Denison, 1990; Denison et al., 2004)
developed and empirically supported a theory of organizational culture and
effectiveness that identifies four cultural traits that are positively related to
organizational performance.
Denison (1984) proposed a model to evaluate the shape of organizational
culture and an instrument to measure it that he called DOCS (Denison
Organizational Culture Survey). The methodology origins from research by
Denison (1982, 1984, 1990). Initially, Denison studied 34 companies and found
that results were significantly different depending on behavioral issues. Denison
and Mishra (1995) expanded the database to 756 companies and now this database
includes results of over 1500 companies of different sizes (Mobley, Wang and
Fang, 2005). The main focus of this method is to connect several different
cultural/behavioral dimensions to company performance. Those dimensions are
involvement, consistency, adaptability, mission and cultural traits. Figure 7 shows
the Denison model and its dimensions graphically.
Figure 7: The Denison model to measure organizational culture
Source: Denison 1984, 1990
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The model scales the four dimensions on a horizontal axis showing internal vs.
external focus and a vertical axis that depicts flexible vs. stable focus. The
dimensions "adaptability" and "mission" belong to the external environment and
"involvement" and "consistency" to the internal environment of the organization.
The dimensions "mission" and "consistency" also belong to the stability side of the
axis while "adaptability" and "involvement" belong to the flexibility side of the
axis.
The Denison culture model is a tool which helps organizations, divisions, and
teams, and the individuals within each attain a baseline assessment of current
cultural strengths and weaknesses. A high score on any of the 12 dimensions is
regarded to be positive, a strength, for the organizational culture, while the
opposite is true for a low score. The center of the model (Figure 7) shows the
underlying beliefs and assumptions that are the foundation for the human behavior
and the actions taken by the organization. A run with the Denison model will
provide managers with an understanding of bottom-line related performance such
as profitability, sales/revenue growth, market share, quality, innovation, and
employee satisfaction, with direct links to cultural elements which may be
supporting or hindering these performance areas.
The outcome of a measurement with DOCS defines the shape of the
organizational culture. At the same time, the outcome of the adaptability dimension
shows the level of market orientation of that organization. Knowing that the right
research instrument has been chosen for the purpose of this study, we can now
proceed to the research questions connected to the main research question: what are
the effects of the bank´s level of market orientation on its business performance?
SI TUATI ON I N SERBI AN COMPANI ES
In almost all previous studies in this field, the primary emphasis has focused on
the market orientation of manufacturing firms in developed economies. Despite the
importance of market orientation in the modern business world, the need for market
orientation investigations in the developing countries is still ignored by researchers.
In mature economies characterized by prevalence of buyer’s markets, stable
growth and intense competition, firms that are more oriented towards customers’
needs and competitors action will do better as per the claims of market orientation
scholars. In contrast, in developing economies characterized by ill-defined market
boundaries and strong or burgeoning demand, firms may be able to "get away
with" a minimal amount of market orientation. Until recently; however, there has
been relatively little research into the applicability of the market orientation
construct in developing economies.
Although various conceptualizations of market orientation appear in literature,
researchers in general agree that market orientation encompasses three key
dimensions, i.e. customer orientation, competitor orientation and interfunctional
Faculty of Business Economics and Entrepreneurship 89
coordination (which means a coordinated utilization of resources for creating
superior value for customers). A market oriented firm is supposed to be one which
successfully applies the marketing concept. What is not so clear is whether the
market orientation concept is appreciated by small firms. According to some
authors, small business owners have a problem with marketing and often see it as a
peripheral to small firms' requirements.
The reason why market orientation has received a great deal of attention from
many researchers is because it is believed that a high level of market orientation
can provide a solid basis for a sustainable competitive advantage. In this paper, we
hypothesize that market orientation has a positive effect on performance.
Over 95% of companies in Serbia are small and medium-sized companies and
represent important part of our society and economy. From the perspective of the
researchers small and medium-sized companies are big (and unexplored) field of
potential clients – users of researcher’s services. Theory, research and everyday
experience suggests that small and medium-sized companies have problems with
marketing and that they don’t consider it particularly useful.
Therefore the objectives of this paper were: a) to examine the degree of market
orientation exhibited by small firms, and b) to investigate the impact of market
orientation on business performance of small firms.
Market orientation implies usage of marketing concept as a business
philosophy. In the center of most definitions is the customer – importance of
reacting to customer, but also to the other participants (competition, employees in
the company). Behavioral conception (Narver & Slater, 1990) defines market
orientation as business culture or behavior that reflects in the activities of the
company in three aspects: 1) orientation to customers, 2) orientation to
competition, and 3) inter-functional coordination. MKTOR scale is created for
measuring market orientation, with claims of situation in company in every of
given aspects.
Orientation to customers
Orientation to customers reflects orientation of company on satisfying the
needs of customers and creating added value. MKTOR scale has six claims for
measuring this aspect of market orientation.
Orientation to competition
Orientation to competition reflects monitoring and understanding short-term
strengths and weaknesses as well as long-term abilities and competition strategies.
It represents reacting to competition activities and orientation to creating
competitive advantage. MKTOR scale contains four claims for measuring this
aspect of market orientation.
Interfunctional coordination
Aspect that reflects the degree of information exchanging and knowledge
inside the company, as well as the common action of all departments and
employees in achieving companies goals. MKTOR scale has five claims for
measuring interfunctional coordination.
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ANALYSI S OF THE EXAMI NATI ON
Analyzing the examination of 200 top managers of small and medium-sized
companies throughout Serbia (Brakus, Aleksi?, 2008), we have tried to check our
market orientation assumptions. In examination was using CATI (Computer Aided
Telephone Interviewing) method, and sample was random, with quotas for size of
the company, sector and region. MKTOR scale is used for measuring market
orientation. Claims are presented using the Likert 5 degree scale (1 – strongly
disagree, 5 – strongly agree). In table 2 presents the data relating to the size of
companies, sectors in which they work, and regional distribution.
Table 2: Sizes, sectors and regional distribution of companies
Size Number %
1-5 employees 57 28,5
6-15 40 20,0
16-50 41 20,5
51-250 62 31,0
Sector Number %
Trade 72 36,0
Services 55 27,5
Production 73 36,5
Region Number %
Belgrade 56 28,0
Vojvodina 55 27,5
Central/West Serbia 45 22,5
South/East Serbia 44 22,0
Total 200 100
Source: Author's view, 2014
In table 3 presents MKTOR scores according three aspects.
Faculty of Business Economics and Entrepreneurship 91
Table 3: MKTOR scores
Orientation to customers Mean
We are carefully measuring the degree of our employees dedication in satisfying the
needs of the customers
4,60
We are very dedicated to our customers 4,75
Satisfaction of our customers is the main goal of our business 4,79
We are regularly monitoring satisfaction of our customers 4,71
We are always trying to find a way to create added value for our customers 4,66
We are dedicating a lot of attention to the services after the sale 4,49
Orientation to competition
Our dedicated staff regularly monitors and exchanges information about strategy of
the competitors
4,22
We are quickly reacting to the competition activities 4,30
Management of our company is regularly considering the strategy, strengths and
weaknesses of our competitors
4,18
We are creating our offer so that we can achieve competitive advantage 4,41
Interfunctional coordination
Top management regularly visits our key customers 4,04
Information about the customers is freely distributed throughout the whole firm 4,40
All of our employees and departments understand the needs of the customers 4,52
All of our departments are taking part in the preparation of business plans and
strategies
4,10
Activities of our departments are well integrated 4,36
TOTAL MKTOR SCORE 4,42
Source: Authors, 2014
Using the K-Means cluster analysis, SMEs are grouped by the way of
evaluation MKTOR claims. Companies differ little in orientation to customers –
the biggest differentiation is in claims about competition and coordination. Four
different segments have singled themselves out:
Competitive ("ideal") market orientation includes companies that have
significantly higher score on claims about competition. And scores for every other
aspect are very high. This is the biggest segment, with 54% companies.
Balanced market orientation represents companies that gave relatively high
scores for all claims and on less extreme – well-balanced way. This is the second
segment in size, with 27% companies.
Non-competitive oriented are companies that have significantly lower score on
claims about orientation to competition. They represent 12% of entire sample.
Non-coordinated companies that have scored the lowest in claims about
coordination inside of the company. This is the smallest segment, with 8% of the
companies.
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Figure 8 shows relevant data relating to the first segment.
Orientation to customers and competition is almost ideal in this segment, while
the interfunctional coordination is little less. These companies often have more
than 50 employees, and work in trading industry. Some departments that they have,
or better, do not have, cast doubt on their "ideal" market orientation.
Figure 8: Competitive ("ideal") profile
Source: Author's view, 2014
Figure 9 shows relevant data relating to the second segment.
Companies in this segment dedicate equally a lot of attention to every market
orientation segment. They also have bigger number of employees, but mostly in the
production sector. In comparison to companies in the previous segment, difference
in the structural level is especially significant – it is more probable to have
departments for marketing, planning, research and development.
Figure 9: Balanced market orientation
Source: Author's view, 2014
Faculty of Business Economics and Entrepreneurship 93
Figure 10 shows relevant data relating to the third segment.
In this segment are mostly micro companies, with up to 5 employees, that
work in area of services. Their strongest focus is on customers, while the
competition is less important. They rarely have the departments or persons that are
in charge for marketing, planning, research and development.
Figure 10: Non-competitive oriented profile
Source: Author's view, 2014
Figure 11 shows relevant data relating to the fourth segment.
These are mostly micro companies, in sector of services and production –
rarely in trade. Unlike the previous segment, they dedicate equal attention to
competition and customers. Having in mind the number of employees, it’s a
surprisingly little coordination – so one can assume that "keeping the information"
is a reflection of influence of the personal characteristics.
Figure 11: Non-coordinated profile
Source: Author's view, 2014
94 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
FI NDI NGS
As opposed to expectation, MKTOR score suggests that most of the small and
medium-sized companies in Serbia are market orientated. Yet, behind the total
score, there are different types of orientation – especially in their relation to
competition and coordination inside company. Second segment (Balanced Market
Orientation) is theoretically closest to market orientation, while the last two
segments represent companies that are the least market orientated.
The biggest part of SMEs has strong focus on competition and customers, and
a bit weaker on internal coordination. This kind of external focus could reflect
specific organizational culture, and maybe internal problems. Structure of "ideally"
oriented companies suggests that there really exists a difference between theory
and practice – claims and realization.
Most of the small and medium sized companies in Serbia are strongly
orientated to customers and competition. Market orientated companies are more
open to research, because of their integration in their business philosophy – they
take in consideration both the customers and the competition, and also imply
intensive exchange of information.
CONCLUSI ONS
The emerging consensus is the concept of a market orientation constitutes a
fundamental strategic approach to understanding markets. This orientation can be
described as an organisational culture focused on understanding the market which
helps firms to develop customer value strategies that take advantage of
opportunities and repel threats. Through the years, numerous scholars have found
that market oriented behavior in marketing new products or services leads to better
performance, has positive effects on customer satisfaction and loyalty as well as
innovation, employee satisfaction and cooperation.
One important fact to consider is that a firm‘s entrepreneurial orientation is
positively related to the firm‘s performance. This suggests that the firm and its
managers may benefit from implementing strategy to encourage and increase the
firm‘s level of entrepreneurial orientation, which has been shown to be the
propensity of the firm to be innovative, proactive to marketplace opportunities, and
be willing to take risks. Porter (1996) posits that an entrepreneurial orientation may
be the mechanism for firm survival and success.
Market orientation which is, broadly speaking, understood as the
implementation of the marketing concept as a business philosophy has received a
strong attention in the marketing literature. However, there has been little research
on market orientation within the small business sector. The same can be stated for
Faculty of Business Economics and Entrepreneurship 95
Serbia, despite the fact that Serbian firms are prevailingly considered to be small
and medium businesses.
Serbia is, as is well known, a country in transition and based on analyses of
situation in SMEs can be concluded that most of SMEs are strongly oriented to
customers and competition. Thus, managers should acknowledge that the primary
function of market orientation might be to act as an impetus that fuels the
development of market-based capabilities.
For better understanding of situation in Serbian small and medium-sized
companies it is necessary to conduct more thorough research. As it is already said,
this is still unexplored field with great challenges, so it is expected that, use of
scientific methods and knowledge, provide a more realistic view of the state.
Orientation to market reflects on position, development and growth of these
companies, and better performance is expected with changes in organization,
orientation to learning, exchange of information and introducing the innovations.
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98 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BUSINESS IMPROVING WITH CLOUD COMPUTING
TECHNOLOGY
Djordje Ilic, MA
9
,
Marija Markovic Blagojevic, MA
10
ABSTRACT
More and more small and medium business managers are thinking seriously
about their data protection and storage strategy. They know their businesses are
dependent upon the computers and storage that handle customer orders. Sharing
and protecting that information is vital. At the same time, the increasing pace of
business and the need to speed operations makes sharing information among teams
critical to customer satisfaction and efficiency of business. Cloud Computing offers
reliable service to its customers at flexible prices. However, as creative and
innovative Cloud Computing may be, it doesn't necessarily mean that Cloud
Computing is good for all businesses. In most situations, small businesses reap the
most benefits of cloud computing. Finally, looking to the future of cloud computing,
we will see how Cloud Computing can be used in business in the future. Analyzed
parameters and conclusions in the paper were given and based upon the conducted
desk research.
Key words: Cloud Computing, Small and Medium Business, Protection,
Sharing, Efficiency
J EL Classification: M15
UDK: 005.5:004.72
9
Djordje Ilic, Graduate school of proffesional studies "Prof. dr Radomir Bojkovi?", Krusevac, Serbia,
[email protected]
10
Marija Markovic Blagojevic, Faculty of Business Economics and Entrepreneurship, Belgrade,
Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 99
I NTRODUCTI ON
Whenever we think of clouds, one of the association that comes to mind is that they
are a phenomenon that is always present and which always follows. Using this association,
software companies recently launched the concept of cloud computing, Figure 1.
In its most simple description, Cloud Computing is taking services ("cloud
services") and moving them outside of the organization’s firewall on shared
systems. Applications and services are accessed via the Web, instead of via the
hard drive. In cloud computing, the services are delivered and used over the
Internet and are paid for by cloud customer (business) - typical "as-needed, pay-
per-use" business model. The cloud infrastructure is maintained by the cloud
provider, not the individual cloud customer.
Cloud Computing networks are large groups of servers and cloud service
providers that usually take advantage of low-cost computing technology, with
specialized connections to spread data-processing chores across them. This shared IT
infrastructure contains large pools of systems that are linked together. Virtualization
techniques are often used to maximize the power of cloud computing.
Currently, the standards for connecting the computer systems and the software
needed to make Cloud Computing work are not fully defined at present time,
leaving many companies to define their own Cloud Computing technologies.
Figure 1: Illustration of Cloud Computing
Source:http://bodhost.com/blog/cloud-computing-principles-and-paradigms/
(11.4.2014)
100 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
They connect users in a virtual world, enabling access to email, creating
profiles on social networking sites, uploading photos or performing everyday tasks
in banking, electronic commerce, shopping or reading a newspaper.
WHAT I S CLOUD COMPUTI NG
Cloud Computing is a Web-based computing. Computer has been simply
defined as any electronic gadget that enables the input of data for processing into a
predetermined format that can be dispensed through an output media.
Cloud Computing is a term that describes the use of the internet to perform
functions that could have been done in the past by a PC. Information, data, files,
videos, photographs etc. can be stored in the cloud for processing instead of the
regular movement of a computer system before gaining access to such information.
The main requirement is access to the internet and understanding how it works.
Many people have heard about the advantages of doing business in the cloud, but
they are not sufficiently informed about the system usage. It is true that business in the
cloud has the potential for development of small and medium-sized enterprises. The
advantages are: low cost, savings, increased productivity and efficiency.
Simply put, clouds allow business to rent IT and hosting services instead of
investing in new infrastructure, training new personnel or licensing new software. It
differs from traditional hosting in three key things: the cloud service is rented on request,
allows the user to take as much space of a service as they want at any time and provides
full service provider. Business in the cloud offers easy operating cost that doesn’t burden
the budget so much. Companies using this service, pay monthly rent, so there is no
longer need for current and large capital investment in own hardware and software that
will be amortized in the future. Because of this, more companies from the world are
deciding (instead of the traditional IT) using cloud computing, Figure 2.
Figure 2: Example of use cloud computing in the world
Source:http://community.amd.com/community/amd-blogs/amd-
business/blog/2011/06/01/amd-2011-global-cloud-computing-adoption-attitudes-
and-approaches-study-infographics/ (11.4.2014)
Faculty of Business Economics and Entrepreneurship 101
Although some commentators categorize Cloud Computing services somewhat
differently, the most common approach segregates services into three-part
taxonomy (Mell, Grance, 2009). Software as a service (SaaS), probably the most
popular category, offers software for conventional operating functions such as e -
mail (Microsoft Exchange mail) and desktop applications (Microsoft Word and
Excel). It is also suitable for specialized functions such as accounting, payroll and
customer relationship management (CRM). Infrastructure as a service (IaaS) is
offering remote access to IT resources such as servers, processors, storage devices
and other devices and networking equipment. Business owner and IT team are
exempt from the management and maintenance of hardware. Platform as a Service
(PaaS) provides shared resources (including hardware and software) which are
available on request. In combination with the advantages of IaaS, this category of
services allows subscribers to download and management software of your choice
and can be used for design applications, development, testing and deployment.
In traditional model of software delivery, software is purchased in advance
under permanent license agreement. They usually pay an annual maintenance fee to
remove any bugs or bring some improvements. Software is the data center of the
company. Implementation services must engage the partner companies that have
the expertise in the application software. This model is still prevalent with large
application vendors, making these applications available to SMB (Small and
Medium Business) sector, due to the high cost and scope of the implementation.
Today we recognize a different approach when using a licensed software.
Before, the license of the software vendor and the buying additional service
provider (ASP) was required. ASP is a peak in the late nineties and the early years
of the 21st century, but hosting fees, costs of licenses and ongoing support made
the total cost of ownership extremely high. Software provider quickly identifies a
better method of delivery of software from the data center and this is the way wa
SaaS was born. The SaaS approach is a software solution whose delivery is made
via the Internet using a common web browser. SaaS applications are typically
hosted in discrete data centers that are owned or leased by the seller. SaaS model
uses a complex architecture, which means that SaaS users share common parts of
the application and their data and configuration of business processes are specially
kept. In SaaS model, customer paid subscription price includes the use of software,
support and access to all updates and service packs. From the user perspective, it is
less important whether the application of a dedicated data center or cloud, although
the cloud offers increased reliability and reduced downtime due to possible falls.
Nowadays, the concept of SaaS includes applications which are delivered as a
service via the web browser, either from the data center manufacturers, public or
even from a private cloud.
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CLOUD COMPUTI NG SERVI CES
Cloud Computing providers offer their services according to several
fundamental models, Figure 3:
? infrastructure as a service (IaaS),
? platform as a service (PaaS), and
? software as a service (SaaS).
Figure 3: Structure of Cloud Computing
Source:http://deletemalware.blogspot.com/2011/07/paas-cloud-computing.html
(11.4.2014)
Other key components in anything as a service (XaaS) are described in a
comprehensive taxonomy model published in 2009, such as Strategy-as-a-Service,
Collaboration-as-a-Service, Business Process-as-a-Service, Database-as-a-Service,
etc. In 2012, network as a service (NaaS) and communication as a service (CaaS)
were officially included by ITU (International Telecommunication Union) as part
of the basic Cloud Computing models, recognized service categories of a
telecommunication-centric cloud ecosystem (WikiPedia).
Faculty of Business Economics and Entrepreneurship 103
CHARACTERI STI CS OF SAAS
THE OBVI OUS ADVANTAGE
This is a small model of the evolution of software delivery and an attractive
option specifically for the SMBs sector. The main advantage is that SaaS allows
SMBs to gain access to features that was previously available only to large
companies with high capital. Hence, when they eliminate capital expenditures and
expenses to be paid in advance, any organization can pay a fee and obtain an
application as a service. Besides these obvious advantages, SaaS provides
numerous additional benefits. For example, every company in Benchmarks
portfolio uses Amazons cloud infrastructure in one way or another (Ha, 2009).
LOW FI NANCI AL RI SK
Many traditional applications include initial fees and periodic fees for support
and maintenance. SaaS is different. There is not only initial investment in IT
infrastructure and technological development. There are predictable and recurring
costs. There are no hidden costs for upgrades and maintenance. Everything is
included in the subscription. This results in a lower total cost of ownership and
avoiding large capital expenditures for the benefit of lower operating costs. Upon
termination or completion of the contract, the user is free to choose whether to
extend them or not. The US federal Chief Information Officer Vivek Kundra has
argued that Cloud Computing is economical. They are flexible, can be rapidly
implemented, can improve consistency in service, can be more energy efficient,
and can increase an organization's ability to focus on its mission since it can spend
less time and fewer resources on information technology (Kundra, 2010).
EASY APPLI CATI ON
It is assumed that the implementation can be expensive and a time-consuming
task. In addition to investments in technology infrastructure to run the application,
they must earmark funds for the installation and customization of the application.
Fee for advice may further increase costs. However, today's organizations who
want to be competitors cannot afford a long and complex projects in which there is
an interruption or disturbance of the basic work processes. The advantage of SaaS
in the fact is – in the most SaaS instances, it can be provided in a few minutes.
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COMPREHENSI VE SUPPORT
Many SaaS vendors establish rates for different levels of support and service.
In this way, they can choose the best package without paying for more or receive
less service than you need. Unlike traditional software license, SaaS model
includes subscription for comprehensive support and product maintenance and
upgrades. So, there are no hidden costs or additional costs, they do not have the
need to take care of the maintenance of the hardware or loss.
RELI EF FOR STAFF
In most organizations, IT staff is already overburdened. It is very important
that SaaS doesn’t set new demands on the IT team in the company, because there is
a technological infrastructure and application environment to support it. For small
and medium companies, which often lack dedicated IT resources, SaaS
applications are an attractive solution. If you need additional assistance, SaaS
vendors will often offer their services directly.
HI GH SECURI TY
When you relocate important data to a service provider, there is a firm belief
that the system is safe. SaaS vendors place their applications in world-class data
centers with the most reliable power supply system and security. They also use the
latest security protocols for ensuring the security and protection of data integrity.
This also goes for the cloud vendors, whose servers are located in the same data
center. Sellers who use public cloud application delivery also incorporate security
features to protect data in transit. Crucial point for the eventual acceptance of
Cloud technology in business industries will be the safety of critical data, both in
transfer as in storage. Large enterprises will not be willing to support the Cloud
concept as long as there is not more transparency available at which geographical
location the data is stored and protected (Henschen, 2008). Reasons for that are
foreign laws, which would possibly allow foreign governments to access these
data, or domestic insurance contracts, demanding the data to be stored only in
certain regions. But providing this required transparency would in some ways
contradict the whole idea of Cloud Computing itself, and it remains to be seen how
the large Cloud vendors will tackle this concern.
Faculty of Business Economics and Entrepreneurship 105
CROSSI NG AND ACCESS TO SAAS
Virtually, every type of application can be delivered as a SaaS. Customer
relationship management, document management, accounting and finance, human
resources - all of these critical applications are available from the SaaS provider.
But the question is how many of them are willing to do this transition. SaaS
application allows you to gain access to data and documents from any place that
has Internet connection. People who work in the field or travel, can effectively
collaborate with colleagues and share information using any mobile device. In
some case, offline workers cannot use this technology, because it is solely offered
online (Miller, 2009).
SMART I NVESTMENT
If a company has to elicit only a recommendation and group them in one place
as unique tips to help someone recognize their need to move to SaaS and decide
easier to take this step, the following questions may help:
If the business has grown, are the applications geared towards small and
medium sized enterprises?
Is more power and more functionality needed to assist in the growth of the
company?
Is there a growing number of workers in the field and those who are mobile
and who have trouble connecting via VPN (Virtual Private Network) and is there a
concern about safety in these connections?
Is the technology infrastructure up to the task to run today's applications and is
there the ability to invest in updating equipment?
If IT staff is overwhelmed by tasks of providing support or resources that
might not have been intended and who in that case pays for the job?
Those who answer yes to more than two of these questions need to think about
the basic SaaS applications as a possible solution for their organization. A further
recommendation is to start with one application, such as for example stacking
documents and trying how it works. Many providers offer a SaaS trial period of
thirty or sixty days, so that a small team can assess the application. And if they are
satisfied with reliability, security and ease of use of the application, they can
include other applications that are integrated with other front and back - office
systems. For sure, SaaS has many strengths and very few weaknesses. For small
businesses looking to grow and remain competitive, SaaS is a smart investment.
106 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
PUBLI C OR PRI VATE CLOUD
Company management often faces the dilemma of whether to take advantage
of the public or a private cloud, Figure 4. The decision to create a private cloud, or
use a public or hybrid cloud is based on various factors. It is important to define the
differences between private and public clouds. However, these businesses should
be mindful of the uses of Cloud Computing, as well as of the fact which services
provide suitable public or private clouds (Staten, 2008). In Figure 5, the percentage
of used Cloud Computing types around the world is given.
Figure 4: Private and Public Cloud
Source:http://blogs.msdn.com/b/arunrakwal/archive/2012/08/16/what-is-cloud-
computing-public-cloud-v-private-cloud.aspx (25.5.2014)
Figure 5: Representation of Cloud Computing in the world
Source:http://community.amd.com/community/amd-blogs/amd-
business/blog/2011/06/01/amd-2011-global-cloud-computing-adoption-attitudes-
and-approaches-study-infographics (25.5.2014)
Faculty of Business Economics and Entrepreneurship 107
PUBLI C CLOUD
The public cloud is provided as a service over the Internet. In the virtual
premises of Cloud provider, the customer does not have the visibility and control to
cloud services. The core infrastructure is shared between many organizations, but
data and usage are logically separated so that only authorized users can access
them. Public Cloud reduces the complexity and time testing, as well as the
implementation of new applications. It allows companies small or virtually no
capital expenditures. Public Clouds have their advantages over the private cloud
services.
PUBLI C CLOUD - ADVANTAGES
The simplicity and efficiency are the overall benefits of a Public Cloud
service. Public Cloud offering their services is usually over an Internet connection.
This type of technology provides a higher capacity of memory storage, so the users
do not have to worry about their PC memory storage (Miller, 2009). Host is to
manage the system and the users are to connect to the system via the web. Public
Clouds charge month or annual subscription. By keeping the public cloud,
organizations can reduce their IT budgets, because they don’t have to buy
hardware. The organization doesn’t have to spend money on employees who keep
track of the system, because they are taken care of by the host. If the hardware or
software configuration needs to be changed or if there is a server crash and the
process needs to be restarted, that would take several hours or days depending on
the situation. In Public Clouds, all the virtual reconfiguration takes a minute. If one
server fails, another can immediately be activated by reducing the time of arrival.
Due to the fact that the Cloud serving is the host, employees are responsible for
maintaining the system. The design allows users to update or introduce the tools
into the system more quickly. There are no contracts and no long-term
commitments. In general, the ease of use and price of Public Clouds usually wins
private ones.
PUBLI C CLOUD - DI SADVANTAGES
Companies need to have in mind the lack of public clouds before making a
decision. Due to the fact that a third party is responsible for maintenance of data,
many organizations feel they have little control over their personal data. Public
Cloud services are based on the Internet connection, which means slower data
transfer. If the organization keeps or carries a large amount of data, public cloud
may not be the best solution. For example, many users will not tolerate slow
108 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
loading. Poor security is seen as a major drawback. Google addresses this by
storing government data only within the US, but it doesn't guarantee for Public
Cloud customers like small businesses (Krishnan, 2010). This doesn’t mean that
public cloud has no security. Most of them have great actions, but for customers
with sensitive personal information, such as financial, it is difficult to trust a third
party. As with any technology, such benefits are partly offset by the existence of
risks, and in particular for cloud computing, security tops the list of concerns for
most organizations (Gens, 2008).
PRI VATE CLOUD
A Private Cloud can also be called an internal cloud. This means that
accounting and other infrastructure hosted on a private platform are not shared with
other organizations. The key is that technological innovation helps organizations in
the Private Cloud virtualization. Virtualization helps organizations achieve cost
savings by using the existing hardware infrastructure. Virtualized systems run
multiple virtual machines on a single physical host and as such, virtualized servers
will be more vulnerable than physical servers for the next few years until
organizations learn more about securing their systems (Gartner, 2010). It is
important to note that private cloud offers the opportunity to the customer to
quickly add new applications.
PRI VATE CLOUD - ADVANTAGES
Due to the fact that the hardware is owned by them, organizations have more
control over their data. The organization is responsible for monitoring and
maintaining the data taking in the full control over the data. A Private Cloud is
dedicated to one organization and the network can be designed to ensure a high
level of security. It is deployed inside the firewall on the network organization,
which means that the transmission rate is increased in relation to the use of the
Internet. Hardware performance and storage can be customized to Private Cloud,
because it is owned by the company.
Faculty of Business Economics and Entrepreneurship 109
PRI VATE CLOUD - DI SADVANTAGES
Private Clouds are generally more expensive than the public ones, because
they both require hardware and maintenance. In order to build a Private Cloud
service, organizations must invest in hardware or use existing systems. They
require system administrators, which leads to higher costs of administration. If a
company has multiple data centers, maintenance costs also increase significantly.
Due to the limitations of the hardware in the data center of the organization, there
are limitations in the capacity of data, which is considered their biggest flaw.
HYBRI D CLOUD SERVI CE
A hybrid Cloud service, Figure 6, is the combination of a Private and a Public
Cloud. It refers to an organization that keeps some of its operations in house
(Private Cloud) and also utilizing a cloud service from an outside provider for its
other operations (Public Cloud).
Figure 6: Hybrid Cloud
Source:http://www.nirix.com/cloud-solutions/(11.4.2014)
For example, if an organization has both sensitive and non - sensitive
applications, it can use a hybrid cloud to get the best of both worlds. The Hybrid
approach can allow business to take advantage of the cost effectiveness that a
Public Cloud service offers while keeping mission-critical applications within a
Private Cloud. A company can keep each aspect of its business in the most efficient
environment possible. The downside is that you have to keep track of multiple
different security platforms and ensure that all aspects of your business can
communicate with each other.
110 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
RETURN ON I NVESTMENT BY USI NG CLOUD COMPUTI NG
The cost of Public Cloud is dropping fast, so how can they make sure that the
value is in accordance with the money spent? It is not a secret that the cost of cloud
services is dropping as more choices become available and the providers battle for
the customers, but it is not always easy to ensure them. Although it may seem
clever to go for the cheapest option in terms of balancing the books, it is more
important to go for an option that will give you the highest role and this can
sometimes mean paying that little extra in the beginning, to make it the best value
for money offering in the future. In the SMB segment, the fastest adoption of
Cloud services is in the UK and Europe and that is because many of the SMB firms
are growing fast and looking to use cloud for cost saving. SMBs also want agility
and the ability to reach new markets that other, larger, companies are not able to do
because they already have investment in non-cloud-based real estate.
The first important step in identifying which service provider to go for and
whether to go for a Public, Private or Hybrid Cloud is to approach a local trusted
provider for help and identifying what should be moved into the cloud and for
advice on whether everything should be moved to a Public, Private or Hybrid
service.
Although the Public Cloud is cheaper, it may be more appropriate to focus
more on creating a Hybrid Cloud and understanding what workloads are best
deployed where and not automatically thinking everything is the best concerning
the Public Cloud. It may be that they only need to use a service part-time and in
that case, there is no need to pay for server space full time. The world is getting
more dynamic in the sense that volumes of transactions are not predictable from a
business point of view. The world is automated. Everything depends on IT and
infrastructure. They must run and implement business processes.
Already at present, many consumers use Cloud services for private purposes –
although possibly without knowing that they are doing so – for example through
the usage of certain e-mail providers or social networks. Apart from data
management advantages, consumers can be motivated to use cloud services by
means of financial and ecological benefits, for example if they learned that cloud
usage could reduce their energy bill and help them protect the environment (Jaeger
et al. 2009). The IT devices of private households in Germany consumed 60 % of
the total energy consumption of IT in 2007, and the ratio is expected to further rise
until 2020 (Stobbe et al. 2009). Thus, even small energy savings in each household
may lead to a significant overall impact (Kumar, Lu, 2010). However, these
favorable prospects again rely on customer knowledge and acceptance of the new
IT infrastructure.
Faculty of Business Economics and Entrepreneurship 111
EXAMPLES OF CLOUD COMPUTI NG
Before the advent of the various developments in the parlance of Cloud
Computing, the majority of internet users were used to the email, which could be
stored in the cloud and remain if deleted ( in case the person has an account like
Yahoo mail, Hot mail, Gmail etc). But the idea of massive storage of data,
synchronization of such data, word processing, gaming and a bulk of what the
computer could hitherto perform physically in the past, is now done in the cloud.
There are typical examples of Cloud Computing.
? Microsoft SkyDrive (Microsoft Cloud Computing) is a cloud based storage
device for personal and corporate files, data, information etc. which is
accessible from anywhere through an internet connection. Microsoft Word,
Power Point, Excel and a great deal of other products of Microsoft can be
accessed for free. SkyDrive application can be downloaded and installed in a
PC if the system supports it. Otherwise, it has to be accessed directly in the
clouds. In order to access SkyDrive, you need a SkyDrive.com account,
through which the cloud is accessed. Microsoft provides up to 7GB free
storage for documents, photos, files, data etc. Users of Windows 8 are at
advantage as SkyDrive application is integrated into the operating system
and by implitation, it can be accessed easily when the system is online. This
is one of the advantages of Windows 8.
? Google Drive (Google Cloud Computing): This was known as Google Docs
until recently, when it was changed to Google Drive. Google Drive is an
example of Cloud Computing where videos, photographs, files, documents
and data can be stored and organized whether for an individual or a
corporate organisation. Google offers up to 15GB free storage for users.
There is a periodic payment plan for additional storage as the demand grows
for clients. Google account is required to access this facility. For easy access,
Google Drive can be downloaded into a PC or into a similar form.
? Dropbox (Dropbox Cloud computing): This one is the Cloud Computing
giant and a front line outfit in the industry. Since its inception in the year
2007, it has made some remarkable landmark achievements worth emulation
by others in the same competition with respect to quality of service. By
implication, Dropbox offers Cloud storage for its clients for files,
documents, Videos, data synchronisation and much more. Apart from the
free storage offer, more storage as referral bonus is available. For additional
storage demand, a competitive payment plan is available.
? iCloud (Apple Cloud computing): iCloud is cloud based and owned by
Apple incorporated for the storage and sharing of files, music, documents,
applications, videos, photographs, data etc, built into every compatible
Apple and other form. The iCloud application can be downloaded from
Apple store and installed into your form if compatible. This can be accessed
anywhere, as long as the device is compatible via an internet connection.
112 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
WORKI NG I N A VI RTUAL OFFI CE
However, Google’s online suite of office applications is probably the best
known,but by no means the only solution or offer. Rather than having a system and
space hogging suite of applications like a word processor, a spreadsheet creator and
a presentation or publishing platform sitting on computer, they could opt to work
online instead. Accessibility, potential for collaboration and perhaps even online
storage are just some of the benefits of satisfying your office suite needs by
working online. Examples of online suite offer include: Ajax 13, Think Free and
Microsoft’s Office Live. When somebody needs to meet with a customer, sending
him a meeting request in Outlook that includes a link to an online meeting hosted
in Lync Online, that is very impressive. Online meetings are much easier to arrange
and enterprises use them extensively. In addition, online conferences can host up to
50 people at a time (O’Reilly, 2012).
ACCOUNTI NG I N THE CLOUD
Painless bookkeeping: brings all your finances together into one place, tax
payment and invoice dates to calendar, free support and regular software upgrades,
bank-level security and data protection. They build professional estimates and
proposals which can be tracked through to approval and converted to invoices. Charts
of invoice payments show month-by-month when payments are due, overdue or have
been paid. Electronic bank statements and building monthly balanced charts are
obvious advantages, as well as tracking what the company owes to the user, by adding
out-of-pocket expenses, including scanned expense receipts.
FLEXI BLE ENTERI NG
If you need complete visibility on how your time is being spent, FreeAgent lets
you easily log timeslips for work done on active projects. Switch between weeks and
months and see at a glance where your time is going. When the project is complete,
generate an invoice from all unbilled time and send this to the client in minutes.
TI MESHEET REPORTI NG AT YOUR FI NGERTI PS CLOCK I CON
At any stage in a project, they can generate flexible and professional time
tracking reports, broken down by contact, project, user and tasks. If necessary,
these can be printed off as high quality PDFs and submitted to the client. This is
something especially useful for contractors.
Faculty of Business Economics and Entrepreneurship 113
I NVOI CI NG SOFTWARE THAT HELPS GET PAI D FASTER
The FreeAgent traffic system instantly shows the status of invoices, allowing
quick determination what has been paid, what payments are outstanding or what
still needs to be sent. Also, it is possible to filter invoices by status or invoice date,
including tax years. Once the invoice has been paid by clients, FreeAgent will
reconcile the invoice and payment into bank account. This provides a more
accurate picture of money used in business. Integration with PayPal means that
PayPal links could be included in emails so clients can settle the invoice online
immediately. It's all about getting paid faster. Invoicing with FreeAgent means
getting paid faster and with less effort. They can create invoices with a company
logo or even create their own design.
EXPENSE TRACKI NG
For expenses such as magazine subscriptions or web hosting, it is possible to
set them to automatically recur. A comprehensive list of expense categories helps
building accurate accounts which are priceless at tax time. For complete
accountability, FreeAgent allows uploading of scanned expense receipts as
attachments to expense records. These can be viewed as individual expenses or be
downloaded as the original files again, at any time.
ACCOUNTANT FRI ENDLY
By giving access to account, the clouds are able to give you instant, better and
more relevant advice, Figure 7. It's a completely new way of working with your
advisor that benefits both parties.
Figure 7: Year and Month Profit and Loss
Source:http://www.freeagent.com/tour/accounting (25.5.2014)
114 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Track income and outgoings to get a true picture of business over time.
FreeAgent alsp builds month and year Profit and Loss statements. FreeAgent builds
a fully balanced sheet for business with a comprehensive list of your company's
assets and liabilities. Year-end accounts can be handled as soon as the books are up
to date. Some Cloud-based systems allow accepting many forms of payment and
have the funds deposited directly into business bank account, to help firms in
maintaining a healthy cash flow (Bates, 2011).
SI MPLE SALES TAX
Everybody can set the appropriate sales tax for any country and FreeAgent
applies this to all required sales and purchases. Additional sales taxes can also be
added for regions where multiple sales taxes are needed and can mark these sales
taxes as compound, as is required in certain places. Quick, easy and configurable
reports show all the sales tax charged on invoices.
CLOUD ACCOUNTI NG
FreeAgent's cloud accounting software is completely web-based - there's
nothing to download, update, or install and you can access it from your regular
browser. Everybody can use it anytime, from any computer - no more sharing
spreadsheets or lugging around your laptop. It is not needed that the user worries
about computer crashing and losing all of your business's books - with FreeAgent's
cloud accouting, all of data is securely transferred at backup servers several times
an hour.
SECURE CONNECTI ONS
The security of data is of biggest concern. FreeAgent uses 256-bit SSL
technology to encrypt all transactions between firms and servers of vendor. It is the
same technology that banks use to protect data. Redundancy and resilience is built
into hosting infrastructure. They operate out of two geographically isolated data
centres (DCs), so they can offer full DC-level failover in the unlikely event that an
entire DC becomes unavailable. As well as maintaining real-time copies of vendor
database across two separate data centers, they additionally run a full database
backup every four hours with additional incremental backups several times an
hour. These backups are encrypted and transferred to a secure offsite location.
They also allow downloading all data from within FreeAgent account at any time.
Faculty of Business Economics and Entrepreneurship 115
MOBI LE PHONE
Whether on iPhone, an Android handset or Windows Phone, FreeAgent will
just work on browser. It’s free and there’s no application to be installed.
DI SCUSSI ON
Cloud Computing is a challenge to many analysts. Most people think that
solutions must be created within the organization as well as its own product, based
on its needs and capabilities. Management companies do not need to waste
valuable time on managing and maintaining servers, database or application
infrastructure, they should be more devoted to their primary business. Opponents
of Cloud Computing mainly deal with security issues and legislation.
In the transition to Cloud, it is necessary to check the performance that the
vendor offers. Applications that use large data base or require a fast processor and
capacity of RAM may not be the best choice for the Cloud, since it would run them
and the use itself would be too expensive. It is the best to check the details with the
Cloud provider. Caution is needed with providers that have a minimum price for a
monthly service fee, because it can directly affect the level of support that the
provider offers.
It is necessary to determine precisely which security issues are the
responsibility of the organization, and which security issues are the vendor’s
responsibility. It is necessary to estimate the time and cost of transferring large
amounts of data on the Cloud, as well as to inform on the business continuity and
the training of employees. Along with that, it is needed to pay special attention to
internal business issues, especially to those related to human resources, because a
large number of organizations is faced with the discontent of employees who may
feel threatened.
Cloud computing is definitely a new age in the era of computing that tags
along a number of benefits. They can be classified into several different categories,
namely:
? virtualization,
? democratization of computing (small and medium enterprises operating in
the infrastructure that has already been available only to large companies),
? scalability,
? commodification of infrastructure (IT department is able to deal with the
strategic aspects of the business).
116 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON
Cloud Computing has numerous advantages, but also some disadvantages. It
can be seen that the benefits of cloud accounting outweigh its negative aspects.
When firms use cloud correctly and efficiently in a business, they cannot only
increase profits for a company by allowing fewer employees to work remotely,
they can also increase the productivity of a company. As more and more companies
turn to Cloud Computing to save money and to increase business value, the future
of Cloud Computing becomes more uncertain. The popularity of these services will
only continue to increase, especially while companies are continually forced to
adjust to decreased budgets.
REFERENCES
[1] Bates, C. (2011). Cloud Computing Is Changing the Way Small Businesses
Work, OPEN Insight Guide
[2] Calvey, J. (2013), Cloud Computing principles and paradigms,http://bodhost.com/blog/cloud-computing-principles-and-paradigms/
(11/4/2014)
[3] Gartner (2010) Gartner says 60 percent of virtualized servers will be less
secure than the physical servers they replace through 2012.http://www.gartner.com/it/page.jsp?id=1322414.
[4] Gens, F. (2008). Cloud Services User Survey, pt.2: Top Benefits & Challenges.http://blogs.idc.com/ie/?p=210.
[5] Ha, A. (2009). Who uses cloud computing? Startups do, VCs don’t. Retrieved
December 2, 2010, fromhttp://venturebeat.com/2009/06/25/who-uses-cloud-
computing-startups-do-vcs-dont/
[6] Henschen, D (2008) Demystifying cloud computinghttp://www.intelligententerprise.com/blog/archives/2008/06/demystifying_cl.ht
ml. Accessed 2009-03-30
[7]Jaeger, PT., Lin, J., Grimes J.M., Simmons S.N. (2009) Where is the cloud?
Geography, economics
[8] Kumar, K, Lu, Y.H/ (2010) Cloud Computing for mobile users: can offloading
computation save energy? IEEE Computer 43(4):51–56
[9]Krishnan, K. (2010). Introducing Google Apps for Government. Official Google
Blog,http://googleblog.blogspot.com/2010/07/introducing-google-apps-for-
government.html.
[10]Kundra, V. (2010). State of Public Sector Cloud Computing. Chief Information
Officers Council
[11]Miller, M. (2008).Cloud Computing: Web-Based Applications That Change the
Way You Work and Collaborate Online, Indianapolis: Que Publishing, 2008.
Faculty of Business Economics and Entrepreneurship 117
[12]Mell, P., Grance, T. (2009, October 7). The NIST definition of Cloud
Computing (version 15).http://www.csrc.nist.gov/groups/SNS/cloud-
computing/cloud-def-v15.doc
[13] Published with the authorization of Microsoft Corporation by: O’Reilly
Media, Inc. 1005 Gravenstein Highway North Sebastopol, California 95472,
2012.
[14] Stobbe S., Nissen N., Proske M., Middendorf A., Schlomann B., Friedewald
M., Georgieff P.,Leimbach T. (2009) Abschätzung des Energiebedarfs der
weiteren Entwicklung der Informationsgesellschaft. Fraunhofer Institut für
Zuverlässigkeit und Mikrointegration, Berlin
[15]Staten, J. (2008). Is Cloud Computing Ready For The Enterprise? Forrester.
[16]WikiPedia,http://en.wikipedia.org/wiki/Cloud_computing#Service_models
(25/5/2014)
[17]http://deletemalware.blogspot.com/2011/07/paas-cloud-computing.html, PaaS -
Cloud Computing, (11/4/2014)
[18]http://blogs.msdn.com/b/arunrakwal/archive/2012/08/16/what-is-cloud-
computing-public-cloud-v-private-cloud.aspx, What is Cloud Computing -
public cloud v private cloud (25/5/2014)
[19]http://www.nirix.com/cloud-solutions/ Cloud solutions (11/4/2014)
[20]http://www.freeagent.com/tour/accounting (25/5/2014)
[21]http://community.amd.com/community/amd-blogs/amd-
business/blog/2011/06/01/amd-2011-global-cloud-computing-adoption-
attitudes-and-approaches-study-infographics/ (11/4/2014)
[22]http://firstmonday.org/htbin/cgiwrap/bin/ojs/index.php/fm/article/view/2456/21
71. environment and jurisdiction in cloud computing. First Monday 14(5).
Accessed 2013-03-10
118 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
APPLICATION OF BUSINESS INTELLIGENCE AND
OLAP TECHNOLOGY IN BUSINESS DECISION-
MAKING
Jovan Zivadinovic, PhD
11
Zorica Medic, PhD
12
ABSTRACT
Basic goal of this paper is application of business intelligence and OLAP(On-Line
Analytical Processing) technology in development of decision-making process in a way that it
should facilitate, as much as possible, decision-making based on the knowledge which is hidden
in the transaction systems. Managerial decisions that are made in business systems, determine
their competitive advantage, so obvious is the need for decision-making to be free of subjective
impressions, and to be based upon knowledge more. Having in mind the area and the goal of the
research, the methods that will be used in researches are: inductive and deductive method, as
primary logical method, which during research enables drawing of certain conclusions on the
research subject and methodology of objectively oriented development of business intelligence
system, which includes: defining the demands, analysis, design and implementation of business
processes. Analytic processing of data can be done directly over relational data base (ROLAP)
or over the prepared data base (MOLAP). OLAP gives the opportunities to users to individually
pose questions, which significantly increases the possibilities to do analysis necessary for
decision-making. In this paper the authors used exam results as indicators of efficiency of
educational process, by analysing them according to the examination period. This paper uses
the exam results as indicators of efficiency of educational processes, analysing them according
to the exam periods, terms, subjects, grades... The application of instruments of business
intelligence and OLAP technologies enables the users to individually set demands, which
significantly increases the possibility for executing the necessary analyses in decision-making,
providing the conditions for better and faster reactions to spotted problems. The contribution of
this paper can be seen in application of business intelligence and OLAP technology, to the
following and advancing the teaching processes, improving their standards, developing the
scientific and research work, more quality decision-making and management of educational
processes. Also, the significance of this paper can be seen in application of very efficient
standardized tools like Microsoft programs, MS EXCEL and MS Query for quality and
successful business analysis; it makes the decision-making processes shorter and decisions
better and more rational.
Key words: Business Intelligence, Data Base, Multi-Dimensional Analysis
J EL Classification: D80, I21
UDK: 005.94:004.9 005.311.6:004.65
11
Jovan Zivadinovi?c Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
12
Zorica Medic, Graduate school of proffesional studies “Prof. dr Radomir Bojkovi?”, Krusevac,
Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 119
I NTRODUCTI ON
Complete and precise information at the right time represents one of the basic
resources of business and the key for best business decision-making. During data
processing one finds hidden relations, sees new business possibilities which
contribute to making quality managerial decisions.
Quality management of a business system and its processes represents a
critical factor of business success. Making the right decision directly and indirectly
depends upon the quality and the right time of information that the decision-maker
has. For obtaining such information it is necessary to have appropriate data in
every moment. The gathering of raw data does not represent the solution of the
problem of decision-making process, nor the quality management. Great amount of
unstructured and unprocessed data can represent the difficult circumstance during
decision-making, because it can easily blur the essence of a problem and „getting
lost in the sea of data that do not have a purpose“ (Balaban, 2006).
Operational information systems are mostly oriented towards executing
business and transactions and less towards the issue of decision-making.
Information of one enterprise is mostly inconsistent and unavailable. The problem
is finding the necessary information as well as uncertainty of the information's
accuracy, which results in poor business decisions. Additional problem in
managing large systems is the inability of the managers to individually and in a
simple way access the necessary data and shape them into necessary information.
Even in the cases when wanted information exists, it is often hidden in the huge
mass of data and cannot be used. Obtaining the necessary data from such a
complex systems is very expensive and sometimes impossible. That is the reason
why the larger and larger number of companies develops and uses the systems for
business intelligence, in order to use the existing data better and faster in creating
information needed for the decision-making process.
The application of business intelligence process enables using only that
information that is necessary, at that moment, to make the managerial decisions.
The advantage of this concept is the increase in information quality, to show it in a
simple way as the reduction of large number of information that the employees are
usually exposed to.
The main purpose of business intelligence is generating the quality
information that will enable making the best possible business decisions.
120 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DEFI NI TI ONS
Business intelligence is an area within the information technologies, whose
goal is to put all the information potentials of an enterprise into function of making
the top quality decisions, with the ultimate goal to realize the determined strategic
goals of an enterprise.
Intelligence: intelligence is inborn ability to understand properly the things and
notions in life and everything else, reason, mind, the ability to understand, as a
collective noun, all people that have this trait, classier and better world in general,
educated people (Vujaklija, 1980).
The notion of „business intelligence “that signifies the systems for support in
decision-making process, in the respect of a separate part of information
technologies comes from English language. (Business Intelligence, BI). "Business
Intelligence" as a notion was suggested by Howard Dresdner (A Brief History,
2014.), in order to categorize the concept and methods that help in easier business
decision-making by using the facts based systems.
Business intelligence represents the data analysis, reporting and tools for
setting demands that can help business users to make their way through multitude
of data and to synthetize the right information. Those tools are today called
business intelligence (Gartner Group report, 1996).
There are many definitions of the notion of business intelligence that are
different according to the author, and the point of view that is used to approach this
subject. Even though there is no unique definition, what is in common to all the
definitions is that the business intelligence is seen as a group of methodologies, i.e.
the concept that brings the qualitative progress of decision-making process. A
positive effect of the decisions made by using this concept is greater because it
implies obtaining the quality information on time, systematization of information,
clearer identification of the right information and easier access to information.
When one uses data to make quality information on time, i.e. knowledge, the
probability that the decision made based on them will be right and on time and largely
free from subjective impressions (in the sense of assumption on missing information)
and uncertainty with making decisions ( decision-making needs decisiveness).
Business intelligence represents the group of new application formed in such a way
that they can organize and structure data on business transactions in a way that enables
the analysis useful for the support to the decision making and operational activities of an
enterprise. Or simply said, business intelligence represents the process of gathering of
available internal and significant external data and their turning into useful information
that help business users with decision making (Kalakota, 2001. p. 349).
According to Larisse T. Moss's and Shaku Atrea's (The Origins of Business
Intelligence 2014) definition, business intelligence represents an architecture and
the collection of integrated operational applications, then the applications for
support to making decisions and data bases that enable the business systems easy
access to information.
Faculty of Business Economics and Entrepreneurship 121
From the technical point of view, i.e. from the point of view of information
technologies, business intelligence is a process of multiple levels, where a large
amount of information is stored in information systems of an organization and the
application systems, turns into useful information. Business intelligence system
consists of three wholes, the first one is made of data sources, central point is the
data base where data from the source systems are collected and adjusted and the
third component is the analytic tools (Rajkovi? et al., 2012).
RESEARCH METHODS
The setting and developing, as well as the general researches, are based on
certain scientific and research methods:
? modelling method as a systematic research action which is used to build
simulation model that is capable of substituting the subject of the research,
? observation method which enables gathering, from the real system, sufficient
amount of data which will be used as entry data for researches the
simulation models in order to draw the conclusions on the system that the
model represents,
? methodology of objectively –oriented system development of business
intelligence which includes: demand defining, objectively –oriented analysis,
objectively –oriented design and implementation,
? inductive and deductive method, as basic logical methods, that enable the
drawing some of the conclusions on the research subject.
? With the goal of comparative analysis and forming the personal attitudes and
conclusions we used comparative method is the process of comparison of
obtaining information by a classic process and process by using the business
intelligence and OLAP technologies.
KEY FI NDI NGS
''Business intelligence is some kind of business radar. It warns for threats,
points to the business opportunities, foresees that something is going to happen,
adequately prepares for the inevitable, expands the manoeuvre space for decision
making, to sum it up, it increases the controllability of success that you want to
achieve by doing business“ (Kukrika, 2011).
Business intelligence is a necessity and an imperative of every successful
business, managerial idea with clearly defined tools, without which the quality
management is an illusion. The conditions of doing business are constantly
changing and becoming more complex, and the changes demand faster reactions.
In order to manage the right way, management needs quality information, directed
122 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
towards managing, that encourage activity. Such information are delivered by
business intelligence.
Considering the spectrum of activities of business intelligence which implies:
analyses of the set goals of an organization, constant comparison of planned and
realized, coordination of activities of different organizational units in the business
system, assessing the current state, making decisions, information transfer etc. it
can be concluded that the business intelligence represents the means of efficient
realization of business results.
Frequent question is: Can we predict what the future holds? If our business
system has a modern information system, well-developed management control and
uses the elements of business intelligence, we will surely have quality information
based on which we will no longer fell insecurity in making decisions and we will
have a better vision of future business (Medi?, 2013).
When an organization gathers the data and organizes them into databases, data
warehouses and local data warehouses, then it can use them for further analysis
(Figure 1).
Figure 1: Principles of business intelligence operations
Source: Authors
Business intelligence implies applications and technologies for consulting,
analysis and securing the access to a vast amount of data that help users to make
better strategic and business decisions. Business intelligence system unifies the
methodologies, technologies and platforms for data warehousing, OLAP data
processing (Online Analytical Processing) and data mining, enabling the
companies to create useful managerial information from the data on the business
found in various transaction systems and come from different internal and external
sources.
Raw data and
corporate database
Sales
Supply
Buyer
Point of
sales
Supply chain
Center for
providing
information
Data
warehouse
Tools for
business
analysis
Results
Insight
Charts
Reports
Warnings
Predictionsa
Data
mining
P= X
2
- Y
Web store
Faculty of Business Economics and Entrepreneurship 123
DATA WAREHOUSE
Base of the support system to decision making is analytic data base Data
Warehouse (DW), whose one of the primary functions is to maintain the processes
and regulations of business of an organization as a whole. As an effective and
efficient support to management, DW cleans and aggregates the data from the
operational systems and places them into so-called dimensional data bases, which
represent the repository of consistent historical data, easily accessible and subject
to effective manipulation. Data organized like this are used for assessing the state
of business situations, trends, projections and alternatives with the purpose of
support to decision-making process (Balaban, 2006.).
DW contains a large amount of data which are organized in smaller logical
wholes that are called Data Marts. Data Warehouse systems use denominalized
data, which enables faster execution of the demands over such data. According to
the definition set by William H. Inmon (Inmon, 1995), data warehouse represents
subject-oriented, integrated, time-variant and non-volatile group of data, and the
ultimate goal is support given to the managers in decision-making processes:
? subject-oriented – directed towards specific organizational activities or
decision processes instead on the current operations.
? Integration – centralized database which contains data from different sources
internal, external and personal.
? Invariability - DW does not change permanently, but it only periodically
adds new data depending on the business needs.
? We can say that the key characterises of DW are time dimension and ability
to transform business, operational and other data into data warehouse, in a
quality way.
Data in data warehouses are time-variant, which means that every data that is
in the warehouse is connected to some moment. In the end, data in warehouses are
invariable i.e. when a data is written in the warehouse he can only be accessed.
Ralph Kimball defines the data warehouse as a copy of transactional data
structured in such a way that it enables setting the demands and data analysis
(Kimball, 1996.).
These demands and data analyses are almost impossible to execute in OLTP
systems because in such systems data are constantly changing. Information from a
specific time frame is often called data recordings. For example, if an analytic
database contains data recordings on sales that are taken every evening, it will be
clear during data analysis tomorrow that those data are a day old. Then daily,
weekly and yearly comparisons make sense because we will always have
consistent values which we can compare.
Data Warehouse is formed to enable the users of different levels the solving of
various analytic tasks. It enables:
? reporting and monitoring of business processes,
? analysis and setting the diagnose, finding information in an interactive way
by setting the demands and analysing the obtained results,
124 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? planning and simulation, making and executing models of plan and
simulation,
? access to a large amount of data for the end user,
? creating and demanding different trend reports,
? extraction, transformation and placing the large amount of data.
DATA WAREHOUSE ARCHI TECTURE
Data from the source systems are integrated and transformed before they load
to the data warehouse considering that the data are taken over from various sources
and platforms, they have to be integrated and transformed before they are placed
into data warehouse.
Some of the advantages of data warehousing are:
? simplicity,
? better data quality,
? faster data access,
? separate support processes for decision-making and production processes,
? providing competitive advantage,
? distributed data base,
? possibility of parallel processing,
? platform independence,
? security.
Basic architecture of data warehouse is given in the figure no 2. Basic
component of data warehouse is database
Figure 2: Basic architecture of data warehouse
Source: Authors
Data
transformation
and integration
Sales
Supply
Buyers
Supplier
Data
Warehouse
Faculty of Business Economics and Entrepreneurship 125
Data warehouse architecture has the following characteristics:
Data are extracted from various source systems, databases and folders –
systems found in companies are basic data sources for data warehousing. Data
which are necessary for support system to making decisions are taken from these
systems where their number can be large. Sometimes it is necessary to extract all
the data that are found in these systems. It is most often the case that the data are
taken from different data bases, from different platforms and different formats and
data types.
ON-LI NE ANALYTI CAL PROCESSI NG (OLAP) SYSTEMS
Basic role of OLAP (on-line analytical processing) tools is to find and answer
to the users questions as quickly as possible, their usage is for n-line analysing of
data and reporting. In the beginning the users' questions were relatively simple.
However, in time they have become complex so that the relational tools (OLTP
tools - On-Line Transaction Processing), (by definition OLTP systems represent
the transactional systems for updating of databases and transactions' processing),
were not able to provide answers in an acceptable timeframe. This is exactly the
purpose of OLAP tools. They enable a simple synthesis, analysis and consolidation
of data. They are being used for intuitive, fast and flexible manipulation of
transactional data. OLAP systems support complex analyses that are done by
analytics and enable data analysis from different perspectives (business
dimensions).
When we say OLAP we think of the program tools that are being used for
manipulation of multidimensional data that come from different sources. In order
to use fully the OLAP's potential it is necessary to have as large amount of data as
possible. This is why along with OLAP we talk about data warehousing. In order
for an OLAP product to be considered an application, it has to have three key
characteristics:
? multidimensional view of data,
? possibility of using complex computer operations,
? possibility of time data analysis.
Analytic systems are the systems that provide information which are used for
problem analysis and are primarily done by using comparison or analysis of
patterns and trends. For example, analytic system could show how a certain type of
product is being sold in different areas of the country. It could also show how one
type of product is being sold now in relation to the period when the product
appeared at the market for the first time. Analytic databases are developing for
analytic systems.
The question of what the end user needs?
? He must be able to pose any business question,
126 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? Able to use any data from the business system for analysis,
? Able to get indefinite number of reports.
Business decision-makers need answers to the questions that directly influence
their ability to be competent at the fast changing modern market. They need clear
answer no matter how difficult the question is, as soon as possible. This is why we
use OLAP analytic systems that provide information that are being used for
problem or situation analysis. Analytic processing is primarily done by using the
comparisons or pattern and trend analysis.
Figure 3. shows the place of OLAP systems in decision-making process.
Figure 3: Place of OLAP system in decision-making process
Source: Authors
Analysing the data patterns and trends demands the existence of large number
of historical data. That is why the analytic data bases do not contain newest data,
but they keep information from a specific moment. For example, it is possible to
determine if the sales in one month has significantly fallen only if the system has
the data on sales in the previous months, so that the data can be compared.
OLAP systems use characteristics of multidimension and denormalization of
data and it can be said that they represent the upgrade of data warehouse.
Interface of OLAP system should enable the user to work comfortably, to
individually preform the analytic operations and getting the overview and business
graphics, without the skills of programing and knowledge of database structure.
OLAP tools very efficiently enable moving from the tables to
multidimensional charts by using the dynamic screens. This defined OLAP or
hyper cube contains tens of thousands of possible reports that are easily changed,
quickly defined and executed even faster.
- Data presentation
- Visualization
B u s i n e s s I n t e l l I g e n c e
OLAP
Extraction
Filtrating
Transformatio
n
- Demands
- Generating reports
- Foreseeing
- Analysis
- Modeling
Internal
data source
Personal
data
External
data
sources
Data sources
Faculty of Business Economics and Entrepreneurship 127
Demands that OLAP system has to fulfil are:
? Possibility of working with a large group of data and users,
? Short response time,
? Integrated data that connect OLAP server and relational database,
? Possibility of working with data with various levels of details,
? Ability to calculate the complex mathematical functions,
? Support for what-if analysis modelling and planning,
? Simplicity of introducing and maintaining the system,
? Data protection,
? Possibility of working with a large number of tools with which oe can access
the data, do analyses and show data.
ARCHI TECTURE OF OLAP SYSTEM
Under OLAP system architecture we imply the way in which OLAP system
works with the data from data source.
? Some of OLAP tools physically transfer all connected transactional data
from the relational database and other sources into multidimensional
database, using meta level, and fill data warehouse over night (batch
approach), i.e. they do complete renewal of data in certain time intervals.
? Another approach, the so-called on-line, transfers every individual change of
relational into multidimensional database i.e. it updates the warehouse only
with the data which have changed between two intervals of updating.
However, middle solution is often used, where batch method is the basic one
while only some changes at the old data are transferred individually.
Previously defined approaches provoked the appearance of two basic architectures:
? multidimensional OLAP (MOLAP) and
? relational OLAP (ROLAP).
MOLAP is a solution when multidimensional databases are being used, and
ROLAP emerges as the upgrade of relational databases. MOLAP and ROLAP are
different in the way they physically store data. With MOLAP systems data are kept
in multidimensional structure and in the case of ROLAP system data are kept in
relational databases.
Based on what we have just said, we can conclude that the cubes in OLAP
tools store in three different models:
? relational storing model is called relational on-line analytic process or
ROLAP, and
? multidimensional on-line analytic process is called MOLAP.
? When the dimensions are kept as a combination of these two variants, then
such a model is known as hybrid on-line analytic process or HOLAP.
128 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
RELATI ONAL OLAP (ROLAP)
ROLAP or relational OLAP systems are done based on the data that are in the
relational database, where the databases and dimensions charts are kept as
relational charts.
This model allows the multidimensional data analysis considering that it
enables the users to use traditional OLAP functions of cutting and turning. This is
achieved by using any of the tools of SQL system for reporting the system to
separate directly over the data warehouse.
Figure 4: Architecture of ROLAP system
Source: Authors
The advantage of ROLAP model of OLAP analytic tools is that it is more
stable when managing a huge amount of data. Another advantage of ROLAP tools
is that they are efficient in managing the numeric and textual data. It also enables
the users to get the details of data that are found at the lower level of hierarchical
structure (drill down). The picture 4 shows the architecture of ROLAP system.
Lack of ROLAP applications is slower performance in relation to other styles
of OLAP tools because the calculations are done inside the server. Another lack of
ROLAP tools is that it is dependent on using the SQL for data manipulation.
ROLAP systems are optimized for data access, while MOLAP systems are
optimized for data gathering. Advantage of the ROLAP systems is that the
summary tables are created directly in relational system for database management
(RSUBP), which provides short response time, and the tables are very clear.
Basic reasons for using the ROLAP system is that there are already developed
and checked tools for them for data storage. Also ROLAP systems are created
because they provide a direct approach to data from tables so there is no need to
duplicate the data like MOLAP systems do.
Processed
information
Base data
Transactional
system
Data warehouse (RSUBP) Relational OLAP OLAP interface
? Parallel demand
? Parallel loading
? Parallel indexing
? bit-map indexing
? hashing
? Star schemes
? Detail data
? Backup and recover
? Expense optimization
? SMP and MMP support
? transformation
? dynamic consolidation
? complex filtering
? prediction
? exceptions' process
? background processing
? division of demands
? allocation
? flow management
? aggregation
? kontrola
? tables
? charts
? maps
? warnings
? drill down
? cutting
? searching
? ranking
? printing
? integrating
N
i
v
o
b
a
z
e
p
o
d
a
t
a
k
a
N
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v
o
a
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l
i
k
a
c
i
o
n
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l
o
g
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k
e
P
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e
z
e
n
t
a
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n
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v
o
Faculty of Business Economics and Entrepreneurship 129
MULTI DI MENSI ONAL OLAP (MOLAP)
Multidimensional OLAP – MOLAP is considered a classic form of OLAP.
One of the main differences between MOLAP and OLAP tools are the data, With
MOLAP they are summed and kept in an optimized form of multidimensional
cube, instead of in relational database.
Main advantage of this model is that it provides excellent performances of the
demands because the cubes are designed for a fast data access. While using this
model, data are structures in such formats in accordance with the clients’ demands
for reports with already calculated data in cubes.
MOLAP model is considered to be the best OLAP tool for creating reports
considering that it enables the users to reorganize easily or rotate the structure of
the cube in order to see different data aspects. MOLAP analytic tools are in
condition to do complex calculations. Considering that the calculations are
previously defined during the creation of the cube, it results in faster access to
calculated data in relation to ROLAP. MOLAP systems also enable users to
quickly forward the data into a group of data. Also, in relation to ROLAP, MOLAP
is significantly less demanding when it comes to hardware because of the data
compression technique. In short, MOLAP is optimized for demands and access to
summary data.
Figure 5: Architecture of MOLAP system
Source: Authors
There are certain limitations in MOLAP system's application. Basic weakness
of MOLAP tools is that they are less scalable in relation to ROLAP tools. MOLAP
approach also introduces data redundancy. In the end, MOLAP demands additional
investing because cube technology has to be specially built in an organization
which demands investments in people and resources. Picture 5. shows the
architecture of MOLAP system.
Transaction
systems
Multidimensional data base
? Demands
? Indexing
? Consolidation
? Percentages
? Ranking
? Predicting
? Finding exceptions
? networks
? charts
? warnings
? drilling
? searching
? ranking
? printing
? integration
? rotiranje
Database level
Application level Presentation level
Processed
information
Base data
OLAP interface
130 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
MOLAP databases have a limitation of physical size of data groups with
which they can operate. In order to do any kind of analysis, it is necessary to load
the data first into multidimensional structures. Various calculations are done in
order to create the aggregations and complete the data, which can last for a long
period of time. After the process is completed, the user can start the analysis.
Lack of MOLAP systems is the difficulty to add new dimensions. According
to that MOLAP systems are good to use in cases when it is impossible to divide a
large group of data into smaller groups of data (Tot, 2009).
We can see in picture 4 that the data from different transactional systems are
loaded into multidimensional database with the help of batch routines. When data
loading is done, creation of aggregations begins, after which database is ready to
work. Users make their demands for OLAP reports via interface.
CONNECTI ON DATA WAREHOUSE - OLAP- DATA MI NI NG
Creating Data Warehouse and using OLAP tools enables the aggregation of
historical data and data manipulation through interactive approach to
multidimensional information. Through previous models and methods one can get
the answer to the questions like what the last month's income was, what the
fluctuation was in the observed period, what region the highest growth was
achieved in. Identifying the observed fact (e.g. income) in relation to certain
previously defined factors (place, time, buyer, product, price etc.), conditions for
further analyses is created based on which the decision will be made.
Analysis should give answers to why the situation is like that and in which
way business actions should be directed in the future in order to improve the
business result. Data Mining is a process of automatic finding of hidden relations
and patterns in behaviour among data, which implies using various statistical
techniques, artificial intelligence and creating the predictive models based on
discovering the relations among the data. Data Mining gives the possibility of
receiving an answer to the question without setting of any assumption in the
influence of a certain factor.
As a data source that is processed through Data Mining one uses databases and
data warehouse. Data warehouse is not necessary for data mining, because data
mining technology can be applied to the operational and transactional databases.
Data Mining and OLAP are complementary systems because before the
relations among the data are determined (data mining), the certain assumptions
based on which the relations are made have to be set (OLAP):
? OLAP is a part of system tools for decision-making process support and it
gives answers to the questions if some assumptions that are taken from the
database are true. OLAP analysis is basically a deductive process.
? Data Mining access tries to find some relation between data. Data Mining is
an inductive process.
Faculty of Business Economics and Entrepreneurship 131
EXAMPLE OF APPLI CATI ON OF BUSI NESS I NTELLI GENCE I N
EDUCATI ON
There are several approaches or methodologies for designing and development
of business intelligence concept. However, there is no consensus over which
technology is best, but it depends on the characteristics of and actual system.
Methodology of object-oriented development of business intelligence system
was born form the analysis of standards IDEF0 (Integration Definition Function
Modelling), IDEF1X (Integration Definition Information Modelling), UML
(Unified Modelling Language) and methods for creating data warehouses. This is a
contributing to the development of methodology of object-oriented development of
business intelligence system, because it integrates the known classic methods of
functioning (IDEF0) and informatics (IDEF1X) modelling with object approach
(UML), (Stanojevi?, 2008).
Figure 6. shows the structure of the built methodology of object-oriented
development of business intelligence, which was applied in writing this paper.
Figure 6: Structure of methodology of object-oriented development of business
intelligence system
Source: Authors
Object-oriented methodology consists of the following steps:
? Defining the demands,
? Object-oriented analysis,
? Object-oriented design,
? Implementation.
Development of
database
Preparation of data
analyses
Development of
user interface
Development of
model system use
cases
Development
Of conceptual
model
Development of
interaction
diagram
Collecting the
demands
Creation of
models of
business use
cases
Preparation of data
for analytic
information
processing
Development of
dimensional model
Development of
class diagram
OBJECT-ORIENTED
DEVELOPMENT OF SYSTEM OF
BUSINESS INTELLIGENCE
0
DEFINING THE
DEMANDS
OBJECT-ORIENTED
ANALYSIS
OBJECT-ORIENTED
DESIGN
IMPLEMENTATION
4 3 2 1
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DEFI NI NG J OBS' TREE
Based on the defined limits of the system, we go over to the activity of
defining the jobs' tree where it is necessary to determine the vertical (hierarchical)
connections among jobs. Jobs' tree is defined by application of the method of
solving problems top-down, when a complex job is separated into many sub jobs,
and then one should solve simple sub jobs.
Defining of the diagram of decomposition jobs – Faculty of Business
Economics and Entrepreneurship from Belgrade.
Figure 7. shows the decomposition diagram of jobs in the school.
Figure 7: Decomposition diagram of jobs in school
Source: Authors
Following IDEF0 standard, appropriate arrows show the sets of documents
that are defined as information. All information at every next level is divided up to
the level of activities, where they are defined through arrows as actual documents.
1
MANAGERIAL
JOBS
2
ORGANIZATIONA
L JOBS
3
EDUCATION
PLANNING JOBS
4
EDUCATION
AND TRAINING
JOBS
5
STUDENTS’
JOBS
Law on higher education of RS
Law on scientific and research institutions
School’s Statute
School's management
Students’ applications
Application of standard members
to the competition
Information from legal and physical entities
Principle's information
Department’s information
Students’
information
Decisions
Report
Department’s documents
Principle of the school Teachers Heads of departments Students
NPP
Timetable
School management’s information
Faculty of Business Economics and Entrepreneurship 133
PROBLEMS WI TH TRANSACTI ON SYSTEMS
Basic source of data for the Faculty of Business Economics and
Entrepreneurship are transaction systems. Their basic purpose is to enable
everyday collection of the data on business transactions, with as low time delay as
possible, in order not to slow down the business processes.
Figure 8: Inadequate attempts of IT sector to provide information
Source: Authors
Transaction systems are practically developed to perfection and have enabled
current evidencing of business transactions and storing vast amounts of data.
However, because of high complexity of the structure of these systems, obtaining
the analytic reports is very hard and demands involving information technologies
experts. Besides this, this kind of structure demands great time delay while
receiving the analytic reports, and they are often unable to respond to information
demands of the strategic nature (Figure 8).
OLAP cube solves the problems of complexity of reporting from transaction
systems by introducing the new so-called dimensional data structure, which is intuitively
clear to business users (decision-makers) as well and not only to information
technologies experts. Dimensional data structure consists from dimensions and measures.
Dimensions represent the structure of the cube’s heading of report, while measures
represent the aggregated data according to dimensions and dimension members.
Besides the problem of complexity of reporting OLAP cube solves the
problems of time delay while obtaining reports, by keeping in its structure
previously aggregated data according to dimensions and dimension members.
OLAP takes up larger data warehouse space in relation to transactional systems but
it significantly speeds up the process of creating complex reports which often
cannot be obtained from the relational structure.
User needs
information
IT creates
ad hoc
demands
User asks
for IT’s
report
IT puts the
demand on
hold
IT sends the
demanded
reports
User expects
answers
Usual
information
flow 4-6 weeks
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OLAP SYSTEM FOR STUDENTS' SUCCESS ANALYSI S
OLAP or multidimensional analysis signifies the analytic data processing that
is done in real time, interactively. OLAP is the only business intelligence
technology. It enables to analysts and control managers to have an insight in
business indicators by a fast, consistent and interactive approach to analyses.
Through analyses, information got via data transformation from operational
sources, is seen from various angles of business context.
OLAP as one of the technologies of business intelligence, through consistent
and interactive approach, enables the following and analysis of students' success.
The purpose of this system is following the number of students that:
? have the right to apply for exam,
? apply for exam,
? sit an exam,
? pass the exam,
? fail an exam,
As well as the percentage reports of all parameters like for example. Sat /
passed, at the level of:
? exam period,
? term,
? year (or more years),
? every subject, or
? cumulative, per department and at the level of the entire school,
? for Bachelor and Master studies.
These reports are being analysed at the end of every exam period, term and
year. Without OLAP system for obtaining these reports it would be necessary to
create dozens of complex demands, which are usually inflexible, so even the
slightest change in the demand would cause creating new demands.
Additional problem is that the data needed for creating of new demands are
physically kept at different places. That is why a data warehouse is created, which
unifies all extracted data and automates the flows for transfer and integration of
data into the warehouse.
We will show the way in which the demanded reports are being got, with the
help of OLAP cube. As a software tool for reading the data from the cube we used
Microsoft Excel. If there are only three dimensions according to which the data are
analysed, OLAP structure can be represented graphically as a three-dimensional
cube (Figure 9).
Faculty of Business Economics and Entrepreneurship 135
Figure 9: Three-dimensional OLAP cube for monitoring the pass rate
Source: Authors
In the case shown in the picture 9, every cube represents the number of
students from a certain department that have passed the exam in a certain exam
period.
In the picture 10, we showed the report on basic parameters of students that
passed exams according to subjects in one term in 2013. These reports can be very
important to decision-makers in analyses of results, number that sat an exam and
number that passed it, number of students applied, comparing results among the
subjects, terms etc. We wanted to be concise so the rest of the subjects per term
have not been shown, but such results are got by just one click to the wanted term.
In this case the parameters refer to all the students that took exams and all exam
periods that are noted in OLAP system.
Figure 10: Report on the number of students that took exams per terms and
subjects at the yearly level
Source: Authors
Pass rate – number of students from a certain department,
that passed an exam in a certain exam period
Exam
Direction
Time
- exam
period
Dimension
136 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
However it is often necessary to analyse the number of the students who
passed or failed an exam, but only of those who enrolled at that year of studies for
the first time. This is achieved by dragging the dimension Student in the field for
data filtering. If it is necessary to get a report only for certain exam periods the
dimension Exam Period is dragged in the field for filtering and one can choose a
specific exam period.
By introducing the dimension Group in the columns of the report, one would
get a report that shows the number of students that passed and failed an exam per
every department for every subject, while choosing different parameters of
dimensions Year and Exam Period one can get different reports (for one of more
years and exam periods). It is generally possible to create a large number of reports
that are structurally different, as well as the values of parameters, without
information technologies expert knowledge.
The advantages of Microsoft Excel as a tool for report creation from OLAP
cube is that it shows the desired reports in the format favourable for presentation,
and further formatting of data showed is possible as well as calculation of derived
values based on data got in the report.
Further, we showed a pivot chart connected to the exam analysis, which was
created for the needs of this paper.
The figure 11 shows pivot chart which shows the average grade at the exam
per year of studies (2010, 2011, 2012 i 2013) for subjects, Business informatics
(BI), Management of information systems (MIS) and Electronic business (EB).
Table 1: Pivot chart which shows the average grade of selected subjects,
Year (AII)
Exam period (AII)
Student (AII)
Subjects and average grade per year of
study
2010 2011 2012 2013
Business informatics (BI) 7.63 7.86 7.92 8.12
Management of information systems (MIS) 7.22 7.18 7.33 7.33
Electronic business (EB) 6.78 7.34 7.89 7.95
Source: Authors
Faculty of Business Economics and Entrepreneurship 137
Figure 11. Gives a graphic overview of data from pivot chart, Table 1.
Figure 11: Average grade of selected subjects - graphic overview
Source: Authors
Pivot tables and charts enable insight into some value's movement trend like it
is shown in table 1. And figure 11., which enables predicting the results for the
following period. We can notice the growth trend of the average number of passed
exams of Business informatics, Management of information systems and Electronic
business, so we can predict that in the following year this average number will be
even better. This can be a signal to decision-makers to specially monitor the
process of realization of lectures from subjects with this trend, so that it can serve
as a positive experience. It is more important for the decision-makers to spot a
trend of fall in the exams passed, in order to fix the educational processes by
appropriate measures.
In general it is possible to create a great number of reports that are different in
structure and values of parameters, without information technologies expert
knowledge. The result of this paper is a developed business intelligence system that
contains data warehouse, OLAP cubes and appropriate pivot tables for data
analysis which decision-makers need. OLAP cubes and pivot tables enables the
exam analysis to be done using many dimensions, different levels of details,
depending on the current need.
2010 2011 2012 2013
138 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON
Economic globalization, constant and radical changes in business
environment, imposes the need to change the current management style. New
technologies and tools that enable fast and efficient approach to data become
inevitable in such circumstances. Business intelligence transforms data into
information ad information into knowledge, which leads to decisions based on
information and actions that follow them, and that is the value that it brings to the
business world in fighting the competition.
Business intelligence tools enable the process of gathering internal and external
data and their turning into useful information which help business users with making-
decisions. Data based on using these tools of business intelligence provide the
possibility to see not only the advantages but also the problems, so the causes can be
analysed on time, instead of just solving the consequences. Business intelligence
systems are focused on improving the possibilities for access and distribution of
information, to those who make them as well as to those who use them.
Efficient process analysis in educational institutions is essential for control and
improvement in their operations. Modern education systems at all levels should
have a function of satisfying the students' needs for knowledge. At the same time,
educational institution must develop, adjust to the circumstances and thus improve
educational processes in the conditions of global competition.
This paper describes the advantages of application of OLAP systems for analysis
of students' success at a higher education institution (picture 6 and 7). We shortly
presented the procedure of implementation of one of OLAP systems by using the
object-oriented methodology of development of information system on the example of
analysis of the students' exams. As a base for building OLAP system, we used OLTP
information system which is implemented in the School, we defined OLAP cube
(picture 9) and completed the creation of user application in pivot tables and charts
(table 1 and picture 11). Pivot tables enable analysis and comparison of data according
to various criteria. It is also possible to create large number of reports that are different
by their structure and the value of the parameters.
Created user interface provided, through OLAP system, a detailed analysis of
students' success per selected subject, measures and comparisons of success per
term and year of studies, which enables an adequate analysis of all educational
processes and comparison of success with all the educational systems in the
environment. Information got by the process analysis of the School is a base for an
efficient work of the management of the School.
For successful management of educational processes of high education
institutions in the conditions of fast development of advanced information and
communication technologies, we suggest using business intelligence tools. In this
way by application of OLAP system technologies, through business intelligence
one can provide taking the corrective measures in case of deviation from set goals,
which enables the decision-makers to have an optimal control of all educational
processes in all scientific areas and it is applicable in all educational institutions.
Faculty of Business Economics and Entrepreneurship 139
Combining of various business intelligence techniques, OLAP cube,
development of Data Mining methods, and usage of data from the external and
internal sources as well as expert knowledge contributed to improvement of
performances of all components of business intelligence system showed in this
paper, which had as and ultimate goal to increase the efficiency and effectiveness
of educational processes as a whole.
The applied models of business intelligence and OLAP technologies provided faster,
more precise and flexible reporting, which enables fast and quality decision-making of all
interested decision-makers. Optimized ILTP systems, applied for business analysis of
operations of higher education institution, enabled the decision-making process to be
shorter, better and more rational. Application of business intelligence, OLAP technology
contributed to understanding the necessity of using knowledge, as the most important
resource for fast and efficient decision-making in the process of successful business
systems’ management. We believe that, very soon, business intelligence and OLAP
technologies will find their wider application in our region.
REFERENCES
[1] A Brief History of Decision Support Systems by D. J. Power Editor, www.
DSSResources.COM (18.05.2014)
[2] Balaban, N., Risti? Ž., (2006) ''Business intelligence'', Faculty of Economy, Subotica
[3] Gartner Group report, (1996) September
[4] Inmon, W.H. (1995) '' What is a Data Warehouse? '', PRISM,,http://www.cait.wustl.edu/ cait/papers/prism/vol1_no1/
[5] Kalakota, Ravi, Robinson, Marcia. (2001) ''E-business 2.0 Roadmap for
Success'' Addison-Wesley, Boston, str. 349,)
[6] Kukrika, M. (2011) ''Business intelligence- from information to profit'', E- magazine.
[7] Medi?, Z. (2013) „Optimization of control management system by introducing
on-line analytical processing (OLAP) business intelligence system“PhD thesis,
Business academy, Novi Sad
[8] Rajkovi?, B. ?uki?, S. Kastratovi?, B (2012) ''Business intelligence- practical
manual“ Faculty of Economy, Podgorica
[9] Kimball, R. (1996) “The Data Warehouse Toolkit – Practical Techniques for
Building Dimensional Data Warehouses”, John Wiley & Sons,
[10]Stanojevi?, Lj. ,Veljovi? A. (2008)“Development of methodology of business
intelligence projecting“, monography, Belgrade
[11]The Origins of Business Intelligence,http://searchsap.techtarget.com/searchSAP/downloads/ McDonald_Chp1.pdf
[12]Tot, I. (2009) „Dvelopment of on-line analytical processing (OLAP) decision-
making support system“, PhD thesis, VA, Belgrade
[13]Vujaklija, M. (1980) Lexicon of foreign words and phrases, Prosveta,
Belgrade.
140 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
LEAN LEADERSHIP AS A PRECONDITION FOR
SUCCESSFUL BUSINESS OPERATIONS OF
ENTERPRISES
Saveta Vukadinovic, MA
13
Jovanka Popovic, PhD
14
ABSTRACT
Lean is a process-focused management concept that seeks to increase customer’s
value by reducing waste and continuously improving processes. Majority of
enterprises, when implementing Lean concept, puts emphasis on tools and methods,
although a full commitment of employees to continuous process improvement is crucial
for the successful operation of Lean enterprises. This is accomplished through a
special management style - Lean leadership, so we can say that leadership is a key
success factor for accelerating the adoption of Lean concept and the missing link
between theoretical solutions and its application in practice.
This paper suggests that enterprises implementing Lean should focus on the
leadership behaviors that are crucial for Lean to progress beyond the standard
limitations, and have a significant impact on business of enterprises and the whole
industry. The paper is based on a systematic literature review that examines how the
application of Lean leadership contributes to the creation of value in the organizational
processes and achieving operational excellence. The starting point is defining concepts
and key features of Lean and Lean leadership, given by the prominent authors. The next
step is clarifying the basic principles of Lean leadership, the main objectives of its
application and possibilities for further improvement. Further, we have discussed the
relationship between traditional and Lean leadership, as well as the process of
knowledge management in Lean enterprises. Finally, the aim of the paper is to attempt to
offer some original consideration to what Lean leadership is and why it is important for
management and business. By doing so, the authors hope to bring more clarity to the
subject of Lean leadership, which will be beneficial for people studying Lean, as well as
for Lean practitioners and the body of academic knowledge.
Key words: Lean Concept, Lean Leadership, Continuous Improvement, Employees
J EL Classification: L21, L23
UDK: 005.346 005.336.1
13
Saveta Vukadinovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
14
Jovanka Popovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
Faculty of Business Economics and Entrepreneurship 141
I NTRODUCTI ON
Lean is a philosophy derived mostly from the Toyota Production System
(TPS), and has two fundamental elements - process improvement by removing
waste in order to maximize value for customers, and a commitment to respecting
and developing people in order to create a culture of continuous improvement. The
main purpose of Lean manufacturing is to increase productivity, improve product
quality and manufacturing cycle time, reduce inventory, reduce lead-time and
eliminate manufacturing waste.
Today, there are already many organizations trying to implement Lean philosophy
in everyday business. This paper suggests that the enterprises implementing Lean
should not be overwhelmed with the toolbox of Lean tools and techniques, but should
focus on the leadership behaviors that are crucial for Lean to progress beyond the
standard limitations, and have a significant impact on company business and the whole
industry. Lean is much more than just techniques; it is a way of thinking which
involves everyone in a culture of continuous improvement. It is a human system,
customer focused and customer driven approach, where the employee are the
customers of their upstream colleagues (Liker, 2004, pp. xi).
The most contemporary organizations are managed and led by thoughtful,
hardworking people who want success of their enterprises, but problem lies in
finding leadership system that will make this possible. Leadership, nowadays, is
the well-known and often discussed process of influence exerted by one person,
accepted and followed by all, over the other factors (human resource) that he works
with, in order to reach the organizational goals (V?car, Miricescu, 2013, pp. 430).
Leadership is the critical success factor for accelerating the adoption of Lean in the
organizations. Bearing in mind a growing interest in the importance of Lean
leadership, this paper attempts to offer some original consideration to what Lean
leadership is and why it is so important in management and business.
LEADERSHI P - THE CONCEPT AND FEATURES
Any group of people, that wants to work together and achieve a shared
objective, need to march in the same direction. People need to know where the
enterprise is going and what they are supposed to do to contribute in reaching
enterprise goals. Leadership is the process by which leader sets goals or direction
for that group of people and motivate them to act with competence and
commitment in achieving goals. Leadership is one of the defining elements of
successful enterprises and it is linked to the leader's personality, his ability to
influence, to generate interest, expectations and emotions, and his ability to arouse
the interest of employees. This involves creating the vision, setting goals,
determining the values and principles of action.
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Leadership is actually an observable set of skills and abilities that are
accessible to any person, at any level, in any organization. With this in mind, the
term leader is used to describe anyone with the ability to influence the work of
others (Kouzes, Posner, 2007). Burns (1978) saw the leadership in relationships
and developed the concepts of the transactional and transformational leadership.
He described the transactional leadership as a relationship between leader and
follower where they exchange values, and the transformational leadership as an
engagement between leader and follower based on an increased level of motivation
and morality. Glynn, DeJordy (2010, pp. 122-125) have summarized different
theories of the leadership. They began with the trait or great-man theories, which
claim that leaders were born, not made. These are followed by behavioral theories,
in which leaders have certain properties and features. In contingency theories,
leadership is treated as a change process, and leaders are adjusting to different
situations becoming a catalyst of change. The most current leadership theories are
based on behavioral and contingency theories.
The definitions of the leadership can also be organized into five approaches.
Yukl (2010) defines them as a trait, behavior, power-influence, situation and
integrative. The each approach has its merits and contributes to the application and
practice of leadership. The trait approach assumes that great leaders are born, not
made and determines which personality traits were important for effective
leadership. Traits that are common for most of leaders are intelligence, self-
confidence, determination, integrity, and sociability (Northouse, 2013). In behavior
approach, the focus is on behaviors that individuals demonstrate, not on innate
characteristics of the individual (Yukl, 2010). This approach attempts to map
leader’s behaviors to their effect on subordinate satisfaction and performance
(Bass, 2008). The power-influence approach examines the influence process
between a leader and the group members. The essence of leadership is the realm of
power, the capacity to influence (Bass, 2008), and sources of power are reward,
coercive, legitimate (position-based), and expert and referent (person-based). In the
situation approach, the leader’s effectiveness is dependent on the situation, in
particular of competency and commitment of subordinate workers (Yukl, 2010). At
the end, integrative approach involves more than one of the above approaches
(Yukl, 2010). Despite the difference in perspectives, Northouse (2013) identified
some common elements of leadership, which all approaches share: 1. it is a
process; 2. it occurs in a group; 3. it involves influencing; and 4. it is concerned
with goal attainment.
The role of the leader is to articulate a common vision and then marshal
management and organizational resources to build the necessary systems and
structures to insure the smooth accomplishment of the mission (Shim,Steers, 2012).
A good leader must be a good communicator who cares about his employees and
an expert in his field, a good strategist who thinks ahead and a promoter of change,
because change is vital for future success. By the continuous adaptation to market
changes, a leader helps his organization to continue to grow and thus become more
competitive, by employees whom they have available. He must encourage
employees to come up with new ideas to involve them in planning and
Faculty of Business Economics and Entrepreneurship 143
implementing change and such change will not be only accepted, but also
implemented by the team (V?car, Miricescu, 2013, pp. 431). For this reason, some
theorists suggest that the essence of leadership is the leadership of change (Yukl,
2010). The leadership of change is important for Lean philosophy because the
adoption of Lean practices is fundamentally about managing an organization-wide
change.
NEED FOR A LEAN LEADERSHI P
Lean leadership is the missing link between theoretical solutions and
application in practice. It can also be considered as the missing link between the
toolbox Lean and continuously improving organizations (Mann, 2009, pp. 16).
Developed as a production system, eliminating wastes in the Toyota’s plants in the
1960’s, Lean is evolving into a management approach that improves all the
processes at each level of an organization. Many eminent authors have studied this
phenomenon, but a unique and generally accepted definition of Lean leadership has
not been adopted yet.
The crucial element in transforming an organization from traditional to Lean is
leadership.The contemporary researchers argue that the lack of understanding
which leadership style is preferred is a problem for management in implementation
of Lean practices. In Lean management, the people bring the system to life:
working, communicating, resolving issues, and growing together. Lean leadership
goes well beyond by encouraging, supporting and demanding employee
involvement. Lean leadership requires committed management, proper training,
and culture of continuous improvement in the enterprise. Continuous improvement
literally means making things better every day, sometimes by taking big steps and
more often by taking small steps.
The key factor for the success of Lean enterprises are employees (Liker,
Meier, 2007, xvii), and their biggest challenge the change in behavior and mindset
of employees and leaders (Mann, 2009, pp. 17). The essence of Lean can be
described with Liker?s 4P model: philosophy, process, people and partner problem
solving (Liker, 2004, pp. 6).
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Figure 1: 4P model of the Toyota Way
Source: Liker, 2004, pp. 6 (adapted)
According to the 4P model, Lean philosophy and long-term thinking are an
inextricable part of Lean leadership, indicating a need for constant and sustainable
development of employees and leaders. Lean leadership is a precondition to
continuous process improvement, so its task is to create an environment in which
waste will be eliminated, and the great value for consumers will be made. Respect
for people, that is encouraging participation and improving knowledge of
employees, is one of the main foundations for Lean leadership. Finally, Lean
leaders should have the expertise in learning and coaching problem solving.
Most enterprises have focused on the process and elimination of waste by
using Lean methods and techniques, completely ignoring the other three elements
of Lean. Their goal was to improve constantly every process, every day, in order to
achieve continuous process improvement, which is impossible without motivated
and dedicated employees. For the Lean, the core of empowerment is workers
participation in Kaizen – the ability to participate in decision-making and problem
solving. In the past, management instructed the workers in their improvement
actions. Now, operative employees have to point out improvement possibilities,
too. Therefore, leadership needs more employee participation and employees need
basic knowledge about the Lean production systems (Dombrowski, Mielke, 2013,
pp. 570).
For a Lean initiative to succeed in an entire enterprise, leaders at three
organizational levels must play complementary roles and be closely related.
Effective Lean leadership comes from both, the top and lower in organization, but
Faculty of Business Economics and Entrepreneurship 145
senior leaders play a central role in Lean management. Their contributions are
essential in (Mann, 2009, pp. 16):
? Developing and implementing structures and processes that anticipate and
respond to the difficulties of a Lean initiative that crosses internal
boundaries;
? Transforming commitments to change into actual change, supporting and
sustaining new behaviors and practices;
? Increasing the odds that process improvements survive the transition from
project mode to the ongoing process;
? Establishing and maintaining new, process-focused measures alongside
conventional measures of results;
? Creating conditions in which a sustainable Lean culture of continuous
improvement can develop.
Successful sustained Lean conversions often involve changes in culture.
Proper use of Lean is to create a Lean management system to fit the environment
and culture, rather than forcing the environment and culture to fit a Lean
management system. Therefore, it follows that success in Lean implies a change in
what leaders reinforce - a change in leadership behaviors and practices. The failure
of most Lean initiatives can be pinned on a failure to change leadership practices
(Mann, 2009, pp. 17). Lean success requires a change in mindset and behavior
among leadership, and then gradually throughout the organization. Throughout the
continual effort to decrease inefficiency, the Lean leader strives to create a more
efficient organization.
PRI NCI PLES OF LEAN LEADERSHI P
Lean leadership is a methodical system for the sustainable implementation and
continuous improvement. It describes the cooperation of employees and leaders in
their mutual striving for perfection. This includes the customer focus of all
processes, as well as the long-term development of employees and leaders
(Dombrowski, Mielke, 2013, pp. 570). Although there is no consistency among
authors about defining Lean leadership, the majority agrees about five of basic
principles inherent to this concept.
146 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 2: The five principles of Lean leadership
Source: Dombrowski, Mielke, 2013, pp. 570.
Improvement culture contains all the attitudes and behaviors that result in
continuous striving for perfection in the enterprise. Perfection is most often
described as a state with zero waste, zero inventory, zero defects and losses of any
kind. A distinct feature of improvement culture is observing current problems as a
chance for learning and future advancement. The goal is to discover the root cause
of failure and make an effort it does not happen again, not to find the culprit for the
failure. Operational workers have the best insight into the weaknesses and
shortcomings of the process, but they need management support in order to
implement improvements in all processes and at all levels. Continuous
improvements essentially do not function without formal rules and regulations and
the active role of leaders in improvement activities. Lean leaders need to hear the
ideas of employees and help them to carry out those ideas in practice.
The self-development is an important principle of Lean leadership, since some
attributes depend on the leader?s personality, but others have to be learned and
developed (Liker, Convis, 2012, pp. 47). Transformation into Lean leadership
requires new knowledge and leadership skills, and both leaders and workers are
guided by a sensei, who is a kind of teacher or mentor. Sensei uses short learning
cycles based on Deming cycle (Plan-Do-Check-Act) to achieve self-development.
Qualification of employees is a crucial task of Lean leaders, because in this way
workers can actively participate in the continuous improvement. As Liker, Convis
(2012, pp. 228) impose, continuous development of processes must go along with a
continuous development of people. Developing skills and qualifications of employees
does not imply only conventional education using courses and trainings, but also the
everyday training through the problem solving in a specific workplace. That is the
famous Toyota kata method, presenting particular behavior routines, habits or patterns
of thinking and conducting oneself, that are practiced over and over every day (Rother,
2010, pp. xvi). Toyota Kata is a structured way to create a culture of continuous
learning and improvement at all levels.
Faculty of Business Economics and Entrepreneurship 147
Gemba is a Japanese word that signifies an actual place, ie workshop or a place
where value is added. It is also known as go-to-Gemba or genchi genbutsu. According
to the Gemba principle, Lean leaders should go to the workshop frequently, in order to
truly understand the processes and to make the right decisions. They need to spend a
couple hours observing processes, until they realize, from the first hand, critical points
and opportunities for improvement. With this approach, the Lean leaders can identify
the root cause of a failure without being misled by inaccurate data collection or
interpretation (Liker, Convis, 2012, pp. 35). They should even get their hands dirty by
working on process improvement. Doing so, Lean leaders will have an insight into the
importance of operational workers and appreciate more their contribution to the
enterprise success.
In order to implement these behaviors in their daily practice, Lean leaders
should follow the five golden Gemba rules:
? Go to Gemba first. Lean leaders should go to the place where the problem
occurrs.
? Check. Lean leaders should urgently analyze everything - products,
processes, people etc. until they find out the cause of the problem.
? Take temporary countermeasures. Find some countermeasures that will
satisfy the customer immediately and provide extra time for the next rule.
? Find the root cause. It is very important to identify the root cause of the
problem. Otherwise, the solution will not have long-term effectiveness.
? Standardize. After finding the root cause, the permanent countermeasures can be
taken. The current process is being revised and new standard must be found.
Hoshin Kanri or target management is the fifth principle of Lean leadership
and it implies that is necessary to have a superior system, which directs individual
activities on the path to continuous improvement. It seeks to improvement
activities do not have opposite directions and to contribute the big-picture strategic
goal. Hoshin Kanri is the process of setting goals and targets and, most important,
the concrete plans for reaching those targets. It’s another example of personal
leadership being guided by institutional leadership (Liker, Convis, 2012, pp. 148).
Hoshin Kanri is a leadership development tool, not just a tool for achieving
business objectives. As leaders develop and follow good problem-solving
processes, achieving the business objectives will come more naturally (Liker,
Convis, 2012, pp. 249).
The above principles are developed into practical behaviors that can be
demonstrated, understood and replicated using rapid learning techniques, with
particular focus on team leadership.
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CHARACTERI STI CS OF LEAN LEADERS
Lean management is surprisingly different from the conventional leadership
practices. The next table shows some essential differences between the traditional
and Lean leadership.
Figure 3: Traditional leadership - Lean leadership comparison
Source:http://www.leanvs.com/lean-coaching.htm
In addition, we can say that traditional leader is proud and quickly achieves
objectives through the people. Unlike him, the Lean leader is humble and patiently
develops people throughout the process improvement. Furthermore, as Figure 4
underlines, the main difference lies at the interface, the interaction, between manager
and subordinate (Rother, 2010, pp. 225). Some authors talk about the empowering
leader, which is a leader, that actually does not lead, but supports and helps teams and
people to learn and lead themselves. The traditional leader gives clear orders, well-
defined tasks and seemingly tight control from top to bottom. Quite the opposite, the
empowering leader is a developer of people, teams and the organizational structures
that support them.
Figure 4: Lean leadership
Source: Rother, 2010, pp. 225.
Faculty of Business Economics and Entrepreneurship 149
It takes a deep commitment and usually about 10 years of time to become a
true Lean Leader. Key factors for achieving this are patience, a focus on long-term
rather than short-term results, reinvestment in people, product, and plant, and an
unforgiving commitment to quality.
We know that Lean leaders must possess the general characteristics and skills of
effective leaders, such as creating a vision, knowing what drives the people they lead,
active listening, empathetic questioning, helping people to satisfy their needs, etc.
Apart from that, Liker and Convis (2012, pp. 35) indicate five core values of a Lean
leadership. These values are having the spirit of challenge, having a continuous
improvement mind, going to where the work happens, embracing teamwork, and
having respect for the people. Lean leader takes responsibility for other people
reaching their objectives. He encourages engaging people through their contribution to
team performances and strongly believes in developing individuals through team
problem solving. Lean leader has exceptional relationship-building skills and he
focuses on building the trust. Lean leaders are also advocates of change.
Lean leaders, like all other leaders anywhere, want to see measurable results.
However, they know that the financial result is a result of quality of processes and
people. Jon Miller suggests using the PROFITS acronym, to describe some of the
essential qualities of Lean leader that result in profits (Seven Essential Qualities of
a Lean Leader, retrieved from:http://www.Gembapantarei.com/2009/10/seven_essential_qualities_of_a_lean_lead
er.html, June 18th, 2014).
P is for Perspective. The Lean leaders should hold a long-term perspective and
guide their organization to make the best decisions over the long period. The depth of
perspective requires the leader to be curious enough to go see, listen, connect with
people and learn about the work in details. A lean leader sees beyond own horizon, is
aware of the larger impact of actions, and thinks in terms of total costs.
R is for Responsibility. Many leaders have exhibited a high degree of personal
responsibility to gain their position. The further an organization moves from
interacting directly with customers, the weaker the sense of responsibility is (eg
government bureaucracy, internal customer relationships, and financial service
organizations). Therefore, Lean leaders need the quality of strong responsibility in
order to earn lasting results and respect.
O is for Openness. Leaders must be open to change, especially to new ideas.
Lean leader needs to constantly challenge ideas and assumptions, particularly his
own. Taiichi Ohno said that even sages are wrong half of the time, but leaders are
no sages, and need to be open to being wrong so they can mend their ways. With
proper perspective and responsibility, openness should gain a sense of urgency.
F is for Flexibility. A Lean leader must be a skilled two-way communicator,
able to adjust quickly to differences in styles. At best, communication style to
accommodate the leader is only as effective as leader's style. Flexibility for a Lean
leader is the ability to accommodate differences in style, communication, and
circumstance without reverting to type and defining the problem as it fits their
favored personal solution.
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I is for Inertia. Inertia usually means "a tendency to remain inactive", but that
is not the Lean leader's definition. Technically, inertia is the tendency of a body to
maintain its state, speed and direction, unless acted upon by an external force. The
essential quality of a Lean leader is steadiness, confidence, persistence, constancy,
sticking to the principles and process, unless a sufficient external learning
influences him to change his ways. Leader should have more of inertia.
T is for Teamwork. An effective Lean leader must be willing to identify,
influence and be influenced by the needs of his team. A Lean leader effectively
links one's own goals with the goals of the group, removes barriers to enable
teamwork, and identifies strongly with the team. It is all about the people, since
that is what leaders lead. A combination of flexibility, a strong sense of purpose
and the ability to work through people will enable the leader's vision.
S is for Self-knowledge. Self-knowledge is an important category of learning.
Before leader takes control of the organization and leads the team effectively, he needs
to get knowledge. Knowledge by itself will not transform or lead to anything, unless it
is properly directed and focused by the prism of effective leadership. The ability to
learn constantly and to accept challenges is the mark of a true Lean leader.
A leader who possesses these seven essential qualities will guide his organization
and his employees towards profits. Of the hundreds of leadership development models
that exist, the Five Practices of Exemplary Leadership stands out as a proven approach
to shaping organizational cultures aligned with the guiding principles of Lean
management. This model is used by over three million people in thousands of
organizations around the globe for developing individual leadership abilities and
building effective teams (Integris Performance Advisors, 2013, pp. 7):
? Model the way. Leaders live their values and lead with respect by establishing
principles concerning the way people should be treated.. They create standards
of excellence and set an example for others to follow. They unravel bureaucracy
when it impedes action, and they create opportunities for victory.
? Inspire a shared vision. Leaders believe they can make a difference. They
envision the future, creating an ideal and unique image of what the organization
can become. Leaders enlist others in their dreams. They breathe life into their
visions and get people to see exciting possibilities for the future.
? Challenge the process. Leaders search for opportunities to change the status
quo. They use Lean thinking to look for innovative ways to improve the
organization. They experiment, take risks, and accept mistakes as learning
opportunities.
? Enable others to act. Leaders foster collaboration. They actively involve
others, and strive to create an atmosphere of trust and respect. They
strengthen others, making each person feel capable and powerful.
? Encourage the heart. Accomplishing extraordinary things in is hard work. To
keep hope and determination alive, leaders recognize contributions that
individuals make. In every winning team, the members need to share in the
rewards of their efforts, so leaders celebrate accomplishments. They make
people feel like heroes.
Faculty of Business Economics and Entrepreneurship 151
LEAN LEADERSHI P I MPLEMENTATI ON
Lean is more than just a kit of tools to improve the flow and quality; it is a
business philosophy, which mainly refers to the appropriate leadership style and
commitment of all management levels. The only way that Lean becomes a
philosophy, rather than a tools-based improvement program, is for Lean leaders at
all levels to encourage commitment throughout the whole organization to achieve
the goals. By creating a philosophy of Lean leadership, more and more
organizations are able to identify problems quicker, design solutions accurately and
implement them at a rapid pace.
Successful Lean implementations require Lean leaders. Although many
leadership teams know what Lean is, most do not know how to coach, guide, and
sustain it. To transform into a Lean organization, an enterprise needs three types of
leaders (Womack, Jones, 1996):
? someone who is committed to the business in a long run and can be the
anchor who will provide stability and continuity - an experienced worker
with long history in the company
? someone with deep knowledge about Lean techniques - Lean specialist
? someone who can be the champion/leader and fight against the
organizational barriers arose as a result of the dramatic change in the
organizational operations.
While the basic principles of Lean are the same in any organization, each
implementation is unique. Different organizational factors such as human resource
practices, management style, organizational strategic vision, organizational culture,
external partnerships have importance in the Lean implementation process. Among
numerous variables, management support plays an important role. Top
management should not only demonstrate commitment and leadership, but it must
also work to create interest in the implementation and communicate the change to
everyone within the organization. Lean initiatives are likely to fail, without
committing leadership who understands Lean principles, and believes it will
deliver benefits to an enterprise. Lacking an implementation plan is also an
important reason for Lean implementation failures. Therefore, an imperative task
of leaders is to come up with a Lean implementation plan with clarity and purpose.
Lean leaders must understand the work in detail and know how to involve
employees. If the top of the organization is not driving the Lean transformation, it
will not happen. Therefore, enterprises struggling with implementing Lean, should
analyze their leadership styles. They need to search for transformational leaders or
to train their leaders to become transformational, because transformational leaders
are most successful in implementing Lean practices. The dramatic transformation
from traditional to Lean requires transformational leadership at all levels, from
office to shop floor, to the executive suite, if the metamorphosis is to survive in the
market.
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Lean leadership helps in reducing costs and increasing the level of trust based
on relationships with customers and employees. Employee involvement is one of
the essential elements of a Lean implementation effort. When employees feel
involved, they are more susceptible to changing their behavior. Leaders must
realize their importance and agree that employee empowerment and involvement in
Lean implantation is a crucial factor for business success. Seeing employees as
capable and valuable for the organization is required if leaders want them actively
participating in Lean implementation. Employees will only contribute to the Lean
goals if believing these goals are aligned with their own individual interests. If
some people have unfulfilled needs for self-expression and personal achievement,
they would not be motivated to participate in Lean implementation programs.
Obviously, personal needs can have a large impact over the attitude and behavior
of employees towards Lean improvement activities.
It is often considered that an effective Lean leadership style involves coaching
and leadership behavior that fosters participation and employee empowerment
within certain boundaries. These are the responsibilities of the leaders and
managers in Lean organizations. Study (Tracey, Flinchbaugh, 2006, pp. 50)
surveying 226 managers and employees, indicated that five key variables that
predict successful Lean transformation are:
? development of teams as a supporting structure of Lean
? calculation and communication of metrics
? communication among organization members, particularly across
organizational barriers
? communication to employees regarding their specific role in Lean
transformations
? acknowledgement and celebration of successes toward Lean transformation.
A successful Lean implementation requires dramatic changes at all
organizational levels and departments involving work organization and culture. If
the company wants to change the culture, it must develop true Lean leaders who
can reinforce and lead the cultural change. The best way to do this, is through
actions to improve the company’s core value streams, supported by committed
leaders who reinforce culture change (Liker, 2004, pp. 305). Culture is both a result
and enabler for sustainable and successful Lean operations. It is a role model,
which guides the employees through the organizational change towards the values
of Lean thinking. Changes of mindset give people an aim in their working life, and
have the potential to change attitudes, so that the employees begin to think
differently, and are more willing to contribute to company’s improvement
initiatives. Motivation and creating a working environment that allows employees
to develop their abilities, is the key for achieving the best condition for
implementing Lean. The transition from decision making to being a coach for the
employees is the lesson that enterprises need to master in their attempt to adopt the
Lean approach.
For many leaders is surprisingly difficult to implement a Lean system. The
leader?s focus should be on teamwork in sharing values of Lean principles. The
Faculty of Business Economics and Entrepreneurship 153
core values of Lean enterprise should be known and lived with both, employees
and leaders, in order to improvement culture be successful. In this regard, Lean
leaders should be a role model for their team members. Leaders also need to praise
team members for a job well done, and show appreciation for people’s
contributions. They should listen to diverse points of view, empower people to act,
and support the decisions others make. Besides developing their team members,
Lean leaders need to communicate their targets. Communication of Lean results
involves the people and keeps them motivated. Leaders talk about the big picture
which company wants to accomplish, and inspire others to share that vision. In
essence, Lean leaders influence their followers by words or actions.
As stated above, one of the key challenges faced by enterprises in Lean
implementation appeared to be the communication of the vision and values of Lean
thinking to all employees. Lean leaders recognize that communication is a two-way
process, encourage a diversity of opinions and see errors as opportunities for
learning. When investigating problems, Lean leaders tackle the process, not the
people. They lead effective root cause analysis and foster a deep understanding of
the problems. Lean leaders deem that it is acceptable to make mistakes as long as
employees learn from those mistakes. They recognize individual and team efforts
and achievements and use integrity, knowledge, openness and honesty as guide in
leadership practice. Finally, the primary task of managers and leaders in
implementation of Lean leadership is increasing the improvement capability of
people. That has to be made in way that enterprises develop people’s knowledge
and qualifications.
LEAN LEADERSHI P I KNOWLEDGE MANAGEMENT
Davenport and Prusak define knowledge as a fluid mixture of framed
experience, values, contextual information, and expert insight that provides a
framework for evaluating and incorporating new experiences and information. It
originates and is applied in the minds of knowers (1998, pp. 5). Communication is
the main method for sharing knowledge and making people understand, which is
included as one of the essential factors of Lean. For structuring and organizing the
knowledge of employees, it is important to implement knowledge management.
Knowledge management is all about continuously creating new knowledge,
disseminating it widely through the enterprise, and embodying it quickly in new
products, services, technologies and systems. Therefore, knowledge management is
a process that creates, disseminates and embodies knowledge.
The role of leaders in success of knowledge management implementation is
very important, if not crucial. Lean leadership acts together with knowledge
management initiatives to ensure that employees’ knowledge can be transmitted to
others. Lean leaders think horizontally, in the direction that value flows through the
organization, and create strong horizontal focus by assigning a responsible person
to manage product flows. At the same time, they create strong functions that focus
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on knowledge capture and career paths. Knowledge management raises the level of
operation with the help of Lean philosophy. While Lean emphasizes teamwork,
eliminates waste, optimizes values and minimizes the time flow, knowledge
management suggests all this through the organization and presentation of
knowledge in a way that recognizes that it is possible to learn without repeating
mistakes from the past. Knowledge management helps the organization to
understand what intellectual potential it possesses, and Lean leadership to use this
potential most effectively. The main advantage of applying knowledge
management in Lean is the reduction of time, reduction of losses, increase in
output and initiating innovations based on the experience and knowledge.
Lean advocates the importance of leader, but claims that a leaders' most
important duty is to teach others. Training, teaching and educating are essential for
every organization that wants to become Lean. In a Lean environment, training is
pivotal in order to develop a workforce, which is capable of shouldering the
increased responsibilities, to develop multi-skilled workers, and to create an
environment in which workers have the skills and ability to push for continuous
improvement (Puvanasvaran et al., 2009, pp. 132). Being an effective leader
requires a willingness to learn. The goal of learning is to provide positive impact
and outcomes, as a result of effective adaptation to environmental changes and
improved efficiency in the learning process. Adaptation includes appropriate
actions in response to technological changes and learning from other organizations
achieved the best practices in the industry. Organizational culture facilitates the
integration of individual learning by influencing the organizations’ ability to learn,
share information and make decisions. In a traditional hierarchical organization,
position establishes authority to make decisions, but in a Lean organization,
position only establishes responsibility to get decisions made. The leaders need to
be fully committed to Lean implementation, to view the problems that enterprise
faces as opportunities, and to turn every challenge into a learning experience.
Leaders within the organization must know and understand how to work and
live the Lean philosophy and tech it to others. Lean leaders do not bring solutions
to organizational problems, just the opposite; leaders give employees a challenge
and an opportunity to learn by making small-scale mistakes along the way.
Experienced and knowledgeable leaders lead and mentor, but also empower
employees to solve problems by themselves. Lean leadership provides the
templates and practices that enable leaders to learn, and then look for, ask about,
and reinforce the leadership behaviors that sustain the gains. Lean leaders
thoroughly understand the everyday operative work, live the enterprise philosophy,
and teach it to employees. Leader’s willingness to seek input, listen carefully and
learn continuously creates an environment where employees feel respected and
motivated.
Lean leadership has evolved as a concept over time. The interest in continuous
improvement led on to the occurrence of a learning organization. A learning
organization is one that actively seeks to acquire knowledge and changes behavior
because of the newly acquired knowledge. Likewise, organizational learning is a
process of improving actions through better knowledge and understanding, where
Faculty of Business Economics and Entrepreneurship 155
experimenting, learning new things and reflecting on new knowledge are the norms. A
learning organization is involving the opportunity of developing knowledge about
employees, suppliers, customers, and competitors. To convert an organization into a
Lean learning organization, the right combination of a long-term philosophy,
processes, people, and problem solving is needed (Liker, 2004, pp. 3).
The organization must develop a learning culture, which should never stop (Liker,
Meirer, 2007, pp. 288). The culture of continuous learning is a great benefit for Lean
enterprises that opens a new potential for future improvements and, in this way,
achieving sustainability in a long run. It is obviously that leaders must create a learning
culture and be well connected to the external environment, in order to learn
continuously. In learning organization, people continually expand their capacity to
create results they truly desire. The new and expansive patterns of thinking are
nurtured, the collective aspiration is set free, and people are continually learning how to
work together. Enterprises need to build improvement experts and group leaders who
believe in Lean philosophy and have the desire to spread it throughout the organization
over time, to transform into a real Lean learning organization. This involves allowing
leaders to observe the work directly, so they can learn from the processes themselves.
Once a leader understands the work, it becomes easier for him to teach it to others.
Thus, the organization has the opportunity to learn more about itself and continually
improve. Essentially, the true Lean leadership is about fostering a continuous learning
environment for their team members.
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CONCLUSI ON
Lean is a process-focused management concept that seeks to increase
customer’s value by reducing waste and continuously improving processes. This is
accomplished through a Lean leadership, as the key success factor for the Lean
implementation and the missing link between theoretical solutions and its
application in practice. In this regard, this paper suggested that enterprises
implementing Lean should focus their efforts and resources on finding the
appropriate leadership style and behaviors, as a precondition for successful
business operations and achieving operational excellence.
Lean leaders must possess the general characteristics and skills of effective
leaders, such as creating a vision, knowing what drives the people they lead, active
listening, empathetic questioning, helping people to satisfy their needs, etc.
Besides, seven essential qualities of a Lean leader can be described using the
PROFITS acronym as Perspective, Responsibility, Openness, Flexibility, Inertia,
Teamwork and Self-knowledge. Lean leader?s role is to create the long-term goals
and shape an organizational culture, to learn and teach continuously on a road to
continuous improvement. Lean leaders must learn and practice the power of
understanding the human aspect of Lean and the significance of emploees?
engagement. Lean leadership is actually encouraging, supporting and demanding
employee involvement. The true Lean leaders nurture the growth of their
employees, bring out their best and inspire support for the organizational goals.
Motivation and creating a working environment that allows employees to develop
their abilities, is the key for business success of Lean enterprises.
The five principles of Lean leadership, namely improvement culture, self-
development, qualification of employees, Gemba and Hoshin Kanri, describe the
cooperation of employees and leaders in their mutual striving for perfection.
Instead of direct leadership, the Lean leader supports and helps employees to learn
and lead themselves. He is a developer of people and teams and has the exceptional
relationship-building skills, focusing on building the trust.
Finally, Lean advocates the importance of leader, but claims that a leaders'
most important duty is to teach others. Lean leadership acts together with
knowledge management initiatives to ensure that employees’ knowledge can be
transmitted to others. The true Lean leadership is about fostering a continuous
learning environment for their employees. Thus, the great Lean leaders are at the
same time the great Lean educators.
Faculty of Business Economics and Entrepreneurship 157
REFERENCES
[1] Bass, B.M. (2008), The Bass handbook of leadership: Theory, research &
managerial applications. New York: Free Press.
[2] Burns, J.M. (1978), Leadership. New York: Harper and Row.
[3] Davenport, T. and Prusak, L. (1998), Working Knowledge: How organizations
manage what they know. Boston: Harvard Business School Press
[4] Dombrowski, U., Mielke, T. (2013), Lean Leadership fundamental principles
and their application. Procedia CIRP CMS 7, 2013, pp. 569–574.
[5] Glynn, M.A., DeJordy, R. (2010), Leadership through an organization behavior
lens: A look at the last half-century of research. Boston: Harvard Business
Press.
[6] Integris Performance Advisors (2013), Achieving Lean Culture in Washington
State: An Implementation Roadmap Based on the Shingo Model for
Operational Excellence. Walnut Creek: A White Paper by Integris Performance
Advisors.
[7] Kouzes, J. and Posner, B. (2007), The Leadership Challenge: The most trusted
source on becoming a better leader. 4th edition, San Francisko: Jossey-Bass.
[8] Liker, J.K., Convis, G.L. (2012), The Toyota Way to Lean Leadership -
Achieving and sustaining excellence through leadership development. New
York: McGraw Hill.
[9] Liker, J.K., Meier, D.P. (2007), Toyota Talent: Developing Your People the
Toyota Way. New York: McGraw Hill.
[10] Liker, J.K. (2004), The Toyota Way: 14 Management Principles from the
World's Greatest Manufacturer. New York: McGraw-Hill.
[11] Lean Management and the Role of Lean Leadership, retrieved fromhttp://www.lean.org/images/october_webinar_project_slides.PDF (June 18th, 2014)
[12] Mann, D. (2009), The Missing Link: Lean Leadership. Frontiers of Health
Services Management, 26(1): 15-26.
[13] Northouse, P.G. (2013), Leadership: Theory and practice. 6th edition,
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[14] Puvanasvaran, P., Megat, H., Hong, T.S. and Razali, M.M. (2009), The roles of
communication process for an effective Lean manufacturing implementation.
Journal of Industrial Engineering and Management, 2(1): 128-152.
[15] Rother, M. (2010), Toyota Kata: Managing People for Improvement,
Adaptiveness and Superior Results. New York: McGraw Hill.
[16] Shim, W.S., Steers, R.M. (2012), Symmetric and asymmetric leadership
cultures: A comparative study of leadership and organizational culture at
Hyundai and Toyota. Journal of World Business, 47(4): 581-591.
[17] Seven Essential Qualities of a Lean Leader, retrieved fromhttp://www.Gembapantarei.com/2009/10/seven_essential_qualities_of_a_lean_
leader.html (June 18th, 2014).
[18] Tracey, M.W. Flinchbaugh, J. (2006), HR’s Role in the Lean Organizational
Journey. World at Work Journal, 15(4): 49-58.
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[19] V?car, A., Miricescu, D. (2013), Leadership a Key Factor to a Successful
Organization - Part II. Procedia Economics and Finance 6, IECS 2013, pp. 430-
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[20] Womack, J.P., Jones, D.T. (1996), Lean Thinking: Banish Waste and Create
Wealth in Your Corporation. New York: Simon & Schuster.
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HR.pdf,,HR’s Role in the Lean Organizational Journey,, retrieved from (June
18th, 2014)
Faculty of Business Economics and Entrepreneurship 159
THE RESEARCH OF THE ECONOMIC EFFECTS OF
STANDARDIZATION
Milan Krstic, PhD
15
Ana Skorup, PhD
16
ABSTRACT
Standardization usually represents the way of finding the middle between
similar or opposing ideas and their merging into one overall idea. It is a specific
instrument for the techno-economic self-regulation of business entities. It applies
equally to all participants in the national, regional or global economy, and as such
serves the creation of a "public good", embodied in documents called standards.
Standards are specific "technical language" that meets a number of important
functions, such as: enabling interoperability and compatibility; providing a
minimum level of product quality; reduction of diversity; impetus to innovation
development and technology exchange; providing information, as well as
overcoming cultural and language barriers. Standardization and standards from
an economic point of view can produce externalities, or unexpected external
(positive or negative) economic effects to a third party. From the standpoint of
positive effects, it is of interest to explore the assessment of the economic effects
and the impact which standardization and standards have on the microeconomic
level (the business system level), as well as the macroeconomic level (the national,
regional and global level). Therefore, in this paper we focus on a methodology for
assessing the economic effects of standards on a micro level which is based on an
analytical approach of the value chain as well as at the macro level which is based
on the production and economic function. In conclusion, it is stated how the
policies in the development of standardization and standards adoption can
contribute to the prosperity at the national level.
Key words: Standardization, Economy, Externalities, Methodology, Impact
J EL Classification: A12
UDK: 006:33
15
Milan Krstic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
16
Ana Skorup, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
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I NTRODUCTI ON
Standardization usually represents the way of finding the middle between
similar or opposing ideas and their merging into one overall idea.
Standardization can be defined as “an activity for establishing terms for a
general and repeated use in regards to real or potential problems, in the aim of
achieving an optimal level of planning within a given context” (Popovi?, Živkovi?,
2011).
Standardization is the process of establishing and applying certain regulations
in the aim of coordinating and regulating activities in a given area, to the benefit
and with the participation of all interested parties, and especially in the aim of
realizing overall optimal savings, taking into consideration the functional aim and
the technical security demands (the definition of ISO).
Standardization aims, as a rule, are one of the components of state politics and
include improvement and development in the area of product and service quality,
as well as rationalization of production and consumption.
Standardization can be understood as a specific instrument for techno-
economic self-regulation of business activities of companies, and it relates to all
the participants in the national, regional, that is, global economy, and as such
serves to create a “public good”, embodied in documents called standards.
A standard is a “publicly accessible document, established by consensus and
brought by an acknowledged body, which, for a general and repeated use,
determines the regulations, demands, features, directions, recommendations or
guidelines for activities or their results, in the purpose of achieving an optimal level
of organization in a certain area in regards to the existing or likely problems”
(ZOS, 2009).
Standards mainly have a positive impact on most aspects of our lives, as they
secure the required characteristics of products and services. When products and
services are in accordance with our needs and expectations, this is something that is
implied and we are unaware of the significance and role of standards. However, if
standards ceased to exist, very quickly we would become aware of the deficiencies.
From the aspect of the contemporary consumer, products and services would be of
a bad quality, inadequate for our needs, and incompatible with the equipment we
already possess, or merely unreliable and hazardous.
Standards occur and develop as a result of accomplishments in science and
technology, as well as based on experience and good business practice in all areas.
By using standards in production and services, the efficiency and effectiveness of
all processes are increased, as well as the quality of services, and thus at the same
time the needs of the users of products and services are met and this in turn
contributes to the raising of the general level of satisfaction.
Faculty of Business Economics and Entrepreneurship 161
Standardization as a rule starts and ends on the market, and the process takes
place in two different ways: market exclusion (where only one technology survives
in the market) and joint modification (where multiple technologies survive).
The diffusion of the current technologies, as well as the rapid emergence of
new ones, create a space for profit increase but also raises the degree of
technological uncertainty. Their combining reinforces market forces in the
founding of the standardization process, which also increases the benefits of
standardization (Cowan, 1991).
Thus, it is without doubt that standards and product standardizing produces
have positive external effects, as the beneficiaries of their being introducing are,
along with directly interested parties (such as proposers of standards, policy
creators and other interested users), other factors of the economy as well. Such
effects in economy are known as externalities.
Externalities (or overflowing effects) according to Samuelson and Nordhaus
(Samuelson, Nordhaus, 2000) appear when companies or individuals impose
benefits or expenses on other factors outside the market.
In the aim of a closer determining of externalities ensuing from a direct or
indirect impact of standards on the economy, numerous research has been
conducted which endeavoured to identify externalities – positive or negative
influences of standards on economic effects. Here you can emphasize scientific
papers (Swann, 2007, 2009, 2010).
METHODOLOGY FOR ESTABLI SHI NG THE ECONOMI C
EFFECTS OF STANDARDI ZATI ON
METHODOLOGY FOR ESTABLI SHI NG THE ECONOMI C
EFFECTS OF THE I MPACT OF STANDARDS ON THE MI CRO
LEVEL
In the aim of determining the economic effects on the micro level, that is, on
the level of an individual company which have ensued as a result of standard
effect, a methodology under the following name was developed: ISO Methodology
to assess the economic benefits of standards.
ISO Methodology secures a consistent framework of criteria, guidelines and
instruments for assessing economic benefits (externalities) of standards from the
perspective of individual organizations which are mainly companies (for example,
profit organizations), but it can also be applied on the analysis of externalities in
other types of organizations as well (for example, those the public sector).
The further text gives a short review of the key elements of methodology and
concepts on the steps which are applied in the process of assessing and the methods
for calculating externalities – the benefits from standards.
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ISO methodology helps to systematically assess the economic benefits from
standards, that is:
? to enable the participants from the private and public sectors to successfully
assess the economic and social impact of standards which are based on
voluntariness and consensus,
? to promote the awareness of the policy creators and business leaders of the
significance of standards and standardization.
The methodology focuses the issue of economic contribution in creating
corporative values due to bringing and applying standards. It includes international
standards, regional and national standards, as well as standards developed by other
organizations for developing standards, as well as the standards brought by
consortia if they are open for the participation of interested parties, while internal
(closed) standards of the company are excluded from this assessment.
The basic analytic approach of the methodology for determining the economic
benefit of standards on a micro level makes up a value chain.
A value chain consists of stages (stages 1, 2, 3...), which represent a series of
activities and which relate to creating a certain output in the form of products or
services (Figure 1). In each stage, the output from appropriate activities adds a
certain value. Stages can be organized within a company (then it is called “a
company value chain”) or they can be spread across different companies which
cooperate with each other, in a network supply chain (called a “supply chain” or an
“industry value chain”).
Figure 1: A simple value chain
Source: ISO, 2013,1, pp. 14
The value line of a company represents a logical series of activities which are
carried out within a company in the aim of realizing a product or service. The
activities of a company are divided into a larger number of key business functions
(Figure 2), while a total of nine key business functions from A to I were identified.
Each of these functions is linked with a set of specific activities of value chains.
For example, the activities which relate to the production of components and
assembling final products are undertaken within the business function of
“Production/Operations”.
The business functions from E to I are called primary functions, while business
functions from A to D are called auxiliary functions. In principle, all products
which a company realizes are carried out through basic business functions. Some
of these functions can be very complex, when they consist of several stages, while
others can be simple, when they consist of only one activity. Auxiliary functions
Faculty of Business Economics and Entrepreneurship 163
impact primary functions and help their execution. The value chain of a company
shown in Image 4 is generic, and it is realized from the company production model.
The value chain model can also be applied to other types of organizations (for
example, service companies or social institutions), but in that case adapting may be
necessary in order to reflect its specific type of activity in the right way.
Figure 2: Value chain of a (production) company
Source: ISO, 2013,1, pp. 15
The mentioned access to company value chains can be applied to an individual
company, but it can also be expanded to the industrial sector (backwards or
forwards in relation to the observed company), in which case the supplier as well
as the buyer network of the company is included. This is called the “value chain of
industry”. Figure 3 shows the application of the industry value chain on the
example of engineering for oil and gas production.
Figure 3: Industrial value chain on the example of the oil and gas industries
Source: ISO, 2013,1, pp. 16
An assessment of externalities – the economic effects are carried out in
accordance with the steps which are mentioned in the further text, as shown in
Figure 4.
164 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 4: Key steps in assessment of standard impact
Source: ISO, 2013,1, pp. 23
Step 1: Understanding a value chain
The first step is to determine the value chain in an industry and locate the
company within the context of that value chain. The value chain of a company
should be understood in the sense of its key business processes which create an
additional value. A decision of key significance concerns the assessment of the
scale of the encompassed activity, that is, whether the assessment should cover the
entire company or it should be limited to one or more of certain business functions,
considering that this causes a certain adapting of the analysis. The decision
regarding the scale of encompassed activities depends on several factors, of which
the most significant are the following: the size and complexity of the company, the
available resources for project assessment, access to key information, as well as the
experience of the project team members of the assessment.
Step 2: Identifying the standard impact
This step consists of determining those business functions (activities) in a
company’s value chain in which standards have a significant role. Here there is an
intensive use of the existing documentation of the company in order to comprehend
the processes, business functions and the main activities included in every business
function. This step includes the consultation with company experts to determine
which standards (or groups of standards) are applied in the activities within the
chosen business functions. For an assessment of the impact, the so-called Standards
Impact Map is used (Figure 5), which identifies those areas in the value chain
where standards can carry out a significant role, and where the impact ensues from
the standards. The map shows the impacts on the main business functions in the
chain and linked activities.
Faculty of Business Economics and Entrepreneurship 165
Figure 5: Map of standards impact, business activities and associated activities
Source: ISO, 2013,3
For further explanation, Image 8, within the framework of the Standards
Impact Map (Figure 5), gives an excerpt as an example of the standards impact
only for one function (production/ operations).
Function Activities Impacts Description
Production /
Operations
All activities Better internal information
transfer
This section of the
impact map
contains
more detailed
description of
each
of the possible
impacts
Better training of personnel
More efficient processing
Processing More efficient assembly
Better quality of equipment and
supplies
Quality assurance Better quality management
HSE (health,
safety and
environment)
Reduced disadvantages from
regulations
Better health /safety/
environmental compliance
Figure 6: Excerpt from the Standards Impact Map for business functions –
production/operations Source: ISO, 2013,2, pp.18
Step 3: Analysis of value drivers and establishing operational indicators
This step analyses company value drivers (that is, drivers of company
competitiveness) and determine the operational indicators, which will then be
applied to assess the standards impact.
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Value drivers are key organizational possibilities which give the company a
competitive advantage. If some business activities are tightly linked with value
drivers, the impact of standards on creating values with this activity can be
significantly larger than with activities which are not closely linked with value
drivers. Thus, for assessing standards impact those activities which are linked with
value drivers should be chosen.
For example, if one of the company value drivers is “low-cost production”, it
is more likely that standards will be used in the production process which will
directly contribute to that ability, and thus have a greater impact. Similarly, if
another company value driver is at stake of an “innovative and superior product
quality”, the standards used in engineering and R&D which contributes to realize
this aim is more likely to have a bigger impact, and so on. In Image 9, the
intersection presents the area where standards contribute to key activities and
support value drivers (ISO, 2014).
Figure 7: Intersection: standards generate larger benefits which support value
drivers
Source: ISO, 2014, pp. 6
The value driver map in Table 1 has been derived from several study cases.
Table 1 gives the connection of business functions (activities) of the company with
value drivers.
Faculty of Business Economics and Entrepreneurship 167
Table 1: Value driver map
Business functions Value drivers
Primary activities/Primary business functions
All Focused value chain coverage
All Continuous improvement
All Efficiency
All Safety compliance
All Flexibility
All Transparency
All Economies of scale
All Qualified workforce
All (mainly: Inbound logistics, outbound logistics) Efficient logistics
All (mainly: Inbound logistics, Production, Marketing and
Sales)
Quality of products
All (mainly: Procurement, Marketing & Sales) Global reach
All (mainly: R&D, Engineering, Production) Knowledge leadership
All (mainly: R&D, Procurement, Production etc.) Partnerships
Marketing & Sales Control over high-margin after-sales markets
Marketing & Sales Sales effectiveness
Marketing & Sales Reputation
Marketing & Sales Client orientation
Marketing & Sales Sales effectiveness
Marketing & Sales Reputation
Production / Operations Quality of production processes
Production / Operations Efficiency of production
Production / Operations Production capacity
After-Sales Service Service quality
Support activities/Support business functions
Management & Administration
Ownership structure of the
company
R&D R&D effectiveness
R&D, Production / Operations Product innovation
Procurement Partnership with suppliers
Procurement Local access to key inputs
Procurement, Inbound Logistics, Production, Outbound
Logistics Pest and disease control
Source: ISO, 2013,4
Operational indicators are used in the aim of impact assessment which ensues
from standards use, and in that sense one or more operational drivers should be
identified. Operational indicators are quantifiable sizes linked with company activities
which show an improvement or deterioration of performances (for example, time and
costs, number of defects, waste, sale, satisfaction of buyers, etc.). The chosen
operational indicators must be relevant, that is, they should cover the relevant aspects
of activities within an analysis, for which the standard impacts can be observed and
measured. Where it is possible, they should be linked with company value drivers.
Thus, it is crucial to gather information regarding operational activities on a level
nearest the location where the standards are actually used.
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In a general sense, it is possible to make a difference between two extensive
categories of operational indicators:
? Indicators which relate to business efficiency, Table 2;
? Indicators which relate to market development, Table 3.
Table 2: Examples of operational indicators of business efficiency
Business
function
Operational
indicators
Impacts of standards
Management &
Administration
Legal compliance
Due to the use of standards, awareness has been built
into management systems so that legal requirements
can be easier traced
Research &
Development
Manpower
Due to the use of standards, the amount of work
needed to develop a new product has decreased. This
means that the cost for design engineers (hours ×
average cost) was reduced
Inbound
logistics
Non-conformant
supplies
Due to the use of standards, specifications for supplies
can be met by more suppliers leading to more
competition: a) rejections and b) product failures.
The value is calculated as a reduction of a certain cost
over time
Production Conformant products
Reduced failures result in higher quality output,
less re-work and less warranty claims
All business
functions
Accidents
Reduced number of accidents and consequent
injuries, deaths
Source: ISO, 2014, pp. 25
Table 3: Example of operational indicators of market development
Business
function
Operational
indicators
Impacts of standards
Marketing &
Sales
Sales
Due to the use of standards for new or modified
products or improvements in production, the company
increased sales revenues and profits
Access to existing
markets that are new
to the company
By meeting certain requirements stated in standards
(regulatory or market expectations), the company can
access markets that were previously closed to it
Creation of new
markets
Using certain standards, the company developed
markets for a new type of product for whichit occupies
a monopoly position for a certain time
Source: ISO, 2014, page 26
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Step 4: Measuring of impact of standards
The purpose of the entire assessment process is the following:
1. Quantifying the impact of standards by applying operational indicators and
aggregating their impact for each of the chosen business functions;
2. Converting the quantitative results which ensue from the use of standards
for each of the chosen business functions, in financial statistics;
3. Summing up the data for all chosen business functions in a given moment,
to establish the total contribution of standards in relation to the gross company
profit or EBIT (Earnings Before Interest and Taxes).
The aim of this step of the assessment process is to determine the impact of
using standards, which is measured through operational indicators – in a
quantitative way. This is achieved in this final assessment stage by determining the
impact of standards in the financial sense. It is the expectation that standards use
leads to a change of values in the chosen indicators in such a way that the realized
effect by the company is manifested through a contribution of cost decrease,
through a contribution of income increase, or a combination of both.
Depending on the operational indicators, the financial impact can be directly
measured, or it can be determined indirectly based on other company data. For
example, “saving” for material procurement and components are an operational
indicator measured directly in financial conditions. On the other hand, the reducing of
“the labour force needed to complete product design” is an operational indicator which
must be converted into assessed savings based on other company data, such as average
prices of staff, project numbers, and so on. For assessing the changes in values
expressed in financial statistics, the key indicator used is EBIT. EBIT is expressed as
the gross company earnings, that is, the income minus the expenses (Figure 8).
If there are not enough data at disposal to calculate the effects, or the data are
not considered reliable enough for such a calculation, the methodology also
disposes with methods of approximation to fill in the gaps, which are based on data
obtained from assessments of similar functions in other organizations.
Figure 8: Impact of standards on company business functions and their calculating
based on creating company values, expressed as EBIT contributions
Source: ISO, 2014, pp. 7
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Along the value chain, that is, within the business functions in the company,
various cases of standards impact can be assessed (Figure 9).
Figure 9: Outline of results – various cases of standards impact assessed
along company value chains
Source: Gerundino D., Hilb M., 2010, pp. 22
The pilot projects for assessing and quantifying the effects which companies
can realize from applying standards have been realized by ISO and its members in
more than 20 countries. These projects have been carried out in close cooperation
between ISO members, academic institutions, companies as well as staff in
member-states, and case studies have been carried out in the period from October
2010 to June 2012. The choice of companies to realize the pilot projects have been
made by ISO members in their countries. The only condition was that the company
in the recent years was a standard user, and that the member had a good
relationship with the company, in order to secure that the project teams have at
their disposal key staff from the company for interviews and consultations. Table 4
presents industrial companies in which 21 international case studies were realized,
according to the presented methodology (ISO, 2012).
Faculty of Business Economics and Entrepreneurship 171
Table 4: Industries and countries covered by case studies
Industries Countries
Agri-food business Cameroon, Peru
Chemical industry Thailand
Construction & construction materials Botswana, Indonesia, Italy, Lebanon, South Africa, Sri
Lanka
Electrical appliances Vietnam
Electrical power transmission Germany
Food retail/food logistics Singapore
Heating, ventilation, air conditioning Jordan
Industrial automation equipment Brazil
Information & telecommunication Germany
Juice production Egypt
Pipes and piping systems China, Colombia, Mauritius
Shipbuilding China
Water supply SenegalWater supply
Source: ISO, 2012, pp. 8
METHODOLOGY FOR ESTABLI SHI NG ECONOMI C EFFECTS
OF THE I MPACT OF STANDARDS ON A MACROECONOMI C
LEVEL
When it comes to reviewing standard externalities on a macroeconomic level,
that is, the impact of standards on economic effects, then the issue of globalization
becomes an unavoidable factor.
Globalization is a phenomenon of the modern age which is represented by the
process of humankind converging in a distinctive common economic, political and
cultural area, and which is featured by an increase of interaction, the growth of the
number and variety of participants, as well as incessant changes.
Within the economic area, globalization has an impact on trade (exchange of
goods and services), especially on global trade which is realized by way of national
and regional borders, as it demands the harmonizing of national regulations which
leads towards creating international regulations and conditions international
standardization, which further results in producing international standards.
In that way, international standards facilitate economic, scientific and technical
cooperation on a global level and become an effective instrument for regulating the
market, for removing barriers for free trade, that is, liberating from routine tasks
(Krsti? et al., 2012).
Generally speaking, standards provide the necessary help in communication
between economy, technology, science and public services, which contributes to
total economic growth.
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The imperative for sustainable economic growth has produced numerous
economic research of standards impact on a macroeconomic level, for a better
understanding of its factors.
On a macroeconomic level, the role of standards is a multiple one and in a
direct connection with the degree of productivity. Specifically speaking, standards
impact the protection of the community, they facilitate international trade, improve
the interoperability of technology and processes, and ease technological changes
and economic development, by reducing the asymmetry of information.
From the standpoint of international standardization, the most important
benefits from standardization are the following:
? Improvement in universal technical communication and mutual
understanding;
? Facilitating international exchange of goods and services;
? Removing technical obstacles in trade;
? Innovations and transfer of technology.
The significance of technological activity, as a relevant determinant of
economic effect in industrialized economies is mostly acknowledged today. It is
without doubt also, that technical standards are very important for speeding up the
diffusion of innovations, especially new technologies.
An increased economic efficiency, occurring as a consequence of
implementing international standards, creates an economic benefit not just for the
supply industry by increasing profit but also for the users by lowering the price of
goods and services. Also, the application of international standards can reduce the
risk and increase the quality of services. Thus, international standards are able to
improve the economy and contribute to the benefit of society as a whole.
Standards produce externalities – different economic effects (positive and
negative), which can be classified according to several foundations, as shown in
Table 5.
Faculty of Business Economics and Entrepreneurship 173
Table 5: Categorizing standards based on economic effects
Type of standard Positive effects Negative effects
Standard
compatibility
? Network externalities
? Avoiding lagging in old technologies
? Increasing the variety of product
system
? Increasing the probability of
interoperability
? Monopoly
Standards of
minimum quality and
security
? Correction of negative selection of
supply quality
? Reducing transaction costs
? Correction of negative externalities
? Limiting of
competition
Standards of reduced
variety
? Economy of scale
? Building of focus and critical mass
? Reducing choice
? Market concentration
Information ? Facilitating trade
? Reduced transaction costs
? Limiting of
competition
Source: ISO, 2012, p. 8.
The classification is based on compatibility, quality, reducing variability
(unification) and information. Table 5 sums up these four different dimensions of
standardization and stresses the positive and negative effects of each one:
? The compatibility of standards is of a key significance for the development of
network industries such as the sector of Information-Communication
Technologies (sector ICT), as they enable the interoperability between different
users and the compatibility between the hardware and the software systems;
? Standards which specify the minimum of the needed quality and security
limit the risk from production of goods and services of a poor quality, which
in turn increases consumer trust;
? Standards for reducing variability eliminate an undesired variety in processes
or product design;
? Standards which specify information and product description improve
compatibility between products and variability between product types.
Having in mind the advantages of applying standards for the country as a
whole, its quantitative impact for the development of international trade, economic
growth and finally, realizing social aims can be reviewed. In that sense, and in the
aim of analyzing the economic effects of standards on a macro plan, several studies
have been carried out ((Blind, 2004), (Blind, 2011), (SA, 2012), (Miotti, 2009)).
In defining the methodology for determining the economic effects of standards
on a macroeconomic level, the Cobb–Douglas production function is used.
Cobb–Douglas production function is a special form of function which is widely
applied in economics to present the technological correlation between the values of two
or more inputs, a specially engaged physical capital and invested labour as the amount
of output which can be produced from these inputs (wiki, 2014).
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The Cobb–Douglas production function in its standard form in the case of
production of individual goods in whose realization only two factors participate
(labour and capital), has the following form:
(1)
where: Y is the output – the total production (the real value of all goods
produced in the year); L is the input – representing labour (the total number of work
hours of those who worked during a year); K is the output – the representing capital (the
real value of capital expressed through the value of machines, equipment and facilities);
A is the multifactor, that is, the total productivity factor; ? and ? are the coefficients of
capital elasticity and labour, respectively, representing constant values which determine
the available technology. The outputs of elasticity measure the responsiveness of the
output during a change of levels of either labour or capital used together in the production
function. For example, in the case of ? = 0.45, the growth in used capital of 1% would
lead to an increase of the output by approximately 0.45%. If ? + ? = 1, this involves the
presumption of “ideal competition”, and ? and ? can be considered sharers of capital and
labour at the outlet. In this case, the production function has a constant income, which
means that if used capital K is doubled, labour L with also double the output. If ? + ? < 1,
the production function has a decrease of value at the output, even if ? + ? > 1 - the
production function has a value increase at the output.
The further text presents two examples of calculating the economic effects of
the standards at a macro-economic level based on the Cobb–Douglas production
function, but with basically have different models.
Example 1
In this example, and let us mark it as Model 1, for calculating of the economic
effects of standards on a macroeconomic level (Haimowitz, 2007), which will here
be looked at more closely, the Cobb–Douglas production function has the
following form:
Q
t
= A
t
(2)
The output for the realized value of production (Q
t
) is a non-linear function of
production multifactors (A
t
), of basic capital (K
t
), and the amount of labour (L
t
). In
this production function, input capital and labour are combined to produce an
output. The ability of capital and labour to produce an output is increased by the
level of technology and efficiency in the economy, which is represented by the
productivity multifactor (A
t
).
If the left and right sides of the equation (2) are divided by L
t
we get the
following correlation:
(3)
In this model, the correlation from the left side in fact represents labour
productivity, or the realized worker output per hour, and it can be considered as if
it ensues from two outputs, that is, it represents a combination of two contributions,
as shown in the equation (4):
Faculty of Business Economics and Entrepreneurship 175
(4)
Multifactor productivity is composed of two components: knowledge and
efficiency. The factors which impact knowledge or technological capacities are
standards, patents, activities or research and development (R&D), as well as the
import of foreign technology. The factors which impact the level of efficiency in
the economy are standards, improving the infrastructure and structural changes in
the economy, such as the mobility of world labour between industries, and other.
Thus, standards can potentially have an important role in strengthening multifactor
productivity. The mentioned can be interpreted in the example of realization of
railway transportation services. One railway train can realize a certain number of
services (transporting goods, passengers, etc.) with 6 cars. However, 12 cars can
realize a significantly larger number of services in comparison to 6 cars. Let us
presume that at the beginning there were services rendered with one railway
composition, one train engine and 6 cars. An addition of another 6 cars represents a
significant capital increase. Thereby, standardization may indirectly secure that the
mentioned increase of capital is transformed into an increase of output, due to the
fact that if the rails of 6 newly added cars are incompatible with the previously
used cars, the additional capital will not lead to an output increase.
In this study, the multifactor productivity multifactor is modelled as a function
of time and the number of standards, and in that sense it is presumed that it has the
following functional form:
(5)
where exp is the Euler number e; T
t
- is the vector of the time trend, STA
t
-
the number of standards in year t. Additional variables, which in principle can be
important in explaining multifactor productivity, are excluded from the analysis,
due to a short time period for analysis.
If in relation (3) first the multifactor productivity (A
t
), is replaced by the
relation (5), and then on the left and right sides of the equation the natural
logarithm (ln) is applied, then an error is introduced (ut), as well as the ? constant
for defining the initial conditions, and the final functional form is obtained (6).
(6)
The equation (6) is used to estimate the economic effects of standards in the
Canadian economy. The analysis involved the period from 1981 to 2004, during
which the time trend vector (T
t
) included two deterministic periods in the Canadian
economy which divided 1994 (before and after the entry into force of the North
American Free Trade Agreement - NAFTA). The results of calculating the
coefficient by equation (6) are presented in Table 5.
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Table 6: Estimation Results for Existing Number of Standards (in logarithms)
Source: Haimowitz, 2007, pp. vi
During the observed period in Canada, the number of standards grew per an
average rate of 0.69 percent annually, which had as a consequence the increase of
the growth rate of production (the real GDP) by around 9 percent. The implications
of these findings point to an increase of the actual realized GDP in relation to the
GDP which would ordinarily be realized in the case of a lack of standards.
Figure 10: Actual Real GDP and Expected Real GDP Without Standards
Source: Haimowitz, 2007, pp. viii
Faculty of Business Economics and Entrepreneurship 177
Example 2
Let us mark the example as Model 2 for calculating the economic effects of
the standards on a macroeconomic level (Blind, 2004) which will be looked at
closely here. Here too the starting point is the Cobb–Douglas production function,
equation (1). If we add to the mentioned function a time dimension, the equation
becomes:
(7)
where: Y
t
represents the output, K
t
the capital factor, L
t
the labour factor (the
number of workers),
the coefficients of elasticity which represent a partial
participation of the capital and work force factors. A is here the efficiency
parameter, and its change, while other parameters remain constant, leads to a
uniform proportional change of the output for every factor combination. Usually,
technological progress in the Cobb–Douglas production function is budgeted
separately from the function itself and in a neutral form by a time-dependent
equation, where t is the linear time trend, namely:
(8)
When on the left and right side of the equation (7) a natural logarithm is
applied, the production functions become the following:
y
t
= a+ (9)
in which now the lower-case letters (y
t
,k
t
, l
t
) represent logarithm variables,
while a is the constant which is being introduced to determine the initial
conditions.
The weakness of this equation is determining the technological progress via a
time-dependent equation, that is, a member, which can be removed if it is
replaced by suitable members, which more closely represent technological progress
via R&D activities, in the specific case, by way of the number of patents ,
cost of licenses and patents ,, as the number of standards . After the
mentioned transaction and adding the member for an error the following equation
is obtained:
y
t
= a+ (10)
in which the introduced members are calculated based on recursive formula
(11) and (12):
= (11)
= (12)
where: is the average number of patents at the end of the current year t,
number of patents at the end of the previous year, representing
the number of grant patents, the number of revoked patents, representing
the failed patents, the number of standards at the end of the current year t,
representing the number of newly printed standards, representing the
number of withdrawn standards.
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If it is taken that =1+
equation (10) is simplified, after mathematical
organizing, it has the final form:
y
t
= a+ (13)
Based on empirical data from Germany and by using the presented equation
(13) values presented in Table 6 were obtained. The results in the table have
undoubtedly confirmed that the role of standardization is very important. Standards
have a special responsibility for an effective diffusion of innovation, as their
impact, calculated by years, amounts at an average from 0.2 to 1.5 percentage
points from the average degree of annual growth (framed in the table). When
comparing all three factors together (the number of patents, costs of licenses and
patents, as well as numbers of standards), it is clear that standards are equally
important for technical innovations as well as patents. Even though the innovative
potential is not the only decisive factor which contributes to economic growth, it is
a fact that must be widely disseminated via standards and technical rules.
Table 7: Sources of growth in the business sector from 1961 to 1996
Source
Average annual percentage changes
61-90 61-95 66-70 71-75 76-80 81-85 86-90 92-96
1.6 2.6 2.0 1.7 1.3 0.8 1.1 1.1
0.2 0.6 0.1 -0.6 0.5 -0.6 1.1 -0.7
0.1 0.2 0.2 -0.4 0.3 0.2 0.0 -0.3
0.5 0.6 0.5 0.4 0.2 0.1 1.3 0.6
0.9 1.5 1.2 0.9 1.1 0.4 0.2 0.3
Total:
fitted 3.3 5.7 4.1 2.1 3.5 1.0 3.7 1.0
realized 3.3 5.2 4.4 1.7 3.6 1.1 3.8 1.5
Notes: Differences between the sums of the individual components of the growth rates and the
fitted total growth ratesare caused by rouding and by joint effects
Source: Blind, 2004, pp. 317
Viewed as a whole, all the national studies realized on this topic show that
standards have a positive impact on the economic growth as a result of the
improved diffusion of knowledge. The contribution of standards on the growth rate
in each country is different: 0.9% in Germany, 0.8% in France and Australia, 0.3%
in Great Britain and 0.2% in Canada. This also is indicated by the updated German
study whose aim is to recalculate the economic benefit from standardization based
on the current data (Table 8).
Faculty of Business Economics and Entrepreneurship 179
Table 8: National studies on the impact of effects of standards on economic growth
Country Publisher Timeframe Degree of
GDP
growth
Standard
contribution
Germany DIN 2000 1960-1990 3.3% 0.9%
DIN 2011 1992-2006 1.1% 0.8%
France ANFOR 2009 1950-2005 3.4% 0.8%
Great Britain DTI 2005 1948-2002 2.5% 0.3%
Canada Standards Council of Canada
2007
1981-2004 2.7% 0.2
Australia Standards Australia 2006 1962-2003 3.6% 0.8%
Source: Blind, 2013, p. 18.
DI SCUSSI ON OF RESEARCH RESULTS
In this study, we started from the following assumptions:
? Active participation in the standardization process and application of
standards produces specific economic effects, both for those who apply
them, as well as third parties, and these effects can be identified and
quantified, both at the level of businesses (micro level), and also at national,
regional and global level (macro level).
? Active use of standards contributes to the improvement of the operation of
business entities, which consequently results in the enhancement of
competitiveness at the national level.
Hereinafter some of the results of the conducted desk research of the
economic effects of standardization are briefly presented. The results indicate the
following:
1. Generally speaking, it seems that standards and standardization in our
economic context have long been unjustly sidelined to the margins of agenda on
key economic issues. The reason is probably to be found in the known adverse
economic circumstances in which Serbia is in, and the standardization as the
higher-order factor does not come on the agenda. Of course, this is not the case in
the harmonization of general social standards in the process of approaching the EU,
but when it comes to the application of standardization and standards in the
business improvement, it certainly is the case.
2. Study results indicate that the standards produce economic effects at the
macro economic level and that they can be quantified, which was clearly confirmed
by the examples stated in the paper. Thus, in the abovementioned example of the
economic effects of the macro-economic level, from equation (4), appears
important conclusion that the standards were contained in both components of
180 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
multifactor productivity (knowledge and effectiveness). Relevant factors that affect
the knowledge (and, consequently, the technological capacity) include patents,
research and development (R & D), the import of foreign technology, and
standards. Factors that affect the level of efficiency in the economy are
infrastructure improvement and structural changes in the economy, labor mobility,
as well as standards. In this way, standards are potential field for improving the
multifactor productivity. National economy, which seeks to improve the economic
environment, among other things, can achieved that through a proactive approach
to standards. If this is interpreted in our conditions, it is clear that, among other
things, the increasing application of standards can improve the competitiveness of
the Serbian economy.
3. Experience of developed countries shows that national economies that
innovate are more competitive and successful. Successful implementation of
innovation assumes the effective diffusion of innovation. However, the effective
diffusion of innovation requires a proactive standardization and application of
standards, in other words, in the process of innovation diffusion - standards have a
special role. Thus, the innovation potential of the economy is a necessary but not a
sufficient condition, because an evident increase of the level of GDP growth (albeit
unevenly) in most developed countries, is the contribution of standards (as shown
in Table 8 presented in the paper). So, the conclusion is that the innovative
potential has to be widely disseminated through standards. In this way, the
standards represent a specific "catalyst" of the innovation process. In our terms this
means the following: first we have to work on increasing the number of significant
innovations (especially in industry) and along that to work on the intensification of
the activities of standardization.
4. When it comes to determining the economic effects of standardization on
the micro-economic level, the research results obtained confirmed that the
standards produce economic effects and that they can be quantified, which was
clearly confirmed by the examples listed in the paper. Case study analysis
(presented in Table 8 of this paper) mentions a number of such case studies.
However, the number of possible real case studies is nowhere near exhausted. In
this sense it can be suggested that one such study, using the proposed research
methodology, is implemented in Serbia, and by the interested business entity and
the Institute for standardization. This would indicate what the economic effects can
be achieved by applying the standard in our country.
5. The contribution of this research can be reflected in further promotion of
implementation of standards and standardization. From the wider context of
research, it is found that business entities generally do not give proper attention to
the standardization, and it is widely believed that it is a matter for the Institute for
standardization of Serbia. However, we often ignore the fact that participating in
company standardization processes enables, among other things, networking with
partners, users, deliverers, competitors, regulatory organs and bodies for
coordination assessment, as well as a direct approach to the knowledge and
strategy (tactics) of other participants in that process. Along with this, active
participation in this process enables companies not only to directly present their
Faculty of Business Economics and Entrepreneurship 181
interests, but also to have an effective impact on the contents (demands) and form
of standards and similar documents which are a result of this process (Krsti?,
Krsti?, 2010).
6. This paper presents a methodology for determining the economic effects on
macro- and micro-economic level, so selected literature in this paper can serve as a
useful bibliography on this topic.
7. This paper may contribute to raise awareness of decision makers at the
macro economic level as well as management of business entities in the micro-
economic level in the field of further affirmation of standardization and
standardization in our context.
CONCLUSI ON
Applying standards increases the effectiveness and efficiency of the process of
product realization and raises its quality, which meets the demands of the product
users and which in turn contributes to the increasing of the level of their
satisfaction.
The relevant aspects of applying standards are reducing the variety of
products, as well as quality and performances, measuring of standards,
compatibility and interoperability, health and security, environment protection,
codified knowledge and vision.
This paper reviews the issue of economic effects of standards and
standardization on a micro and macroeconomic level. Research has shown that
numerous studies have dealt with this issue and they have unambiguously
confirmed the assumption that the application of standards and carrying out
standardization contributes to externalities – economic effects, as along with the
direct interested parties (such as proposers of standards, policy creators and other
interested users), other factors of the economic systems also benefit indirectly from
their introducing.
The economic effects of standard impact can be positive and negative. Of
course, the focus here is on the positive effects.
In regarding the microeconomic level, that is, the level of the business system,
positive effects can be expressed by way of direct variable factors (economy of
scale, labour division, competencies, barriers for market entry, network effects,
transaction costs, precision, trust and risk), as well as via variables which are of
direct interest for politics (productivity, inputs, competition, innovations, trade, the
object of outsourcing, and market failure). These effects are assessed on the
principle of value chains by way of four steps.
As concerns the macroeconomic level, the positive effects of applying formal
standards are usually expressed in a percentage from the gross domestic product –
GDP, and are variable depending on the industrial branch. Empirical research has
indicated that in developed countries (those which apply intense standardization
182 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
and standards) that percentage is an average 1% of the GDP. The economic effects
of the standards impact in this case is determined by an appropriate modification of
the Cobb–Douglas production function.
Considering that the previous research of the economic effects of standards
excluded the areas of informal standards (standardization activities which are
carried out by industrial consortia), as well as the economic effects of standard
impact in the area of the services sector, this could be the area of future research.
Thus, not only do standards contribute to introducing order in the given
context, they are also a means which help to speed up the diffusion of innovations,
which in turn has a positive reflection on competitiveness. Analysis has shown that
the higher a level of development of a country, especially technological
development, the more it uses standards and standardization, which has a synergic
effect.
The positive macroeconomic effects of applying standards significantly
override the sum of individual benefits of particular business systems and have a
wider significance for the economy, which justifies standardization in its entirety.
REFERENCES
[1] Blind, K., J. A. (2011). The Economic Benefits of Standardization. An update
of the study carried out by DIN in 2000, Issued by DIN German Institute for
Standardization.
[2] Blind K.,J.A. (2013). The Impact of Standardization and Standards on
Innovation.
[3] Blind, K. (2004). The Economics of Standards - Theory, Evidence, Policy.
Cheltenham, UK, Northampton, MA, USA: Edward Elgar Publishing Limited.
[4] Cowan, R. (1991). ) High Technology And The Economics Of Standardization.
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Technological Development: Technology at the Outset. Wissenschaftszentrum
Berlin für Sozialforschung: May 27-28, 1991.
[5] Gerundino, D., Hilb M. (2010). Economic benefits of standards The ISO
Methodology, WSC Academic Week, 9 July 2010. Geneva.
[6] Haimowitz, J. a. (2007). Economic Value of Standardization. Canada:
Standards Council
[7] ISO. (2013,2). International Organization for Standardization, www.iso.org.
[8] ISO. (2013,3). ISO Methodology toolbox 07 (version 2013-09).
[9] ISO. (2013). Economic Benefits of Standards, ISO Methodolog 2.o.
[10]ISO. (2014). Economic benefits of standards.http://www.iso.org/iso/ebs_case_studies_factsheets.pdf.
[11]ISO. (2012). Economic benefits of standards, International case studies,
Volume 2. International Organization for Standardization, PUB100311.pdf.
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[12]ISO. (2013,1). Economic benefits of standards, The ISO Methodology to
assess the economic benefits of standards, International Organization for
Standardization. www.iso.org, 100288.pdf.
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_Value_Driver_Map.
[14]Krsti?, I., Krsti?, M., Skorup, S. (2012). Metodologija istraživanja
kompetencije menadžera za primenu standardizacije u poslovnom sistemu.
Medunarodna nau?na konferencija MENADŽMENT, 20-21 April, 2012.
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[15]Krsti?, M., Skorup, A., Krsti?, I. (2012). Komparativna analiza strategija
zasnovanih na standardizaciji, kastomizaciji i modularizaciji proizvoda. (pp.
890-897). Bor, Srbija: Zbornik celih radova 8. Majske konferencije o
strategijskom menadžmentu – MKSM2012, 25 - 27 maj 2012.
[16]Krsti?, M.; Krsti?, I. (2010). Standardizacija i mala i strednja preduze?a. XII
nau?no-stru?ni skup, "Sistem kvaliteta za uspešno poslovanje i konkurentnost",
(pp. 171-177). Vrnja?ka Banja, 25-26.11.2010. godine.
[17]Miotti, H. (2009). The Economic Impact Of Standardization, Technological
Change, Standards Growth In France. AFNOR Group.
[18]Popovi?, P., Živkovi?, V. (2011). Osnovi standardizacije i metrologije, Prvo
izdanje,. Beograd: Univerzitet Singidunum.
[19]SA. (2012). Research Paper: The Economic Benefits of Standardisation.
Australia: Standards.
[20]Samuelson, P.; Nordhaus W. (2000). Ekonomija. Zagreb: XV izdanje, MATE
doo.
[21]Swann, P. (2009). International Standards And Trade: A Review Of The
Empirical Literature. Paris, 5-6 October 2009: 2009 Workshop And Policy
Dialogue On Technical Barriers To Trade: Promoting Good Practices In
Support Of Open Markets.
[22]Swann, P. (2007). Standards, Innovation and Wealth Creation. Berlin Lecture:http://www.consortiuminfo.org/metalibrary/detail.php?EID=1267&PID=10&I
D=39.
[23]Swann, P. (2010). The Economics of Standardization: An Update, Report for
the UK Department of Business, Innovation and Skills (BIS). ? 27 May 2010,
Innovative Economics Limited: Complete Draft, Version 2.2.
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[25]ZOS. (2009). Zakon o standardizaciji. „Službeni glasnik Republike Srbije”, p.
br. 36/2009.
184 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
COMPANIES RESTRUCTURING - MYTHS AND
MISCONCEPTIONS
Slavica Andjelic, PhD
17
Nemanja Damnjanovic, PhD
18
ABSTRACT
In the last 30-40 years numerous companies in the world passed through the
various forms of restructuring. In the EU each month is registered 90-100
restructuring of large companies. In Serbia, the restructuring process is quite
muted. EBRD in 2013. evaluate the situation in this area with modest 2 + and no
progress for several years. The aim of this paper is to show how to implement the
restructuring process, as it usually involves the loss of jobs and large investments.
Some companies made a change in the legal form of joint-stock company and
began the process of corporatization. The most common problems in enterprise
restructuring are huge budget allocations, frequent protests of workers, lack of
interest of potential investors. The restructuring process carries a dilemma
whether restructuring is "makeup" and how to attract investors? In the
restructuring process of public enterprises were achieved modest results. Some of
them carried out a process of organizational restructuring, and some companies
made a change in the legal form of joint stock companies and started a question of
redundancy. The output is increasingly seeking out through in advanced prepared
programs of reorganization that are a wish list or realistic plan of action.
Key words: Restructuring, Enterprise, Investment, Economic Development
J EL Classification: G34
UDK: 005.591.4
17
Slavica Andjelic, Graduate school of proffesional studies “Prof. dr Radomir Bojkovi?”, Krusevac,
Serbia, [email protected]
18
Nemanja Damnjanovi?, Graduate school of proffesional studies “Prof. dr Radomir Bojkovi?”,
Krusevac, Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 185
I NTRODUCTI ON
The restructuring is the company reorganization, which aims to achieve greater
efficiency and to adapt to new market and business conditions. Restructuring of the
company resorts to when there are problems with the debt servicing which
threatened its collapse. It can be said that the restructuring process is an attempt to
achieve a turnaround in the business. Turnaround in business must include more
than the debt restructuring and capital structure. If a company is exposed to such
problems where restructuring is considered as best solution, it is difficult to say that
the management that led the company in this not-so- enviable position, will be able
to take him out of it. The company, which is in the restructuring process, needs
external assistance. Help can be in the form of a new management that has
experience in creating and managing changes or consultants who will transfer
knowledge and focus the existing management on the way of changes or even both
of them in combination. A consultant assists company in creating a unique and
sustainable competitive advantage in the market which is based on a successful
business, inside and outside the company. Consultants establish cooperation with
clients to identify opportunities for development and implementation of new and
more effective strategy, business processes, knowledge and systems that create
value for both the owners and the customers and employees.
The restructuring process involves analyzing and formulating new strategies
for business transformation, enterprise evaluation and consideration of various
financial alternatives that are available. The restructuring implementation involves
tasks that should be fulfilled : an analysis of operational performance and dynamic
turnover of funds ; stabilization operations and the elimination of the financial
crisis ; financial obligations restructuring; strategies formulation including
marketing and related plans ; business units rationalization, distribution channels
and levels in the management structure ; development plan for turning operations
and its execution ; analysis of available alternatives for financing and financial
restructuring. Restructuring brings new opportunities and challenges. Some
companies focus on survival, reduce costs and redundancies, and more successful
look outside the economic framework to reach sustainable ways to improve the
business and enter new markets. The time is right to explore all possibilities.
However, in order to do so, first you must perform a thorough and effective
evaluation of their own weaknesses, strengths and external opportunities
considering several alternatives. You do not need to bypass problems such as low
productivity and inefficient operating systems because they can be causes of
business problems. In the restructuring process a new perspective must be based on
the fast and sustainable change that will be of critical importance. All this means
the diagnostic work on defining the strengths, weaknesses, external opportunities
and threats compared to major competitors. (www.poslovnastrategija.rs)
186 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
RESTRUCTURI NG OF ENTERPRI SES
The restructuring involves the sale of public enterprises to the private sector and is
associated with a privatization program of modern economy. In developed economies,
privatization involves: the development of market structures, deregulation and increased
activity of markets, greater capital market activities, sale of public enterprises to private
capital and increasing the economic efficiency. Many governments are not satisfied with
the economic efficiency of monopolized companies or branches, low motivation of
managers in public enterprises, bureaucratization and politicization of enterprises, poor
quality of products and services, high costs and prices. The economy restructuring should
enable greater control, market discipline, efficient capital management and ensure the
political and economic effects (Komazec, 1996, pp. 22-25).
Restructuring is present in more than 50 countries in the "center "," semi-
periphery" and the "periphery" of the world capitalist system. Many international
institutions such as the International Monetary Fund (IMF) and World Bank
(World Bank), after the International Conference on Privatization (1986) especially
encouraged and financed those stabilization programs that introduce restructuring
elements. For a successful restructuring program is required political consensus,
which will confirm that a political coalition that was able to implement a
restructuring program. To economic restructuring oppose all those who see in the
restructuring endangering their monopolistic position. Some believe that the
restructuring will result in the reduction of production and quality of services,
increase prices, others see the danger of leaving the public control over the
production of certain goods, the third point out possible efficiency reduction, fourth
warn of rising unemployment etc. (Komazec, 1996, pp. 22-25).
The company restructuring achieve opposite results: improving products and
services quality, meeting the needs, increasing employment, price reduction etc.
Services and goods produced by the public sector can more effectively take the private
sector. The last ten years, we observe the process of appreciation of the market
structure and competition, improving management and encouraging privatization. The
aim of the restructuring is to create favorable conditions for privatization.
OWNERSHI P RESTRUCTURI NG COMPANY
One of the key causes of the economic system inefficiency of the Republic of
Serbia is not optimal ownership structure of a market economy. This situation in our
economy produces inefficiency and inertia, and it is necessary to implement ownership
restructuring. Ownership restructuring has more capital objectives: First, raise
additional capital; Second, changes management system - instead of unprofessional
and in many aspects of amateur management, the introduction of professional
management; Third, the establishment of a favorable ownership structure of a market
economy; Fourth, the creation of conditions for the capital mobility; Fifth, establish a
Faculty of Business Economics and Entrepreneurship 187
positive identification of the ownership of companies whose employees are co-owners;
Sixth, the establishment of compatible types of companies with businesses in
developed market countries; Seventh, the establishment of efficient and competitive -
type basic enterprise (Vasiljevi?, 1995., pp. 155-159).
Ownership restructuring ways, are" tiled " with many issues: First, the tempo of
restructuring - fast or gradual. Accelerated restructuring produces a system that
implements the goals of equity restructuring, but it is objectively impossible in terms of
material limitations because it causes a huge drop in the value of social capital in high
supply and low demand ; Second, identifying the subject of social ownership of social
enterprises in which extent are the workers, citizens or the state ; Third, if the process of
ownership restructuring should be spontaneous or wih a specific regulatory role of the
authorized state organization; Fourth, the restructuring of the company at book or the
appraised value; Fifth, whether the company should always be an autonomous entity
decisions on ownership restructuring in the selection of models for restructuring ; Sixth,
the restructuring of loss-making enterprises ; Seventh, the role of the so-called
institutional investors (development funds, mutual funds, pension funds, underdeveloped
social security funds, financial holding companies, banks, insurance companies, funds for
employment) ; Eighth, the actual achievements of the ownership and management
restructuring (Vasiljevi?, 1995., pp. 155-159).
OWNERSHI P RESTRUCTURI NG MODELS
The legislation establishes several models of ownership of restructuring
enterprise, which leads into a corporation (a stock company or a limited liability
company). According to Ownership Transformation Law, ownership restructuring
is done in the company and any other form of organization that has social and state
capital under the conditions and in the manner provided by law. Ownership
restructuring object is a social enterprise and the state capital. A company that has
a social or state capital determining by assessment the total capital value, social and
state capital value and the capital value of other owners and the estimated capital is
expressed in shares. Capital value is expressed in dinars and foreign equivalents.
Ownership restructuring is done by selecting one or more models (Law on
Amendments to the Law on Ownership Transformation, 2001. )
1. Sell the company or the ideal part of the company is the model of
ownership transformation in which the company can fully or partially in the
ideal area fined the owner. This model is recommended for small and medium
enterprises ( in terms of regulations on accounting ) and may be particularly
successful in financial support from banks and development funds using
mortgage loans to real estate companies (fixed assets), to secure payment of
these claims. This sale is done usually by public auction or by collecting
offers, and exceptionally with direct negotiation. In this way the company can
be sold to domestic or foreign legal or individual person. Under certain special
conditions, which is a special variant of this model, the company may be sold
188 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
(in whole or at least the prescribed percentage) to persons who take
management of the company, as well as special customer (a world famous
company that introduces a new technology and open access to attractive
markets). Since the subject of sale is a non-equity type of company, agreement
on the company sale on the seller side concludes legally authorized entity
(Fund for Development, etc.). (Vasiljevi?, 1995., pp. 155-159)
2. Sale of stock to raise capital (discounted) is a model of ownership
transformation whose essence consists in the fact that the funds generated in this
way belong to the company, that on this basis increase their capital and change its
ownership structure.
3. Debt conversion into shares of creditors (with discount ) is a model of
transformation which characteristic is to give the workers of the company a
discount to the nominal value of shares that have the right to purchase in a certain
period and to a certain amount. The company's capital is reduced by the amount of
shares sold without a discount (which bought the company workers and other
citizens outside the quotas which can be purchased with a discount, as well as
other domestic and foreign legal and individual persons) (Vasiljevi?, 1995., pp.
155-159).
The state established the companies that have no purpose. The state would
have to return to the social sphere, but the social sphere is solved in profits. No
social problem can be solved with the help of Forge, which will make huge losses,
but the other way around. It is contrary solving social problems. Ownership and
management are two important resources for success in microeconomic. Why
property? Because it still need to get to the property by funds. The money can be
debited and must be repaid. Money is very important, capital is extremely
important, and the management is even more important because there are many
who have invested a lot of capital (www.politickiforum.org.rs).
THE RESTRUCTURI NG MODEL OF THE COMPANY I N
LI QUI DATI ON
Institute of conventional bankruptcy leading cashing of debtor and establishment of
bankruptcy pending among the masses from which creditors are paid, all the less used in
modern conditions. Institute of programmed bankruptcy, opposed to classical, doesn’t
lead cashing of debtor and the suspension of its business activities. Active cooperation of
creditors, the bankruptcy debtor and the bankruptcy court allows the continuation of the
business and financial consolidation of debtor. Objectives programmed bankruptcy can
be achieved in two ways: First, by creating a new social capital from assets of the debtor,
which warrant the fulfillment of the debtor's to other creditors; Second, the financial
consolidation of existing businesses and identifying the owners of social capital
(ownership transformation). This other way of programmed bankruptcy may be achieved
by: downloads debt, debt relief or delay payments through voluntary or forced settlement
and will bind all creditors, except for includes debt assumption, voluntary settlement, and
Faculty of Business Economics and Entrepreneurship 189
voluntary conversion of receivables and guarantees and warranties claims, which is
implemented by special rules and commits only creditors who enter into such a legal
transaction (Vasiljevi?, 1995., pp. 155-159).
FI NANCI AL RESTRUCTURI NG
Money has the biggest influence in business and is an essential prerequisite for
survival. Companies that are in the process of restructuring will need to monitor the
inflow and outflow of funds, as well as their turnover at least once a week, or
maybe every day. Each payment must be pre- checked and delay as possible.
Credit departments in many companies will have to change their mode of operation
and service regulations. They will need to centralize control over the money that is
available i.e. withdrawal of funds from the operating units. The next step is to
optimize the capital structure. With decreasing sales and profits, many companies
have difficulty in paying interest i.e. servicing current debt; improvement of the
balance sheet would certainly be useful (www.poslovnastrategija.rs).
Consensual Financial Restructuring is implemented at the latest prior to the
bankruptcy proceedings. Financial restructuring is re- edit the debtor- creditor
relationship between the company in financial difficulties as debtors and creditors.
Financial difficulties are insolvency or over-indebtedness. Sleep debt is a
temporary suspension of obligations fulfillment and prohibitions startup
performance by the company in respect of creditors who participate in financial
restructuring. Financial restructuring is introduced to re- edit of debtor- creditor
relations, and claims which the debtor and creditor freely dispose of. This type of
restructuring is carried out voluntarily, based on the written consent of creditors
and debtors, with the participation of institutional intermediate.
Creditors who have agreed to participate in a financial restructuring are required to
cooperate with each other in order to create conditions for the debt right to collect and
provide data and information about their assets, equity, liabilities, operations and
business plans, and to prepare proposals of restructuring measures. Conducting the
negotiations with the debtor is the creditor with the largest total claims against the
debtor on the date of application for the institutional mediation of financial
restructuring. Financial restructuring provide to all creditors equal treatment and equal
position in proportion to the amount of their claims. The debtor must provide creditors
unrestricted access to data and documents relevant to financial restructuring, which is
related to its assets, equity, liabilities, operations and business plans (The law on
consensual financial restructuring of companies, 2011).
Financial restructuring can be implemented if it involves at least two local or
foreign banks as creditors. Other than banks, in financial restructuring can
participate all other creditors. During the financial restructuring is introduced
inaction debts. During sleep debt creditors who have concluded an agreement on
debt standstill may not take action to collect receivables, except than filing lawsuits
to collect receivables in order to prevent obsolescence of its claims (The law on
consensual financial restructuring of companies, 2011).
If the creditors and the debtor company during debt standstill period do not
agree on the re- regulation of debtor- creditor relations, creditors when debt
190 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
standstill period expiry re- emphasize the right to initiate the collection of
receivables from the accounts of the company, or the right to start or continue the
procedure (The law on consensual financial restructuring of companies, 2011).
Serbian Chamber of Commerce, at the request of the debtor or one or more
creditors, assisting in the establishment of cooperation between debtors and
creditors, as well as support debtors and creditors in negotiations for successful
completion. (The law on consensual financial restructuring of companies, 2011)
ENTERPRI SES COVERAGE AND RESTRUCTURI NG
ACTI VI TI ES
The restructuring is governed by the Law on Privatization and the Regulation
on the procedure and manner of restructuring companies and other legal entities,
and it is conducted by the Center for the restructuring at the Privatization Agency.
Privatization Law provides restructuring process that preceded privatization. As
subjects in certain stages of restructuring appear Ministry of economy and
privatization, as strategist, the Privatization Agency as operations officer and
controller, a company that is responsible for the accuracy of the presented
information and union companies that should actively participate in the creation of
a social program, the creditors - giving or approve the restructuring program, and
also significant is cooperation with counselors agencies, government institutions
and international consulting institutions. Companies that are in the restructuring
process are not attractive to potential buyers and that is influenced by numerous
factors ( debt, a large redundancy of workers, low productivity, inadequate micro
and macro organizational company structure, technical, technological and physical
obsolescence of assets). These factors have usually cumulative effect. A
restructuring procedure consists the following phases: (www.kombeg.org.rs)
? Initiative for privatization
? Delivery of the prospectus
? Agency announces prospectus
? Interested parties send letters of interest to the Agency
? The agency makes a decision on the method of restructuring and sends to the
company
? The company shall submit to the Agency a restructuring program
? Verification of the program by the Agency
? The company removes remarks
? Implement Restructuring
? The privatization of parts or the whole enterprise
Identification of the company to restructure is affected by numerous criteria :
First, the lack of interested buyers ; Second, the low companies solvency; Third,
the existence of a product range that can stimulate recovery; Fourth, national and
Faculty of Business Economics and Entrepreneurship 191
regional significance of the company. A company that fails to meet one of these
conditions do not meet the criteria for restructuring, and company probably ahead
of bankruptcy or liquidation (www.kombeg.org.rs).
The privatization process is launched with initiative of the competent authority
that is the entity to be privatized, according to the Privatization Law. Privatization
initiative is an act of privatization entity which expresses its intention to implement
privatization and shall be in writing. Privatization initiative is delivered to the trade
union organizations that act in such entity and the employees shall be notified in
accordance with the general regulation of the entity to be privatized. The initiative
for the prospectus shall be submitted to the Agency within five days of its
adoption. The privatization process can be interrupted by the initiative of the
Ministry in charge for privatization and buyers. The initiative for privatization in
entities with majority state capital Ministry in charge for privatization submitted to
the Government of the Republic of Serbia for approval. When the initiative is
initiated by the Ministry of Economy and Privatization or interested buyer deadline
for submission of the prospectus is 7 days (Law on Privatization, 2012).
The company shall first conduct an analysis of the situation which involves
assessment of the viability and success of restructuring, and company can
independently perform or by hiring a consultant. For the analysis are necessary the
data on the company organization, product range, assets and rights of the company,
claims and liabilities, financial ratios and cost structure, the accuracy of which
corresponds to the company CEO (www.kombeg.org.rs).
Assessment report also contains a proposal of restructuring measures. Among
other proposed: First, organizational restructuring status is currently organized as a
single divisible or indivisible enterprise mixed or holding ; Second, the concept of
business units with positive capital whose only problem is insolvency, and business
units with negative equity ; Third, the determination of redundancy as a basis for
the development of social programs. The report will be presented to the Agency,
the management and the union (www.kombeg.org.rs).
Agency announces the prospectus within 15 days of delivery by the company
in newspapers, on TV, the Internet. The prospectus is a document by which a
company presents business, financial and market situation, review the financial
position and is given on the officially prescribed form. Advertising is done in order
to collect data on the number of potential buyers. Potential buyers of its interest in
buying capital in the company give it in writing form and inform the subjects of
privatization and the Agency within the time limit specified by the Agency in the
public announcement. Agency within five days of the deadline for collecting data
on the number of potential buyers notify the subjects of privatization on the method
of sale or the need for restructuring in accordance with this Act. (Law on
Privatization, 2012) After the period of 5 days for collecting customer data Agency
shall decide on the privatization method. Upon receipt of the decision enterprise
shall submit within 90 days a restructuring program or agency itself conducts
restructuring. The decision on the acceptance of the program Agency brings in 30
192 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
days from the date of the program delivery. The restructuring program should
include: (www.kombeg.org.rs).
a) Information about the company and its operations : address, organization,
association with other legal entities, the state of assets and liabilities, number of
employees, product or service program, the structure of expenditure and revenue,
the value of capital and property evaluation possibilities of a successful
restructuring.
b) The status of organizational changes: a merger, division, change in shape,
increase or decrease in capital, selling part or the whole company, the transfer of
assets to another legal entity, agreement or compulsory settlement with creditors,
rehabilitation through debt assumption, the conversion of debt to equity
abandonment of unprofitable operations, changes in staff. The aim of these changes
is repeal of non-profit business unit and profit centers reorganization.
c) Regulation program of debtor -creditor relationships: about restructuring
process companies notify the Commercial Court and the creditors are publicly
notified to submit their claims to the company within 30 days. Company
indebtedness, inefficiency of bookkeeping and conflicting debtor -creditor relation
require the process of harmonization of receivables with all creditors. If a dispute
arises it is solved in a regular court proceedings, but they should do everything to
avoid litigation because of high costs. The claims are agreed with the companies
record. Possible discrepancies are removed and it is formed a preliminary list of
creditors. After the alignment the classification is done on secured and unsecured,
matured and not matured claims. Depending on the degree of indebtedness it is
necessary to make smaller or larger write-off. Program is approved by the majority
creditor or more of them when claims exceed 50 % of the total debt - then it is
considered that the program was adopted. If no agreement is reached, the Agency
may order the second restructuring process, propose modifications to the program,
initiate bankruptcy or independently implement the restructuring.
d) Social program: agency oversees the development of social programs from
the company, the Institute for the labor market, the Ministry of Economy and
Privatization, and the Ministry of Labor and Employment. The company should
give a realistic assessment of the needs for workers. For workers who lose their
jobs should consider the age and qualification structure for selecting the right
measures for status, define redundancies that will occur in the future as a result of
the production modernization. The Government of Serbia has adopted a social
program for workers that are redundant which accounts for about 35 % of
employees in companies undergoing restructuring. For them is provided :
severance pay in the amount of 6000 RSD per year of service, if they decide for a
stand-alone business they will receive another 30,000 RSD, if they are brought
together and established small businesses they will be encouraged with 300,000
RSD, workers who lose their jobs will receive a cash compensation up to 24
months, the program of the new employment, the program of public Works and
preparation for re-training (3). Since the adoption until verification of restructuring
program may take 170-210 days and for the implementation of the program at least
Faculty of Business Economics and Entrepreneurship 193
90 days. There is a real business need to be made operational business plan for the
next 9-10 months from the date of initiative receipt. In order to facilitate the
monitoring of the company opens a new account through which operates in this
period. This change is recorded in the Commercial Court and the company itself is
obliged to notify the business partner that is in restructuring. After making a
decision on restructuring under Article 9 of Regulation company requires approval
by the Agency for the implementation of certain business transactions such as the
disposal of movable and immovable property, the giving and taking of loans,
provision of guarantees for the other subject, commitment to another entity,
structure changes, status changes, investment, the change in employment. The
provided measures should help costs and business efficiency.
(www.kombeg.org.rs)
BASI C RESTRUCTURI NG TENDENCI ES I N SERBI A
Since the beginning of transition in Serbia, through the Agency for
privatization has been privatized nearly 2,500 companies and collection was
approximately 2.6 billion euro's. Although initially achieved significant results, the
privatization tempo has slowed significantly in recent years. Since 2002. by 2008.
average privatized 320 companies per year, while in 2009. until 2011. average
privatized only 47 companies per year. This deceleration of the privatization
process is the result of two factors: first, the remaining companies are relatively
problematic, and second, there was a decline of investor interest due to the
economic crisis (Arsi?, 2012., pp. 133-137).
"Restructuring" status is used to non-privatized and the most problematic
companies in order to protect them permanent from bankruptcy. These companies
are on indefinite status of "restructuring" in order to avoid the troublesome process
of resolving the fate of these companies, or resolving the fate of workers "
employed" in them (Arsi?, 2012., pp. 133-137).
What is the strategic goal of the restructuring process in the national economy
? Economic growth, sustainable development and exports to less indebted, more
debt repayment, and employment (www.politickiforum.org.rs).
There are about 600 enterprises under the jurisdiction of the Privatization
Agency, a number of those 600 are actually small and often attached to local
governments, but there are about 150 in restructuring. Companies in restructuring
employ about 55,000 workers, produces about 1.5 % of our GDP, added value as
we make annually. Employ 5 % officially employed. Their productivity is
extremely low. Most of these companies were offered for privatization, which
failed and now are thinking about the different possibilities of how to use their
assets, employment and production programs combined, free of obligations and
debts. The point is that restructuring in which you pull out some funds and some
employees actually what is everywhere in the world classical bankruptcy or even
liquidation, but you are trying to save as much as you can of partners resources,
194 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
commercial production relations and of course the employees that the economic
value of these companies activities do not lose completely.
Enterprises under the jurisdiction of the Agency for privatization Serbian
society cost about 2-2.5 %, they are all state-owned enterprises, including the
public. We will concentrate only on the companies in the Agency. The agency
costs about 55 million euros per year, that was 2012. In previous years, there were
about 100 direct subsidies and € 220 million per year of new debt. These are
indirect subsidies, because sooner or later someone has to pay. This figure refers to
all companies under the jurisdiction of the Privatization Agency, about 2 /3 to 4/5
of the company officially in restructuring. Accumulated debts of these companies
stand in the nearly 500 million, only to public companies, not to mention debts to
government, which are usually in the form of contributions for pensions, health,
etc.. There are debts that are difficult to capture, and the rest of the healthy
economy make business difficulties. When you help them and protect them you
create unfair competition to private owners who are trying to produce something
that might be in competition with the products of these companies. They are
restructuring since 2001., when the decree was made. (www.politickiforum.org.rs)
From the 179 companies in the restructuring in late August for 26 were declared
bankrupt because that companies do not have manufacturing program that can meet
the needs of the modern market. Companies which declared bankrupt, paid a social
program, and 643 workers that applied was allocated 436.5 million (EUR 3.8
million ). Companies in restructuring cost the state and citizens $ 750 million. In
most enterprises restructuring is five years. Research shows that for the five years
was spent 3.750 billion dollars (2.7 billion euro's) as it dumped money on
companies that generally do not do anything. Many who are responsible avoiding
the question, why tolerated so long these companies, and public secret was that on
this way state buying social peace. It is actually the companies that were once
pillars of development in cities across Serbia. With the closure of these companies,
the state would have to deal directly with 51,000 employees in 153 companies
which were in this case. The Action Plan should be to resolve the status of former
socially owned enterprises, which reports the loss of his business, and citizens cost
about $ 750 million a year. The other group companies are those companies whose
property will be offered for sale. If these companies do not find a partner, its time
to find the privatization through bankruptcy. List of companies in restructuring
process is as follows.
Faculty of Business Economics and Entrepreneurship 195
Table 1: List of companies in restructuring
No. Economic sector Number of
companies
1. Agriculture, forestry and fishing 18
2. Mining 4
3. Manufacturing 63
4. Electricity, gas and water supply 4
5. Water supply, waste water, waste disposal process
control
1
6. Construction 12
7. Wholesale and retail trade, repair of motor vehicles
and motorcycles
3
8. Transport and Storage 5
9. Accommodation and food services 6
10. Information and Communication 4
11. Financial and insurance activities 12
12. Administration and other services 2
13. Health and social care 21
Source: Ministry of Economy of the Republic of Serbia
The table shows the number of companies from different economic sectors that
are in the process of restructuring and soon will be offered for sale. To this list belong
companies located in Krusevac IMK October 14 Lubricant Factory, Branko Perisic,
Star Garments, Oil Factory, a contemporary home and HI Parish. Listed companies
belong to the manufacturing industry and are used to represent the core of economic
development of Rasinski county. The assets of these companies will be offered in the
future and these companies are likely to find a partner. However, if does not, its time to
find the privatization through bankruptcy. You need to put an end to the 150
companies that are restructuring because they only spend money or property. When
Privatization Law was adopted restructuring was barred, suspended or banned for a
while. The law stated that anyone who buys capital, which had been the social, 2-3
years and sometimes even longer, the agency has contracted, that should not change
the activity must not sell the property and buy another, that limited borrowing. The
poor owner has actually had to be a bit tricky (www.politickiforum.org.rs). There was
an opportunity at that time to repair the metal sector, part of the chemical sector and
some other sectors, because they have suffered the most because of the ban on exports
at a time when our economy was completely excluded from the rest of the world.
Extremely important is to them to add some options to do something more creative.
Today, after so many years, these companies can not do business in that field, because
the business is past time. (www.politickiforum.org.rs) Most of the companies in its
current state would not be able to survive in the market and would require intensive
restructuring or resolution through bankruptcy or liquidation. Resolving the status of
these companies requires political commitment, because it is associated with loss of
jobs, but also the resistance of managers and some politicians.
196 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
RESTRUCTURI NG PROCESS OF PUBLI C ENTERPRI SES
There are still two major sectors in state hands, two types of companies. One is
what economists call the law and public companies, and it is largely, though not
entirely, provide some fundamental functions such as power generation,
telecommunications, public utility companies. These are some fundamental
features that are not actually made from private ownership to twenty years ago and
that they have great social and economic importance, and are regulated by a special
law (www.politickiforum.org.rs). Public or state-owned enterprises are state-
owned enterprises. Reasons for the establishment and operation of public
companies are as follows: the state's interest in certain business areas (transport,
energy, telecommunication, telecommunication systems, etc.) Public agencies have
different objectives than private. The most common objectives are: to meet certain
social needs, the achievement of social wealth, perform social functions that
private equity does not show sufficient interest and others (Komazec, 1996, pp. 22-
25). There was a belief that public companies are effective as private. However, the
efficiency of public enterprises is necessary to ensure certain assumptions.
Competitive market structure: Inefficient management of the state financial and real
resources and a lack of individual responsibility, shows inefficient micro-entrepreneurial
function of the state, and the state usually becomes a "bad entrepreneur." Studies have
shown that public enterprises are not sufficiently efficient and competitive to private,
where the profit motive in these companies can not be more prominent.
Competitive property rights: private and public companies differ in all
important elements of proprietary functions. Managers behavior in the public
enterprise is less responsible than in private because the public sector is showing
less sensitivity to risk than private. Markets and market institutions have an
important role in public versus private companies (money market, capital market,
investment risk, sensitivity to interest rates and losses, etc.). In public companies
there is a tendency toward expansive employment, but also facilitates investment
funds, which reduces productivity and efficiency in capital use. Social and political
objectives in the public sector reduces the motivation for profit. It is accepted
stance that because of the above mentioned reasons public enterprises (
economically speaking ) are less efficient than private enterprises.
The commercialization of the public sector : The ownership rights of public
enterprises are not part of the capital markets resulting in lower entrepreneurial interest
developed in the private sector. In all countries, resulting pressures for the privatization
of the public sector, i.e. the maximum possible commercialization and market
guidance of public sector enterprises. This resulting with the programs of deregulation,
privatization and decentralization. Program of deregulation should remove restrictions
that inhibit free behavior of economic entities and ensure increase economic efficiency
and competitiveness of enterprises, and thereby the efficiency of the national economy
(Komazec, 1996, pp. 22-25). In developed countries, the restructuring of the public
sector includes: deregulation, privatization - enterprises, institutions and insurers,
organizational reform and restructuring ( decentralization, the introduction of operating
Faculty of Business Economics and Entrepreneurship 197
mode that is associated with stimulation ), encouraging greater diversity and
competition, changing role of services - from spending services switched to offering
services, the introduction of discipline of the private sector to the public sector - interest
capital is dominant.We can talk about public enterprises, their privatization and
restructuring. Again it is worked on their depoliticization. In Privatization Law was
given a deadline to complete the restructuring of those companies that are now under
the authority of the Privatization Agency and are actually most often still socially
owned. There are also state and the public, it usually does not think of them when it
comes to public companies. These companies are again divided into those that are in
restructuring and those that are not restructuring, but in preparation for privatization.
(www.politickiforum.org.rs) From an economic point of view, the goal of restructuring
is to improve the efficiency of public enterprises, and that will be achieved with the
following measures : repairing of corporate governance, the government should
complete the corporatization of the remaining large public companies, that the
expected benefits of corporatization been achieved, it is necessary to establish and
implement a transparent and professional framework for the appointment of directors
and members of management and supervisory boards of public companies, for large
public companies it is necessary to strengthen the role of the state as the owner,
including the manner in which it manages public companies and supervises their
activities. One possible approach is a clear delegation of authority and responsibility of
a specialized department within the Ministry of Finance, which could help reduce the
adverse political interference and allow them to strengthen the capacity to be focused
and efficient. An important element in the reform of public enterprises should be the
development of an integrated performance management, which would include the
development of " key performance indicators ". Actual results would be publicly
promulgated. It is necessary to introduce hard budget constraint (ie, to prevent the
accumulation of arrears and unwarranted issuance of guarantees) clearly separate the
role of public enterprises in carrying out the role of public importance and their
commercial operations. One possible model are contracts for providing services in the
public interest. Public companies would commit to a certain level and quality of
services of public interest, which are not commercially viable, and it would be
receiving direct compensation from the state. This compensation should gradually
replace all forms of support (eg subsidies for current operations and guarantees of
indebtedness) in addition to the reform of the subvention and the issue of guarantees, it
is necessary to reform the system of tariff determination, as well as appointing
authority so that they are based on actual operating results of the company, measured
by both financial and " key performance indicators " The current system of state help is
fragmented ; it is necessary to develop a unique and comprehensive database for all
forms of state support, that will included public and large state enterprises. Improving
the management of public enterprises would increase the chances of their privatization.
From the standpoint of economic efficiency, it is justified the privatization of
enterprises operating in competitive conditions, such as Telecom, Galenika, Železara
Smederevo and others (Arsi?, 2012., pp. 133-137).
198 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE RESTRUCTURI NG PROCESS OF REAL SECTOR I N
SERBI A
The process of restructuring of the real sector in Serbia is 17 years old. You do
not need to go far in terms of restructuring in other countries and other continents,
it is enough to look what is happening in the real sector restructuring, draw
experience and on that basis bring political and other decisions related to the
restructuring of the public sector. The restructuring of the real sector started in the
90s of the last century. No matter in what form, legal and other, and no matter who
was in power that restructuring process has produced disastrous consequences to
the industry in general. Then government said that companies that will be included
in the restructuring process are the strategic enterprises primarily, that have a
national or regional significance and which employ large numbers of workers, who
have specific problems related for its debts. It was the 1996th year. Criteria were
then eligible, it was thought that the process will go in a positive direction. What
happened was that the management of these companies realized that they had
become white bears of Serbian economy. They did not have to pay various taxes to
the state and no bank or any creditor was unable to collect its receivables. For those
companies are associated the largest corruption scandals in previous 15-20 years.
At the head of the company in a high percentage were the people that were coming
from the government structure, i.e. from a certain political party as long as the
company was vital and as long as it had nothing to steal and nothing to be
dismembered. Because of this behavior, we came to other conclusion, which was
that a number of these companies, and the list of these companies in fact was a
kind of list for the shooting and killing Serbian industry and economy. Now we
hear the announcement of the Government of the Republic of Serbia that this
restructuring process should be completed in June of 2014. What do we actually do
that welcome 2014. with completely clear situation, that we saved and that we
undertake, here we took such and such activities and something we have succeeded
and something not ? It is obvious that this process is very mystified and we do not
know who is going to survive.
All these activities killing Serbian economy, taking place under the cloak of
re-industrialization, creating a new economic development strategy. Why do we
say under the cloak? Because it is a mysterious process. The unions do not
participate in it, although we were advocates of the process to start. We do not see
that professional public is included. On the ministry website you can see that some
people are consulted and some experts were involved, but nowhere you can see
who is this, if it's an institute, an individual, or something else. From 1996., when
the restructuring of the industry began until today have been lost over 200,000
jobs. Hundreds and hundreds of companies were shut down. These companies have
gone through the process of a second and third privatization. It is a walk through
the agony for the people who are in those companies really honestly and fairly
tried, through this process to find a solution for the enterprise that led, although the
majority of those directors were the criminal structures that eventually no one is
Faculty of Business Economics and Entrepreneurship 199
going to account nor responded why they spent hundreds millions of euro's. All
this was done under the cover to preserve social peace and a big concern for
employees. Companies with whom we live and of which we are living, using their
products; were proud of it, because they were kind of brand of our business and
industry. These are the Prva petroletka, FAP, IMT, IMR, Machine Industry Nis,
Electronic industry, Dragon, Wagon Factory Kraljevo, Jumko, Beko, Kluz, all
companies from Leskovac former Serbian Manchester, Zorka, Župa, Rad, Prahovo,
Ljubisa Miodragovi?, Ivan Milutinovic, etc.. These companies will not exist. Some
have gone and some will soon disappear. No one is taken into account, nor will file
a liability. (www.politickiforum.org.rs)
What we have never tried with us, and that's about to let out or parts of assets
or the entire business of a company. It is a form of restructuring in the market
economy. The restructuring consists of good ideas, choosing the best and the
bigger combining the better restructuring. Bigger issue is neoliberals or
justification state that does not longer participate. The Republic of Serbia is a
country of small economy and for its economic policy is very important to
completely separate look at the micro economy and get into the problems of micro
economics. (www.politickiforum.org.rs)
SOCI AL PRI CE OF CORPORATE GOVERNANCE I N SERBI A
We know that will be laid off 80 % of these 55,000 people. They go to the
street, many of these companies will fail and therefore these people will become
completely unproductive, so far at least something is produced. As a major obstacle
to serious solving of unemployment problem is the lack of any long-term
government strategy to solve the national burning question. Through future
employment strategy should put emphasis on solving problem of poor
segmentation of educational backgrounds (Damnjanovi?, 2013., pp 289-315).
Ten years of privatization on the liberal recipe produced some results where
there were sold successful companies. Here and there is a company that was
already in difficulties with private capital and packaged privatization failed, but
how to deepen the difficulties in which companies are so increases the probability
that the liberal response wouldn’t be good. The other side says we can not just like
that put people on the street. We had ten years and there is no answer, there are no
results. Why are they there ? We think it is not true that public property can not be
managed well. We could see that this country has a successful state and socially-
owned enterprises. A good part of the German economy depends on the banks that
are state-owned. Let us not be blind to the fact that the management of the state or
public property, including the social itself did not have to be a failure
(www.politickiforum.org.rs).
When the social, public, state-owned enterprise or organization, show poor, it
is followed by the transformation process. In Serbia, we have " restructured "
companies that we recognized finished state. We do not know if someone took
200 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
organizational functional unit, the reality is restructured, and we recognized. The
moment when on the serious market stage a company sees that they can not cover
the costs, they sit at the table and think what they have and how much to keep, with
what vision and in what they have to put to change something. It is true that at first
some people lose their jobs, it is true that some countries help these people and
some do not, but the one who is given the task of leading an economic unit is
tasked to find a solution. He is seeking for a solution within the resources that he
have and going away. Sometimes the state and public institutions know to work
that. One of the problems are these companies that we have put in the restructuring
of ten years or more. Why do we put them? The intention was to do with them
what was happened in the developed and established market economies to private.
That is a process that is extramural, that it is actually under bankruptcy legislation
and eventually get something healthy or liquidate.
We knew that we couldn’t do that by legislation that we had. It had to be done
under proper legal bankruptcy. This was a pretext and cover the regulator to do
something that was extremely logical, necessary and best for all. Very soon the
effort to really restructure the company has died. Others said it was actually a form
of subsidies, direct and indirect. We all know that this means that one part going to
the salary, which are social security, but largely go to corruption or the fact that no
one is really responsible and really have some hope of creating something. Why it
happened and what now? We are in 1965. abandoned central planning, and then
forget that kind of capacity in public institutions for economic thinking, analysis,
guidance, coordination must be built.
Than from 1965. until 1990. and especially after 1974. there were mechanisms
in Yugoslavia which primarily relied on a quasi- state institutions, economic
institutes, centers, but the State Administration, especially at the national level,
during time absolutely left every effort and thus the capacity to be able to do an
economic analysis. When it happened 2000th we were actually what is left at the
federal level and finish them off, and on the republic level we begun to make two
types of institution: what we proposed by international financial institutions, such
as the Privatization Agency, which should lead as in the private economy, and what
Europe said to us, and that is what is needed to harmonize our law with theirs. No
one was involved in our ability to perform the most basic way of economic
direction of our development, and so over the next ten years.
Today in Serbia we do not have a single institution in the state that follows
what happens in the real economy or research center. All those former that we had,
Institute of Economics, Institute of Economics science, market research, became
consulting firm. People were not guilty. The company management of social
companies and all employees had to develop their own restructuring programs. In
their interest was to don’t do anything, and if it was in their interest, in the short
term, of course they do not know what to do. That's why capitalism succeeds in
restructuring and socialism never. Because when something does not work comes
second owner. The neo-liberal model is not only and dominant, but when carried
on he is working, because you have the opportunity, a lot of capital and because the
sale comes much earlier. No one there is buying the company in a state in which
Faculty of Business Economics and Entrepreneurship 201
our companies was in 2001., and certainly not now. Whatever discussion we make
today, we have to answer to the means, what, and how, if you do not want illiberal
model. If you do not have an answer with what means and how than neoliberals
model is better. Hundred million, two hundred million a year by infecting the rest
of the economy in that it is free of charge, by promoting unfair competition, by the
distracting State Administration in solving problems in a company that can not
solve their own problems, it costs entire society too much. In the end, the children
of people who will one way or another have a social problem of restructuring will
have a better chance to get a job if you do it before, nor if you do it later. It is not
true that it is not possible to do something, it is true that we never began the task of
training ourselves as a society to do something if we do not want to be a neo-liberal
model (www.politickiforum.org.rs).
THE ROLE OF STATE AND ECONOMI C DEVELOPMENT
American economist Moses Naim made the concept of liberal economic
reforms that being implemented in two phases: the "first generation reforms" and
"second-generation reforms". In the first phase, the priorities are to reduce inflation
and economic growth, in the second phase it is necessary to increase the
international competitiveness and maintain macroeconomic stability. Changes in
business strategy in the first phase relates to macroeconomic policy, reducing the
role of government in economic life and the elimination of protectionism. The
second phase of reform is building institutions of a modern market economy.
"Second-generation reforms" involve the construction of market institutions,
increasing the competitiveness of the private sector, health, education and other
public services. Instruments used to implement "second-generation reforms"
among other measures include restructuring different sectors of the economy and
building institutions for the exports promotion (Moses, 1994., pp. 59-63). "Second-
generation reforms" include the construction of legal, regulatory and political
institutions. Some of these measures in order to advance the realization of the "
first generation reforms" (for example, " careful liberalization of the capital
account " is aimed at macroeconomic stability and financial stability, which is
liberalized in the first phase of reforms. During the discussions that are taking place
in the Serbia about the role of state in a modern market economy, it is necessary to
point out what is the role of the state in the "second generation reforms". "Second-
generation reforms" require strengthening the role of the state in terms of
strengthening the regulatory functions of the state, the role of the judiciary within
the" rule of law" and ensuring social security of the population. Within the "second
generation reforms "it's about defining" small but efficient government" in a
modern market economy (Stojanovi?, 2008., pp. 84-88). The group of economists
gathered at the Washington Institute for International Economics, led by John
Williamson in 2003., thoroughly analyzed the economic development of Latin
America and formulate proposals for a new beginning of development and
202 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
economic growth in Latin America. Recommendations are important not only for
the countries of Latin America, but also due to changes in the development strategy
of the former socialist countries that are building a market economy, including
Serbia. Gradually are changing views on the relationship between government and
economic development (Stojanovi?, 2008., pp. 84-88).
A World Bank report in 1997. among other things, says that "the completed
development under the domination of the state, has been completed and
development without the state. Good government is not a luxury but a vital
necessity. Without successful country sustainable, economically and socially
growth is impossible. "In all the above discussion still lacks a definition of the
economic role of the state. The theoretical basis of the regulatory functions of the
state in the economy, is based on the " theory of market imperfections " and "
theory of asymmetric information " market aggregates, for which Stiglitz won the
Nobel Prize in Economic Sciences. (The World Bank, The State in a Changing
World Development Report, 1997., pp. 95-100)
Serbia needs a change of economic philosophy, respectively a new
development paradigm. We need a new concept, an alternative model of
development, but as it is appropriate to "small open economy". It is required a shift
from the "neo-liberal concept" towards the idea of efficient markets and state
regulation. Sequencing of reforms depends on the objective assessment of the
situation in the national economy. We need the export orientation in order to
reduce the dependence of the Serbian economy from the influx of foreign capital,
mainly foreign loans, but also to achieve higher rates of economic growth. To
make this happen requires proper policies, aimed at increasing exports of goods
and services. The most successful transition from a socialist to a market economy
and the best development successes was achieved by those countries that have their
own programs of economic development, which corresponds to the specific
circumstances of a given country (Stojanovi?, 2008., pp. 84-88).
CONCLUSI ON
In Serbia, the restructuring process is delayed and there is no agreement on how
and when to implement it, because the restructuring rule means a loss of jobs or
requires substantial investments. The focus of the restructuring process is the
ownership, organizational and financial restructuring of public enterprises in the real
sector. In the restructuring field of public enterprises were achieved modest results. In
one part of the company carried out a process of organizational restructuring. Some
companies made a change in the legal form of a joint stock company, started a labor
surplus and implemented some forms of financial restructuring. The public sector is
facing problems of overstaffing, above average wages, poor financial results and party
influence. What to do with too large, inefficient public sector and how to implement
the management professionalization? In 2013. number of " in restructuring " has
reached 179 ( 54 000 employees). The basic form of "restructuring" was financial,
Faculty of Business Economics and Entrepreneurship 203
which basically came down to protect the company from payment of submitted bills.
Direct subsidies to the state of 2013. they have reached 3 billion, and through the
support of about 4.5 billion. Companies "in restructuring " have the following
problems : huge budget allocations (but each company of modest means ); frequent
protests of workers ( " all eyes " are upon state employees, often the highest state
officials, who are required (soft ) solution to numerous problems in the short term ) and
the lack of interest of potential investors for privatization. Exit from the crisis are
increasingly asking for the "pre- planned restructuring programs " - a wish list or a real
plan of action.
REFERENCES
[1] Arsi?, M. (2012), Reforme državnih i društvenih preduze?a. Kvartalni monitor,
Beograd No 28 (1-3): pp. 72-85.
[2] Damnjanovi?, N., Somborac, B., Ostoji?, S. (2013), Problem nezaposlenosti
mladih u Srbiji. Svet rada No 5(10): pp 848-856.
[3] Komazec, S.,. Risti?, Ž M. Jovanovi? (1996) „Ekonomija“, Beograd:
Univerzitet Megatrend.
[4] Moses, N., (1994), The Second Stage of Reform. Journal of Democracy, Latin
America No. 4 (10): pp. 80-83.
[5] Stojanovi?, I.(2008), Kraj „neoliberalne ere“ i nova paradigma za razvojne
strategije privrede, posebno privrede Srbije, Razvojne strategije preduze?a i
privrede. Beograd: Univerzitet Megatrend u Beogradu, pp. 283-288.
[6] The World Bank, The State in a Changing World Development Report; IBRD;
Washington D.C.; June 1997.
[7] Vasiljevi?, M., (1995) „Trgovinsko pravo“, Beograd: Savremena administracija.
[8] Zakon o izmenama i dopunama Zakona o svojinskoj transformaciji, „Sl.
glasnik RS“, broj 10/2001. od 14. februara, 2001.god.
[9] Zakon o privatizaciji, „Sl. Glasnik RS“ broj 38/2001, 18/2003, 45/2005,
123/2007, 30/2010, 93/2012, 119/2012.
[10]Zakon o sporazumnom finansijskom restrukturiranju privrednih društava, „Sl.
glasnik RS“, broj 36/11.
[11]http://www.kombeg.org.rs. (30.04.2014.)
[12]http://www.telegraf.rs. (30.04.2014.)
[13] http//poslovnastrategija.rs (30.04.2014.)
[14] http//www.politickiforum.org.rs.(02.05.2014.) Milan Kova?evi?, Država osniva
preduze?a koja ni?emu ne služe, Socijalna cena restrukturiranja javnih preduze?a
[15] http//www.politickiforum.org.rs.(02.05.2014.) Kori Udovi?ki Socijalna cena
restrukturiranja javnih preduze?a
[16]http//www.politickiforum.org.rs.(02.05.2014.) Dragan Mati? Socijalna cena
restrukturiranja javnih preduzeca
[17]http//www.master.fon.bg.ac.rs. (04.05.2014.)
204 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
BUSINESS NEGOTIATION
Vlajko Petkovic, PhD
19
Zorana Petkovic
20
ABSTRACT
This paper describes business negotiation, as an essential part of a business
process. It deals with the concept and notion, goals, participants, forms, course
and phases of negotiation process.
Negotiation is defined as a process of discussion between two or more parties,
which often have different interests, in order to achieve a commonly acceptable
solution.
The goal of negotiation is to reach an agreement, acceptable to all
participants. This is achieved through cooperation and compromise between
parties involved in the negotiation. Negotiation is the art of adapting. It is the art
of giving in order to get more in return.
There are different forms of negotiation: internal and external; intuitive and
rational; positional, principle and opportunistic, and depending on the positions
taken by each party in the negotiation process, there are the following forms: win-
win, win-lose, lose-win, lose-lose, win and win-win or no deal.
The entire negotiation process takes place through two main phases. The first
step involves planning and preparation, and the second stage is the negotiation
process. In some cases, there is the third phase. This happens only when one of the
parties deviates from the agreement reached. Then the negotiation enters a new
phase – repetition of negotiation.
Key words: Negotiation Process, Participants, Goals, Forms, Concessions
J EL Classification: M21
UDK: 005.574
19
Vlajko Petkovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
20
Zorana Petkovic, Higher Educational Institution for Applied Studies in Entrepreneurship, Belgrade,
Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 205
THE CONCEPT OF BUSI NESS NEGOTI ATI ONS
Negotiation is a process of discussion between two or more parties, which
usually have different interests, in order to achieve a common, acceptable solution.
It is based on the assumption that it is a controlled communication process with the
aim of resolving the conflict of interest between two or more reasonable
negotiating parties, where each party can block the achievement of the goal of the
other. If one side cannot block the achievement of the objectives of the other side,
then it is not a negotiation. Negotiation is a special form of social interaction, a life
skill, with differences and conflicting interests. Negotiation means to seek
agreement through dialogue. That is the way people solve their differences and
disputes. This is a basic form of human communication which is often used, but
people are not always aware of it.
There is also the notion that negotiation is a form of interaction in which a
group of subjects with conflicting interests are trying to reach a mutually
acceptable agreement on the distribution of limited resources.
In the simplest terms, negotiation is a discussion of two or more parties who
try to find a solution to their problem. It is an interactive process of communication
that may happen whenever we want something from other people or they want
something from us. It must be borne in mind that negotiations are reached by a
voluntary consent of the negotiating parties and that each party has the right to veto
the final result.
It is recommended that all disputes are resolved by reaching an agreement,
regardless of their nature (disputes between political parties, between religious
sects, between companies and trade unions, among researchers in an institute,
between parents and children, between teachers and students, etc.).
Business life is full of such situations, and all managers must negotiate on
daily basis and seek solutions to problems. Negotiation can be even fun if they
know how to do it. The real problems and difficulties arise if, in most cases,
someone comes out with the feeling that he failed in negotiating.
Factors of negotiations are: subject of negotiation, participants in different
roles (buyer-seller; investor-contractor; owner-manager; lender-borrower;
management-strikers, etc.), goal to be achieved, ambient (location) in which the
negotiations are conducted, general atmosphere, as well as many situational factors
that may influence the outcome of the negotiations and the prospect that the
agreement is reached (Pokrajac, 2008, p. 281-291. This interpretation of business
negotiation significantly relies on the cited text).
Ethical considerations require that one should always be well prepared for the
negotiation process. Preparation is the main factor of the success of the negotiation.
One needs to supply the arguments, data, and even the occasional jokes. One
should not be too hard, unyielding at all costs. Stubbornness is a sure path to failure
206 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
of negotiations. Negotiations can be considered successful only when both
negotiating parties are satisfied with the outcome. Otherwise, our seeming success
may, as a boomerang, return to our heads. Therefore, you should skillfully apply a
strategy that clearly separatesgoals to be achieved and those which can be
"sacrified". Every experienced negotiator must know his goals and hispossibilities,
to be able to determine his expectations. Negotiation is not imposing one’s will,
and does not solely serve to fulfill one’s owninterests.
For each of the phases it is possible to identify and extract certain elements
and their application and knowing them lead to a successful final
outcome.Negotiating skills, therefore, are no longer viewed as an innate talent. In
today's complex and changing environment, it is of course still necessary, but it is
no longer sufficient. Successfull negotiating behavior increasingly depends on the
knowledge of proven theories and goodnegotiation practice. Negotiation should be
regarded as one of the key business processes that increases the value of the
business enterprise and its participants.
GOALS OF BUSI NESS NEGOTI ATI ON
The main goal of negotiations should be a mutual agreement. From the moral
point of view only cooperation and compromise can lead to an agreement
acceptable to all participants in the negotiation. Negotiation is the art of adaptation.
It is, in fact, the art of giving away in order to get something more. In order to
achieve this goal it is necessary to leave various prejudices related to gender, race,
ethnicity, physical characteristics, financial status, religious, political, ethnic, or
other affiliation. All this may limit our possibilities of easier and more effective
communication with other participants, and thus the success of negotiations.
Women are not stupid, all men are not goodnegotiators, good-looking might not be
intelligent, poor people are not less capable. We must not think that way. It may
create a prejudice that it will be too easy or too hard to reach the goal of
negotiation. To reach the goal we must use rational approach and flexibility. If we
use flexibility, crucial feature of successful negotiators, we will always find a way
to dispel prejudice that, during negotiations, may jeopardize the ability to adapt.
All people have their own psychological and mental characteristics that make them
more or less suitable for a successful negotiation. However, the existing human
resources are a reality of any organization and it cannot change overnight. Of
course, in the long term, it is to some extent possible, primarily in the context of
building organizational culture.
Faculty of Business Economics and Entrepreneurship 207
PARTI CI PANTS OF NEGOTI ATI ONS
From the point of negotiation, people as negotiators can be divided into seven
psychological types (for further reading see URL: www.poslovniforum.hr):
? Dominant negotiators are those who want to dominate negotiations. They
use rough tactics and tend to command. They suffer from an inferiority
complex, refute the arguments of others, mostly by being loud. In fact, their
negotiation essentially comes to persuasion, including the extortion.
? Extrovert negotiators have a similar approach as dominant ones. They are
superficial, they use rapid and short negotiation to achieve their goals only.
They devote too much attention to appearance and material environment.
? Introvert negotiators do not confide in anybody, they do not have confidence
in anyone. They rarely agree to negotiations and are very difficult to open.
That is why they need more time and patience from others.
? Innocents are pleasant, polite negotiators. They look like they will do
anything just to end negotiations peacefully. But if negotiations continue for
more than 5 minutes, they turn into dangerous negotiators. On the basis of
calmness and confidence of the other side, they create a feeling that they will
agree on everything. In fact, they turn other negotiators to a subjected
position. In negotiation with them, the other side gets the impression that
they achieved what they wanted, but they soon realize that the agreement
was more suited to the others.
? Actors are negotiators who use all kinds of acting, from a recognizable
image, to unusual behavior. It may seem that they more appreciate the form
than the outcome of negotiations. Yet, they prefer the effects of negotiations
to the form.
? Philosophers are negotiators recognizable by their unpredictability. They are for
something, and then, in a second, they change their mind and are against it. They
look like they do not know what they want, but they know it very well.
? Guardians are conservative negotiators, full of common sense. They believe
in traditional values. Their goal is to have a positive result of negotiations, to
keep both sides satisfied. They do not like persuasion. From the ethical point
of view, they are the fairest.
After enumerating the characteristics of individual negotiators, there arises a
logical question about the main characteristics of a good, real negotiator.
Characteristics of real negotiators are:
? Knowledge (intelligence)
? Negotiating skills (experience),
? Honesty (fairness). They take care of their own as well as the interests of the
other negotiating party.
? Pragmatism. They do not ask the impossible, they set realistic and
achievable goals.
208 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? Flexibility. They use a variety of options, including trade-offs and
compensation from both sides.
? Inventiveness and creativity. They have an idea of the various possible
alternative solutions to problems.
? Visioning. They bear in mind cooperation in the future in order to resolve
the current negotiations quickly, easily and favourably.
TYPES OF NEGOTI ATI ON
There are different forms of negotiations.
1. By the location of negotiation, it is divided into internal and external
negotiation (Jovanovic, 2005, p. 232-233).
Internal negotiation is performed within the company. They include
negotiations with management about current and developing enterprise, about the
distribution of resources between different departments, negotiations between
management and unions over pay and conditions, negotiations of different levels of
managers on how to organize a joint venture, negotiations of managers and their
subordinates about solving of a problem, negotiations and discussions on the
reorganization, etc.
External negotiation is done with stakeholders, with people outside the company.
This is related, for example, to the sale of certain products or services, the purchase of
certain raw materials, negotiations aboutsecuring the financial means,joint work and
realization of certain enterprises, information on integration, etc.
2. Due to the factor on which they base their thinking and reasoning, there are
intuitive and rational negotiation.
Intuitive negotiation is based on emotions, self-confidence, intuition, the
"voice within". In practice, a much larger number of people uses it than it is
commonly believed. When deciding on some minor issues, it can be understood
and justified. But when deciding on some crucial issues, with major consequences,
it can be very risky. Some managers negotiate this way, due to their overload,
overwork or lack of time.
Rational negotiating is based on facts, conscience, understanding, knowledge
and experience. It means calm immersion in fact, reflection and necessary
consultation. It is thorough and much safer.
The main difference between these two modes of negotiation is that intuitive
negotiation is: fast, easy, effortless, automatic, under the influence of emotions
(positive or negative), quite risky. Rational negotiation is: slow, difficult, hard,
logical, conscious, less risky.
3. Given the nature of negotiation,it is divided into: positional, principle and
opportunistic.
Faculty of Business Economics and Entrepreneurship 209
In positional negotiation participants have limited powers. The negotiation
process is usually very long and agreement can be achieved only after hearing all
the controversial details connected to reaching a mutual agreement. These are
usually difficult and lengthy negotiations. Examples of this form of negotiations
are bargaining negotiations between employers and trade unions on wages,
negotiations between buyers and suppliers, territorial disputes, long-term
development programs, and so on.
In principle negotiation, we must first determine the basic objectives and
principles of negotiation and when the participants agree about them, then they try
to reach an agreement. In order to successfully negotiate and obtain an acceptable
agreement, it is necessary to first establish all possible options and to consider each
separately in order to reach an agreement. This is a more favorable form of
negotiation, because both negotiators have a sense of reaching a positive solution
and not a loss, as is usually the case with positional negotiating.
Opportunistic negotiationis a specific form of negotiation that can sometimes
precede positional and principle negotiation, or can be done during breaks or
interruptions, and in the course of negotiations. This form is done indirectly
through secret messages, indirect impact on other negotiators through a third party,
press, media and the like. This type of negotiation can shorten the time of
negotiation, which, especially in positional bargaining, can be very long. It may
also help to avoid interruption or failure of negotiations.
4. Depending on the attitudes that in the negotiation process the two parties apply,
there can be defined different forms of negotiation (Corey, 1994, p. 188-213).
According to Steven Covey, there are the following options:
? Win / win (both sides win)
? Win / Lose (I win, you lose)
? Lose / Win (I lose, you win)
? Lose / Lose (both sides lose)
? Win
? Win / win or no deal (both sides win or no deal).
Win / win. All parties involved are satisfied with the decision and wish to
participate in the activities. There is enough for everyone, and the success of one
side does not mean the failure of others.
Win / Lose (I win, you lose) is the negotiating process in which there can only
be one winner. Most people look at life in this way since birth, which later
becomes their life philosophy. Of course, if we are in a situation that is really based
on a low level of trust and there is a limited amount of resources to divide, there is
a place for this kind of thinking.
Lose / Win (I lose, you win) is according to Covey worse than win / lose,
because in this case there are no requirements, standards, expectations or vision.
People who have this approach to relationships only want to appeal to others. In
negotiating, such an approach is considered surrender. It is used by those whose
only goal is a good relationship with the other party, regardless of the result of
210 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
negotiations. According to Covey, both win / lose and lose / win are weak positions
that are based on the uncertainty and personal insecurity.
Lose / lose (both sides lose) - When both participants have win / lose mindset,
both sides will inevitably lose. Some negotiators so much focus on the opponent, to
become blind to everything but their desire that the other side loses, even if it
means they lose, too. Divorce is a typical example of this paradigm.
Win - People with this mentality do not consider it necessary for someone else
to lose or win, it's irrelevant. The only thing that is important for them is to get
what they want. According to Covey, this is probably the most common way of
thinking in everyday life. There is practically no real negotiation.
Win / win or no deal - "no deal" basically means that if you cannot find a
solution from which we all benefit, it is better to separate as friends and break up
the negotiations. According to Covey, when we have this option, we feel to have
more freedom. We do not have to come up with a solution at all costs, and we can
really try to understand the other side.
All of these solutions can be reduced to two basic forms of negotiation:
competitive (win-lose) and consensual (win-win).
The first form, the so-called competitive negotiation, is based on the principle
"win - lose",which means that one party wins and the other loses. This is a
negotiation that takes the form of competition of two opposing sides, each trying to
impose their interests. Negotiation is hard, conflicting and usually long, often with
an uncertain ending. The most common negotiation endingis when one side
achieves a significant advantage, or when a party deviates from its hard line and
wants to put an end to negotiation. This occurs when one party knows the goals of
the other side and the final point where it wants to go to. It also happens when one
side is pressed for time and wants to finalize the negotiation process.
The second form, the so-called consensualnegotiation, is based on the
principle of "win - win", which means that nobody loses, both parties win. It is a
negotiation that takes into account interests of both sides. To make this form of
negotiation successful, it is necessary that both sides want to reach a mutually
acceptable solution and that they are ready to analyze reasonable and advantageous
solutions for both parties. It is believed that this is the most advantageous form of
negotiations, which leads to the satisfaction of both negotiators.
From the ethical point of view, consensual form of negotiation is the most
acceptable form. In order to be successfully used in practice, the negotiating parties
are advised to follow the following principles.
? Viewing the problem from the point of view of the other side. Trying to
understand the other side and its needs.
? Identifying the main issues involved in the negotiations (not positions).
? Identifying the results that would be perfectly acceptable.
? Identifying possible new options to reach these results.
Faculty of Business Economics and Entrepreneurship 211
From the ethical point of view, negotiation should not be directed solely at
achieving the highest possible economic effects. Sometimes non-economic effects
may be more important. You need to look at long-term goals and interests -creating
trust, advertising, winning the market, understanding the position of a business
partner important to us that can sometimes be unfavorable. This form of
negotiation is from the ethical point of view the most acceptable solution. It arises
in a situation with a high degree of trust among negotiators. It is based on reality,
benevolence and understanding of the situation.
CONCESSI ONS I N NEGOTI ATI NG
Concessions are also an element of negotiation. They have a very important
role in this process. Some even believe that they have a central role. They are the
heart of the negotiation process. If there were no concessions, there would be no
negotiations. If one of the negotiating parties is not ready for any compromise, then
the other must give in, or they will reach a stalemate and there can be no
negotiation.
That is why people who begin negotiations always expect to get some
concessions. They are also prepared for demands from the other side,respectfully.
Concessions are changes of the original offer in the direction of interestsof
other negotiating party, which also reduces its already stateddemands in return.
There are different types of concessions: by size (large, small), by the amount
(much, little), by the time they are given (initial and final stage of negotiation), by
the speed (fast and slow), by the way (all at once and gradual) (Petkovic, (2011), p.
53-55).
Different people (different cultures, religions, customs) have a different
attitude towards concessions. In fact, everyone understands their importance as an
essential element of negotiation. However, they have a different attitude toward the
act of concession. Some believe that we should make concessions but should not
bargain much. Other people enjoy in it. This is especially true of Oriental people.
For example, if one accepts the full offer immediately or acceptsit quickly, easily,
without much bargaining, they are not happy. They think that they did not make a
good job, because they initially set very modest conditions.
In practice, each negotiating party in the beginning of negotiation processstarts
from its own area of interest. This zone has the lowest critical point as the "last
price", "final offer" and so on. This means that they know exactly how far they can
go, and where to stop with concessions. Each side tries to keep a secret about their
interests of negotiation, while trying to find out more about the area of interest of
the other. This once again confirms that the process of negotiation, and the
concession process connected to it, is very complex and requires a lot of patience,
knowledge and skills.
212 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
There is also strategy and tactics. According to our strategy we know that we
must give in, how much, to what extent. Tactically, we estimate when and how to
make concessions.
Negotiation takes place slowly, in stages. In the way of negotiations, there
appear concessions. In the beginning, we give small, less significant concessions,
and later – bigger ones. It is determined when to make the biggest, or the latest
concession. It depends mainly on the behavior of the other negotiating party.
Given the importance and great presence in the business life of the negotiation
process and related concessions, there are manybooks written about it. There are a
number of ideas and suggestions. Some have even attempted to systematize and
make certain models, templates for making concessions. However, just as all
negotiationsand almost all their elements are specific, so is the case with
concessions that accompany them. That is why these specific, diverse and dynamic
processes cannot be shaped into the form of a template. Bargaining and
concessions are among the very few functions in a company, which cannot be fully
standardized. However, this does not mean that some recommendations in this
regard should not be known and used in practice. Such recommendations are
usually the following:
? It is good to plan concessions ahead. Planned concessions are less painful
than those that are unplanned, given under pressure.
? When planning any negotiation, we should leave enough space for
concessions.
? As much as it is possible, we should try to open the other side, to find out its
basic intentions, interests and possibilities.
? For our part, we should give some information so that the opposing party
gets the impression of our willingness to cooperate. However, the
information should not be the most important, but some less important.
? It is good to be the first to give a smaller concession, but last when giving
the biggest concession.
? We should exaggerate every concession given and attach greater importance
to it than it objectively has.
? For each concession given we should try to get something in return - "tit for
tat".
? During the time of negotiation and exchange of concessions, we should
watch the other side’s "body language", non-verbal communication: eyes’
reaction ("eyes are the mirror of the soul"), changing the face colour,
nodding, hand gestures, posture, etc. These thingscan lead us to conclusion
whether the other party is satisfied and whether the end of negotiationsis
near.
Faculty of Business Economics and Entrepreneurship 213
ETHI CS OF NEGOTI ATI ON
Ethics as a science of morality, among other things, determines the moral
norms that prescribe what is moral and what is immoral, what is allowed and what
is forbidden, illegal. There are certain norms that are universal, applicable to all
civilized societies. There are also certain moral norms that are related and are valid
only for a particular culture, religion, nation. There are even narrower moral norms
that are connected only to specific structures, professions-ethics of doctors,
professors, judges, customs officials, military officers, sportsmen, etc.. There are
individuals who, because of their origin or the educational system, have moral
standards that are lower or stricter than the officially accepted moral norms.
Problems in business arise when some individuals accept the principle that
everything that is not forbidden is allowed. There especially arise problemsin
international business, where members of different religions, cultures, nationalities
meet. Such is, for example, the case with corruption, which is in the countries of
Europe or America considered not only immoral but also illegal, compared to most
countries in Asia, Africa and South America, where it is almost legalized.
Such is the case with signing and respecting of contracts. Countries of Europe
and America are for strict observance of all provisions of the contract, while in
most countries of Africa and Asia (China, Japan, Korea) a contract regulates only
general cooperation, and details must be further discussed.
That is also the case with tax paying or tax evasion. In the first group of
countries, tax evasion is considered one of the gravest violations and is strictly
punished. In a significant number of the second group countries, it is considered
normal that companies do the book-keeping in three ways, in order to avoid taxes.
There are differences in terms of basic elements of business ethics and
corporate culture: respect of deadlines, punctuality of arrivals at business meetings,
relation to business gifts and so on.
Because of these differences, there are also differences in the process of
negotiation. The first group of countries has maximum respect for the ethical
principles of negotiation, while others believe that it is not immoral to use unethical
means (fraud, bluffing, lying, etc.). Some countries even think that there is no
negotiation ethics that should be respected, but one should be free to negotiate and
use all means available.
Today, under the influence of globalization process, individual countries and
continents connect and the negative views are seen as relicts from the past and are
increasingly being overcome.
For normal and successful completion of the negotiation process, it is essential
that there is adequate environment. The environment should be characterized by an
atmosphere of trust, safety, relaxation, good faith, optimism, hope of success.
Participants in the negotiations should be on an equal footing, free, without any
pressure, obligations and restrictions. They should freely expose their views and
protect their interests.
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Such a good negotiating environment can sometimes be compromised.
Disturbance is usually seen in the form of disorganization, tension, hostility and too
friendly atmosphere (Petkovic, ibid, p.55-62).
Disorganization manifests when one or both of the negotiating parties come to
negotiations unprepared or under-prepared. It is clear that without a good
preparation there can be no successful negotiations. In this case,one should stop
disorganized meeting and immediately start organized preparation for the meeting.
Having done the necessary preparation, one should define the agenda, start the
meeting and work strictly according to the previously defined agenda.
Tension may occur due to various reasons. Again, the most common is
inadequate preparation. If everybody is aware of it and agreesthat negotiation
process is not performed in a satisfactory manner, tension can be relieved by
having a break, by informal conversations, so that people get to know each other
and relax, and then start over the negotiation.
Hostility also occurs when negotiators are not prepared, when agenda and
goals of the meeting are not clearly defined. Negotiator who initiated the meeting
should take more decisive position, and find and analyze reasons that created
hostile atmosphere. When things are clear, hostile atmosphere will evolve in a
friendly and relaxed, and conditions for normal work will be created.
Too friendly atmosphere is created by inexperienced negotiators. Because of
the importance and responsibilities of the job, as well as lack of knowledge and
experience, and sometimes lack of information, negotiators are afraid, they don’t
have confidence. To cover it up, they try to be overpolite. They forget that
professionalism has its principles. Kindness cannot be a substitute for
professionalism. It can only emphasize it and make it more elegant, more
acceptable. Someone with more experience should direct and animate the
negotiations.
To avoid these things from happening, a proper preparation of the negotiation
process must be done beforehand.
The negotiation process is not simple and routine communication, it involves
certain preparations (cognitive, mental, psychological, ethical, etc.) ofnegotiator,
designing a specific environment and overall atmosphere of the negotiations. This
may significantly affect not only the ease of negotiations, but also their very
outcome.
The results of research show that the success of a meeting is directly related to
its preparation. This relation is obvious, so that for every hour of the meeting "face
to face", you need to spend at least four hours preparing it. Of course, it is not just
about professional and mental preparation, but also a complete environment of
negotiations. It is very important that the space is adequate, clean, ventilated,
sufficiently heated or cooled.
The location of negotiation is very important, too. It may be at one or the other
negotiating party or at a neutral location. Every possible solution has its pros and
cons.
Faculty of Business Economics and Entrepreneurship 215
It is believed that the party who is hosting has a slight advantage. As
negotiations are conducted in its premises, it has the advantage of all the data at
hand. A negotiator can use a break to consult with his/her superiors. But the other
side also has certain advantages. It does not have to make the final agreement, it
may seek to delay the final decision because of the need for consultations. Also, it
is good for it to see the whole potential and infrastructure of the other company,
which will give it a more complete idea for bargaining and the next cooperation. It
is also very important to see the contacts, the credibility of a person who is
participating in the negotiations. This information will be valuable for taking a
position in negotiations.
To make negotiations successful,we should pay attention to the following:
Never be late for negotiations. Negotiations begin at the moment when you
appear (you send the first messages by your looks, your movement, your clothes,
your perfume). You don’t have much time to leave a good first impression.
Negotiations are based on communication (sound, words, voice, movements, body
language - presentation equipment, video beam...).
Be well informed. Before negotiations, a good negotiator should gather all the
necessary information on the subject of negotiations, on the other party, metaphors
and quotations that can be used. The strongest weapon of negotiators are facts that
are used to win the other side. Therefore, you should collect the data and store
them methodically, and you should know where to look for information or data that
may be needed during negotiations. Professional negotiators write down all
interesting things that they notice or read every day, and at the end of the day, they
arrange them. It is good to write down the thoughts that you hear during a
conversation. You should make your files and archive them.
Creating trust. You should believe in yourself and have self-confidence and
thusyou will make others believe that you are the person to be trusted. Present
yourself as a reliable, responsible, organized and efficient person who knows how
to achieve your goals, but also make for others possible to achieve their. It is easy
to fool someone who trusts you, which is immoral. But, usually, it can happen only
once. Lost trust is difficult to regain.
Creating a sense of importance. Someone can call this praising, some flattering
and some obsequiousness. You should praise other people in their presence. Find
something in the other party which you truly admire and praise it to the skies.
Flatter other side and entrust them to a secret to show them they are trustworthy.
Mix the bitter with the sweet, because if you put a little bit of criticism with praise,
it will sound more honest. Compare them with somebody better, for example, tell
them they are a lot smarter than someone who has a better car or more money, etc.
Creating a relaxed atmosphere. The feeling of confidence and personal
significance can lead to relaxation and pleasure. Relaxed and happy man will more
easily accept the terms of the negotiations and allow you to reach your goal. Create
a relaxed atmosphere. Choose a calming color of walls, soft music in the
background. Your voice should be calm, comprehensible and pleasant.
216 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
For clear communication during the negotiation, try to apply some of the
following tips. Let your speech be comprehensible, attractive and reliable. You
should watch the other negotiator, maintain eye contact, but avoid the hypnotic
stare. Avoid interrupting other negotiators, allow them to express themselves fully
and freely. Then ask questions related to facts, to clarify your observation.
Analyze nonverbal signals. Do not let the voice, looks or gestures of other
participants influence the content of the message. In the case of conflict of interest,
keep calm, professional attitude. Always let the other participants know that their
goals are important to you and that you strive to find a solution good for
everybody. Your behaviour must be believable, andalways acceptable.
Do not take gifts to negotiations, or if you feel the other side may be happy for
them, then let it be only symbolic signs of attention. Expensive gifts can be
understood as attempts at bribery, which weakens or completely hinders your
negotiating position.
UNETHI CAL BEHAVI OUR AT NEGOTI ATI ONS
In addition to the normal, ethical, professional behaviour, there is also
unethical behaviour. In some cases, there is a lot of such behaviour, and sometimes
it is rare. In civilized, more established, reputable environment, such behaviour is
almost non-existent, and in primitive communities there is a lot of it. Sometimes
even more than we can imagine and expect.
With the advent of various crises and generally turbulent business conditions,
there appeared such behaviour even in some countries where it wasunusual before.
This also happens when there is a meeting of negotiators from different
civilizations, cultures, religions, value systems.
Unethical behaviour in negotiations are manifested through various forms of
the so-called "dirty" negotiating tactic. These are different forms of manipulation,
bluffing, lying. There are various forms of exploitation and abuse of power,
pressure, ultimatums, blackmail, creating a stalemate or different types of
impediments.
It starts with creating a bad negotiating atmosphere and endswith extortion of
certain demands or fulfilling some interests. This is most often achieved through
one of the following forms (Petkovic, ibid, p. 63-65):
Creating an atmosphere of mystery and expectation. Do not let the other
negotiator put you in a state of anticipation, creating an atmosphere of secrecy and
mystery. Ask for an explanation of what you do not understand, even ten times if
necessary. You have the right to get accurate and clear picture of what you
negotiate about.
Using pressure. Pressure may be seemingly decent, and it can be rough. The
most common form of pressure is force. Threatening a business partner, standing
too close to his face, and other forms of force are a thing of the past. Psychological
Faculty of Business Economics and Entrepreneurship 217
pressure may force someone to agree to some conditions, but dominant negotiators
will always look for something more. In this case, you must learn to say no, stand
up to the pressure and say no, I do not accept it.
Creating discomfort. Discomfort is the kind of pressure which some
negotiators use to force the others to promptly stop the unpleasant situation, often
accepting unfavorable solutions.
Creating anxiety. Dissatisfaction with the opinion of others about ourselves,
over-reliance on the opinion of others, fear and uncertainty can make you withdraw
into yourself or start a conflict with the environment. Anxiety, as such, is fertile
ground for taking control over you, in which case you lose negotiations.
Creating the feeling of dependence. Dependence on other people's opinion and
expectations of their acceptance creates fear of the person whom we depend on,
leading to uncertainty. Therefore, make a list of the people whose opinions you
care about, and do not allow others to influence your mood.
Creating fear. Fear affects behaviour, blocking the nervous system and makes
us more sensitive to other people's goals. The most common fears of negotiators
are fear of oneself (of being ignorant, of not be able to understand the other sideand
fear of physical reactions) and fear of the other side. Fear of being ignorant starts
from ignorance of the issues you negotiate. Being unprepared and lack of
knowledge can lead to the fear of unknown and from the start, put a negotiator into
a subordinate position.
The notion that you are in a subordinate role will block you with fear that takes
control of your nervous system, and can lead to serious physical consequences, as
panic attacks. Negotiation requires knowledge and constant readiness to creative
improvisation in expressing ideas and thoughts. Negotiations should be planned,
using notes or plan of presentation canprevent fear. A good negotiator relies on
facts, good presentation, confident demeanor and proper use of voice. All this leads
to self-confidence that is a prerequisite for the successful presentation of thoughts.
Creating and encouraging aggression. Aggressiveness in negotiations usually
occurs as a result of fear and insecurity. Negotiators who have high expectations
and low opportunity of exercising them, will resort to aggression to achieve their
goals. It is possible that they will try to induce aggression in others in order to
make them subordinate to their goals. Aggressive man may lose control and react
without thinking about the consequences. And that is what your opponents want,
they want you to make a decision without thinking about the consequences. If your
opponents affect your behavior,they will also affect your decisions.
Creating stress. Stress is often a consequence of shorttime and set deadlines,
regardless of whether you specify them or someone else imposes them on you.
People who have fast pace of life become victims of pressure and they do not have
enough time for all that must be done in a day. Stress also appears when the other
side tries to make you think or act faster than you are capable of (insisting on quick
decisions, quickchange of proposals or opinions). Under such pressure, you may
make wrong decisions, which is the goal of your opponent.
218 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
You should avoid stress with good self-control and using some of the
relaxation techniques. You should never try to negotiate when you are tired and
discouraged. Do not accept the imposed pace of negotiations if you cannot follow,
but choose the pace that suits you.
THE PROCESS OF NEGOTI ATI ON
Although a lot of different elements are present in negotiation, the key element
is still speech, language, word, meaning, as means to communicate our intentions
and hinder intentions of others.
If, during negotiations,you notice that respondents do not understand or do not
think too much about the topic of conversation, you may use louder speech,
movement and gestures to make them more observant. In case the other side is
intelligent and interested in the topic, you should apply a more subtle approach,
filled with, for example, humor, communication that you will convey with the
appropriate tone, words and movements. If your voice is flat, without expressive
and powerful tones, you will give away the impression of fear and insecurity, or
even indifference. The lack of coordination between thoughts and voice makes an
indecisive voice, which occurs mostly with the negotiators that are not sure what
they are talking about. The cure for such things are notes, which should help the
speakers establish a connection between the brain and voice.
Style of speech is a matter of personal choice of each negotiator. It involves a
good knowledge of grammar, knowledge of word meaning and skill in formation
of sentences. Your respondents expect of you expertise, knowledge of grammar,
which is visible from the correct stacking of words in a sentence, proper separation
of words and proper use of pause. Rhetorical pauses retain the attention of
participants, dramatic pauses stress the importance of that part of speech, and
pauses for air intake must not interfere with fluid discussion. Fast talking
negotiators, who are in the habit of talking before they could think, are difficult to
understand and people may get the impression that they just want to quickly wrap
up the negotiations. Do not accumulate unnecessary words in the debate in order to
impress others as a learned person. Some will see it as your attempt to get more
time because you do not know what to say at that moment. Your speech should
contain no unnecessary words, it should be clear, simple and easy to understand,
but never dull.
The meaning of words. In preparing for negotiations you must be sure that you
know the meaning of words you may use. Do not use Latin words to impress the
other side if you did not check their meaning in a dictionary. The first time such a
mistake may be taken as a cute mistake, but frequent errors could lead to negative
reactions of the other side. Do not use words that, in the local vernacular, may have
a different meaning (often vulgar and offensive).
Faculty of Business Economics and Entrepreneurship 219
Caring for the listeners. Tactics is important for a positive acceptance of your
thoughts and arguments. Do not use the speeches and presentations that cannot be
doubted, you could create aversion. The message will be the same, but the level of
non-acceptance will be lower. Make easy for your listeners to understand your
words by repeating important facts. Avoid mumbling and repeating various
catchphrases like hmmm, well, you know. Use warm and gentle humor and good
spirits. Speaking without listening is a one-way street. Hearing someone does not
mean listening. Physicalact of listening does not mean that words are understood.
Sometimes the pace of listening is faster than pace of speaking, soa listener has
time for his own thoughts, and sometimes the listener estimates that there is no use
of listening and rather amuses him with his own thoughts.
When does not-listening occur? When your listenerkeeps silent and listens to
you, but shows no signs of interest, does not comment on your words or ask
questions.
People often listen to only what is interesting to them, and sometimes they
listen to what they do not want to hear. During the debate, while listening to others,
some people use that time just to clear their minds and start talking as soon as they
have the chance, and sometimes they listen lurking for the wrong words of their
opponents. Remember that those who do not know how to listen, cannot make
others listening.
What to do when your listeners indicate that they hear you, but they are not
listening to you? If they are not interested in what you are saying, change the
subject. If you speak monotonously,try to sound more emotional and speak faster,
and if you start repeating yourself or you speak too much about yourself, again
change the subject. Turn not-listening to listening so that your listener understands
your message and beginsspeaking and you start listening.
Show to the other speaker that you are listeningby repeating and describing
what he said, ask questions, try to guess his thoughts and emotions, ask for
explanations of what you do not understand, and finally repeat his key thoughts and
messages.
The effectiveness of listening will significantly increase if we decide in
advance that we will listen, if we do not talk too much during negotiations, if we do
not use silence to think, we keep eye contact, ask and repeat the main ideas, we do
not interrupt speakers and avoid movements that interfere with negotiations. We
should not forget that good negotiators listen carefully, and the best negotiators do
not miss anything. During negotiations, we must not allow others to interrupt us
with comments, but listen what we want to listen, think in advance and model our
expectations to it and not let emotions put us out of balance. If necessary, check
things two or more times, ask appropriate questions, so that the other speaker sees
that we are interested in the solution. Only if we receive the full message,we will
be able to handle it effectively. People have two ears and one mouth, so let it be the
proportion in which they should be used. So, it is more important to listen than to
talk.
220 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Sense of time is an extremely important characteristic of a good negotiator.
We need to know how long our speech will be before we begin to speak. Some
negotiators deliberately ignore the sense of time in order to create pressure on the
other side. When negotiating, you should plan no more than one quarter of the time
for introduction, two quarters for the main part of negotiations, and the last quarter
for conclusion. Even in negotiations that are not limited by time, you should not
leave more than 10 minutes for conclusion. Always leave several safety minutes
for unpredictable situations during discussion. Do not show before the other party
that you are a slave to time, so as not to leave the impression that negotiations are
done worrying more about the time than the other negotiator and the actual
situation.
Other processes such as phonics, panting, trembling of voice, facial spasms,
etc.are complex processes in which there is a series of voluntary and involuntary
movements, which are not desirable. The movements that we do unconsciously
(frowning, licking of lips, loud swallowing, brows lifting, twitching of lips) - reveal
some of our internal states. Theother negotiator will understand this as our
weakness and a sign of crisis, and try to use it against us. In this regard, the
extremely negative phenomena are tics - unpleasant, little, repetitive, involuntary
movements.
Dressing and personal hygiene. We make our judgment about our surrounding
on the basis of what we see. Although it is said that clothes do not make the man, it
still says a lot about him or her.
The fact is that your satisfaction with someone's appearance will affect your
opinion. And the other way round, if you make a good first impression, you are on
a good way towards the successful completion of negotiations. There is no second
chance to leave a good first impression. So, you should not wear brown shoes with
a black or dark blue suit, checked tie with a striped shirt, white socks, cowboy hat
and so on. But also, do not wear your best evening suit if you negotiate with people
who can barely make ends meet, with union strikers, and so on. Although it goes
without saying, it is good to be reminded on the importance of personal hygiene
(clean and tidy nails, washed hair, no bad breath, neat beard and mustache, etc.),
which can only contribute to your self-confidence, and with that – easier and more
successful negotiation.
PHASES OF NEGOTI ATI ON
Every day there is a growing number of participants in business processes,
especially the key ones: owners, managers, entrepreneurs, advisors, etc., which
puts them in a variety of negotiation situations with different participants. It is
expected that they have a considerable degree of communication skills and all the
other prerequisites for successful negotiation. This is the reason that modern books
on this topic pay more and more attention to knowledge and skills of negotiation as
Faculty of Business Economics and Entrepreneurship 221
a subtle "tool for fine-tuning" of the business enterprise towards its successful
realization.
So, negotiation cannotbe obligation or privilege of only a few selected and
certified, high-quality, experienced professionals, as it used to be. Today, the
strategic emphasis is placed on managing relations with suppliers, customers,
contractors, financiers, government bodies, etc. Therefore, negotiation has become
a very important process that has a direct impact on the achievement of the overall
business success of companies.
The important novelty in the approach to negotiation is systematics, which,
among other things, means that the negotiation process is broken down into several
phases: the preparation phase, the course of a negotiation and the phase of revision
of a negotiation. In this way, using different techniques and resources,we try to
achieve maximum possible additional value to each of negotiation activities.
The first, and, in the opinion of many scholars and practitioners, the most
important phase of every negotiation process, is the preparation and planning of the
negotiations. Generally, this stage is attributed to the 70 to 90% of the success of
the negotiation (Tomaševi?-Lišanin, 2004), Negotiation - business process that
gives value, "Proceedings of the Faculty of Economics in Zagreb," year 2, No. 1).
At this stage, it is necessary to identify and study the available sources of
information, and based on that, determine our needs, demands and possibilities,
and based on them better evaluate business partners with whom we negotiate. In
this phase, we should take into account not only organizational demands, but also
individual characteristics and demands of people who participate in negotiations.
We should not forget that although negotiators present their organization and try to
achieve specific organizational goals and needs, each of them enters negotiations
asa person and an individual with their own individual needs. Both of these should
be taken into account. A good analysis of needs of both sides means the ability to
find a "win-win" solution that will satisfy both sides,no matterthey enter
negotiations because of the existence of disputes or conflicts of interest.
Prior to the commencement of negotiations, we need to determine how far we
can go in giving away, i.e. what we want or can give to the other party. In addition
to the established baseline, maximum, minimum and target positions,we should
predict expected objectionable points that could be crucial or problematic in the
way of coming to an agreement. Also, it is necessary to consider and anticipate
different scenarios and alternatives, acceptable, positive outcomes. The
collaborative, or "win-win" approach to negotiations, preparations should include a
lot of seemingly minor issues such as the determination of location for
negotiations, setting equal number of members of the negotiating team, the ambient
and seating arrangements of negotiators, refreshments and short breaks, with the
aim of making stimulating and pleasant atmosphere for all parties involved. In the
“win-lose"approach,in preparation they usually think about various traps, the ways
of expressing power, as well as the number of available manipulative techniques
that will help with the attempt to put pressure and be dominant over the other side.
222 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
The second phase of negotiations is a negotiating session or meeting where
two sides are trying to reach an agreement. At the beginning of the meeting it is
necessary to do everything to reduce tensions and to express intent and desire for a
successful outcome of the negotiations for all parties involved. A negotiating
session essentially consists of the following elements: coordination and
confirmation of the agenda, expressingof views on the situation, presenting
concrete proposals, debate about the differences in viewpoints, arguments,
discussing possible solutions, compromises and attitudes that are the subject of
possible exchange, and finally negotiating the terms of exchange. When making
concessions, we should always try to get the same value in return not agree on what
we do not like. Otherwise, we may come out of negotiations with badresults. At the
beginning of a negotiation process, we should clearly express what we want to
achieve with negotiations and ask the other side to do the same. It depends on pre-
approved tactics what will be presented as our wishes. It is usual not to expose
immediately the desired final goal, but to start with bigger demands and thus leave
some space for later concessions and negotiations.
When both sides express what they want,it is time to start with the
determination of similarities and differences. To make the process of negotiating
effective, it is necessary to start with solving the problems and discussing the
differences. It usually starts with smaller problems and differences.
The discussion should lead to reducing the differences and preparation for
making compromises. From minor differences and easily solved problems, we
should go to bigger differences and larger problems and solve them patiently and
slowly, one by one. It is very important that the atmosphere in the negotiations is
good and that both sides are willing to make compromise and agreement.
Compromise is a key part of the negotiation process, and without it there can be no
agreement.
The aim of the whole process of negotiation is to reach an agreement. The
agreement is finally reached when all differences are removed and all important
issues are resolved. To end the process of negotiation effectively,the agreement
needs to be formulated accurately and clearly and written downin a form of a
contract, agreement, etc. This is especially important and necessary in larger
purchases and sales, realization of major enterprises, etc. In this case, drafting of a
contract requires special procedures and time for completion.
The third phase occurs only if there is a unilateral deviation from agreement of
one of the negotiating parties or there appear new or changed circumstances which
require new, redefined negotiations.
When concluding this review of the business negotiation as an important
element of the business process, i.e.the factor of the success of a business
enterprise, we should say that each business subject should see negotiation as a
powerful tool, which can help to win a lot, but also lose a lot. It is always important
to set clear goals, to aim high, to target the best possible result. Therefore, in
addition to being clear, business objectives must also be attainable and time
Faculty of Business Economics and Entrepreneurship 223
determined. Also, the more we know about the other negotiator,the more we can
accomplish during negotiations.
Finally, it should be noted that there is an opinion,which is empirically
confirmed, that knowledge contributes 15% to the success of a negotiation, and the
ability to communicate 85%. In addition, verbal communication contributes only
45%, and non-verbal communication 55%.
CONCLUSI ON
The entire process of the analysis shows that business negotiation is a heart of
every business process. Without negotiation, any human activity would be
impossible. That is why negotiation is sine qua non of every human activity and
survival of society in general.
With the development of human society in economic and civilizational terms,
the negotiation process becomes more complex, complicated and sophisticated.
Therefore, we must constantly study, develop and improve negotiation process.
Studying and developing of the process of business negotiation must be
conducted from different aspects, and above all, from technological,
organizational, economic, socio-psychological and ethical aspects.
In the future, human society will primarily develop as an information society.
In advanced information society, negotiation in general, and, especially, business
negotiation will be faster, better, more complex, and also more humane and
dignified.
224 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Corey, R.S. (1994), Seven Habits of Highly Successful People, Belgrade:
Grme?.
[2] Jovanovic, P. (2005), Management, Belgrade: Faculty of Organizational
Sciences.
[3] Pejanovic, R. et al. (2012), Economics and Ethics, Business and Moral,
Belgrade: Proceedings from the First International Conference Employment,
Education and Entrepreneurship, Volume 2, Employment, p.165, Faculty of
Business Economics and Entrepreneurship.
[4] Petkovic, V. (2011), Business Ethics, Belgrade: Faculty of Business Economics
and Entrepreneurship.
[5] Petkovic, V. (2009), Entrepreneurship, Belgrade: Faculty of Business
Economics and Entrepreneurship.
[6] Petkovic, V. (2006), Management of Human Resources, Belgrade: Faculty of
Business Economics and Entrepreneurship.
[7] Pokrajac, S. (2008), Entrepreneurship, Novi Sad: Alpha Press.
[8] Tomaševi?-Lišanin, M. (2004), Negotiation - business process that gives value,
Proceedings of the Faculty of Economics in Zagreb. Zagreb: Faculty of
Economics, year 2, No. 1.
[9] Vukosavljevic, D. (2012), More Flexible Approach to SMEs Financing and Job
Creation, Belgrade: Proceedings from the First International Conference
Employment, Education and Entrepreneurship, Volume 2, Employment, p.233,
Faculty of Business Economics and Entrepreneurship.
[10]http://www.poslovniforum.hr, 25/4/2014
Faculty of Business Economics and Entrepreneurship 225
AMICABLE FINANCIAL RESTRUCTURING OF
COMPANIES IN REPUBLIC OF SERBIA
Vladimir Kozar, PhD
21
Ana Opacic, PhD
22
ABSTRACT
Legal consequences of an amicable financial restructuring of business
companies are important both for the corporate debtor and for its creditors.
According to the order of creation, they can be divided into those that act
independently of the outcome of the restructuring process and prior to its
completion such as debts stand-by (moratorium), and those that are arising from
the conclusion of the contract on financial restructuring, following the successful
completion of the procedure. An effective protection measure of creditors’ claims
during the moratorium is limitation of powers of statutory representatives in the
form of mandatory countersignature. The consequences arising from the
conclusion of the contract are reflected, primarily, in redefining of debtor –
creditor relations, foreseeing of repayment in instalments, modifying terms of
maturity, interest rates and other terms of the loan or collaterals. An important
result is the retention of the order of priority of mortgage.
Tax incentives for the banks and other creditors, the participants in the
financial restructuring, are provided. Absolute right transfer tax was abrogated on
the transfer of shares in legal entity and securities, which refers to the measures of
converting receivables into capital of the business company – corporative debtor.
Contract on financial restructuring constitutes legal grounds for the
reclassification of banks’ claims, thereby reducing the mandatory reserves for the
potential losses and has a positive effect on capital adequacy of the banks.
Key words: Financial Restructuring, Sebts Stand-by, Mortgage, Tax
Incentives, Reclassification of Claims
J EL Classification: K12, K34, K41
UDK: 658.16 347.728.1
21
Vladimir Kozar, Special adviser to the NLB bank a.d. Belgrade and Assistant professor of the
Faculty of Law for economy and justice of Commercial Academy University in Novi Sad, Serbia,
[email protected]
22
Ana Opacic, Faculty of Business Economy and Entrepreneurship, Belgrade, Serbia,
ana.galjak@gmail,com
226 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Amicable (out-of-court, non-insolvency) financial restructuring of a company
represent first in a series of measures which are possible to conduct in relation to a
company which has financial difficulties. Order of measures in such situation in
our legal system is the following: amicable (out-of-court, non-insolvency)
restructuring; plan of reorganization prepared in advance; bankruptcy
reorganization; bankruptcy (Kozar, 2011, pp.8). These institutes, except
bankruptcy, represent ways and forms of recovery of companies, which can be lead
under institution of recovery which is developed for years, and now is not existent
in our legal system (Mi?ovi?, 2011, pp.54).
Law on Amicable Financial Restructuring of Companies (Official Gazette of
Republic of Serbia, 2011, a.18) regulates conditions and manner of amicable
financial restructuring of companies in Republic of Serbia, which is conducted
prior to initiating of bankruptcy proceeding at latest.
Purpose of amicable financial restructuring of companies is timely recognizing
and resolving of financial difficulties and creating conditions for normal
continuance of business activities of a company (corporative debtor). Amicable
restructuring of activity of a company occurs in case that relevant creditors assess
that survival and recovery of a company which has financial problems is
economically justified and manageable, that it should be able to recover and
continue sustainable long term business, and that relevant creditors, primarily
banks, will be able to acquire favourable settlement of their claims. This way, a
company which faces financial difficulties is granted survival and continuance of
business, and at the same time the bankruptcy proceeding is avoided regardless of
the fact that there is long term inability for payment as reason for bankruptcy from
articles 11 and 12 of the Law on Bankruptcy Proceedings (?uki?-Mijatovi?, 2010).
Legal consequences of amicable financial restructuring of companies reflect in
inactivity of debts, which is a result of a proceeding, and if a proceeding is
completed successfully, an agreement on financial restructuring is being
concluded, which defines relations between debtor and creditor.
MEASURES FOR PROTECTI ON OF CLAI MS OF CREDI TORS
DURI NG MORATORI UM
One of base presumptions for successful managing of amicable financial
restructuring of companies is temporary suspension of obligations fulfilment, and
prohibition of initiating of execution proceeding, i.e. postponement of fulfilment of
obligations of corporative debtor towards creditors, primarily banks (delay of
payments, moratorium) (Kozar, 2012, pp. 226). “Delay of payment” is temporary
suspension of fulfilment of obligations, including suspension of execution during
Faculty of Business Economics and Entrepreneurship 227
enforced collection from the account of a company, and prohibition of initiating of
execution proceeding, i.e. postponement of execution towards company concerning
claims of creditors who participate in financial restructuring.
During financial restructuring, delay of payments (moratorium) is being
established, including all executive court decisions, other executive decisions and
legal authorizations, as well as tax, customs and bill of exchange debts from Article
47 of the Law on Payment Operations (Official Gazette of SRJ no. 3/2002, 5/2003,
Official Gazette of RS no. 43/2004, 62/2006, 111/2009, 31/2011), which has legal
effect as from the date of conclusion of an agreement on delay of payments (delay
of payments is regulated by Article 12 of the Law on Amicable Financial
Restructuring of Companies). Therefore, the law does not prescribe moratorium as
legal consequence of process of amicable out-of-court restructuring, which would
incur by operation of law, it is necessary that creditors conclude with a debtor
relevant agreement.
Beside general prohibition of conducting acts which could prevent or
aggravate collection of claims of creditors who concluded agreements on delay of
payments, which is integral part of legal principle of acting in a good faith (Kozar,
2012), it is possible to prescribe special measures of protection of creditors’ claims
in the agreement on delay of payment.
Although it is non-mandatory element of an agreement, prescribed by law –
Rule on Contents of the Agreement on Delay of Payments, allowing stipulation of
special measures of protection of creditors’ claims represents very significant
instrument which contributes to reduction of business and legal risks of creditors
who engage in a project of amicable financial restructuring, whose outcome cannot
be predicted with certainty, with a moratorium as its mandatory phase (Kozar,
2012, pp. 619).
Measures of protection of creditors’ claims include in particular: limitations
and follow-up of payments, settlements of liabilities, debts and other transfers and
transactions of debtors, such as prior or subsequent consent (approval or
permission) or appointing a person authorized for countersigning of documents by
which debtor makes monetary transactions during delay of payments, including
arrangement of matter of responsibilities of this person (Article 3 paragraph 1 point
2 of the Rule on Contents of the Agreement on Delay of Payments). This way, the
autonomous use of various institutes is allowed, by which creditors can control and
follow business of a corporative debtor, e.g. new debts by raising loans, giving
guarantees, establishing mortgages, and concluding other agreements and
businesses which would, by the means of accepting new main or accessory
obligations, burden assets or worsen position of creditors who participate in a
process of amicable financial restructuring.
Prior or subsequent consent (approval or permission) as a measure of
protection of creditors’ claims from an agreement on delay of payments, has
certain similarities with an institute of consent for conclusion of an agreement from
Article 55 paragraph 1 of the Law on Obligations, which prescribes when a general
act of the legal entity specifies and in the registry stated that his representative may
228 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
conclude certain contract only with an approval of an authority, the approval may
be given previously, concurrently or subsequently, unless otherwise stated in the
registry. The difference is that in the first case there is no limitation prescribed by
the general act of the corporate debtor, nor to be registered at the Company
Registry. Also, when it comes to restructuring the limitation refers to the corporate
debtor as the legal entity, and the limitation from the Law on Obligations refers to
its statutory representative. In the first case consent (approval or permission) is
given by the creditors, and not debtor’s authority. Therefore there is a question of
scope of this limitation towards a third, conscientious person with whom the
corporate debtor would conclude a contract or any other legal business on new
debt, without the consent of the creditors provided by the agreement on delay of
payments. In any case, such limitation should be registered so it could have the
legal effect on third parties.
The appointment of the person authorized to countersign documents with
which the debtor performs financial transactions during the delay of payments, as a
measure of protection of creditors’ claims, has greater legal and practical
significance, considering that such person is obliged to deposit its signature at the
bank that maintains the account of the company, and limitation of the countersign
of the documents is registered at the company registry (Article 3 paragraph 2 and 3
of the Rules on Contents of the Agreement on Delay of Payments).
The Rules on Contents of the Agreement on Delay of Payments uses the term
“countersignature” and this limitation ties to signing of “the documents with which
the debtor performs financial transactions during the delay of payments”. There is a
question to which legal transactions the limitation of “countersignature” refers to.
The term “financial transaction” is similar to “payment transaction” which is being
used in the Law on Payment Operations, thus we come to conclusion that by
agreement on delay of payments one can appoint person authorized for
countersigning of payment orders, which the corporate debtor issues to its bank
with instruction for transfer of funds from its account to the creditor, or to the
account of the creditor ( In Article 4 paragraph 1 of the Law on Payment
Operations provides that the payment transaction can be approval transfer or debit
transfer, while in paragraph 3 of the same article defines that the approval
transaction of the payment transactions initiated by the debtor, which payment
order is issued to its bank and given instruction for transfer of funds from its
account to the creditor, or to the account of the creditor.) However, since the terms
“financial transactions” and “payment transactions” do not match “countersigning
of the documents” as the measure for protection of creditors’ claims who
participate in the procedure of amicable financial restructuring, they may be
applied to other legal transactions which govern or provide cash flows, and above
all to conclusion of the new loan agreements, granting guarantees, the
establishment of mortgage, which would worsen the positions of the creditors, the
participants of the restructuring. In this way the creditors are enabled to perform
direct control and influence the business of the corporate debtor, above all through
substitutionary function, and indirectly to the management function.
Faculty of Business Economics and Entrepreneurship 229
There is a question of scope of this limitation towards a third, conscientious
person with whom the corporate debtor would conclude a contract or any other
legal business which performs the financial transaction, without the countersign of
the person appointed by the agreement on delay of payments, when the limitation
of the countersign of documents is registered at the company registry.
The Company Law (Official Gazette of RS“, no. 36/2011, 99/2011) in article
33 stipulates that the representative is obliged to act in accordance with limitations
of its powers determined by the company acts or decisions of the competent
company authorities (paragraph 1). Considering that the signing of the agreement
on delay of payments precedes the decision of the competent company authorities,
it is clear that the representative is obliged to act in accordance with limitations of
its powers which are determined by the agreement on delay of payments, and with
limitation of countersigning of the documents. However, the Company Law does
set the rule that towards the third parties registered limitations of the powers of the
representative (and thus those unregistered) have no legal effect (Vasiljevi?, 2011,
pp.78), stipulating that the limitations to the authority of a representative cannot
stand out to third parties (paragraph 2).
Exceptionally this law prescribes that the limitations of the authorisations of
the representative in terms of the mandatory countersigning can be pointed out
towards third parties, if they are registered in terms with the law on registration
(paragraph 3), so in accordance with the Law on Procedure of Registration at the
Business Registers Agency (Official Gazette of RS, no. 99/2011). This is a
limitation that consists of joint closing a deal by multiple representatives and
procurators (countersignature) (Vasiljevi?. 2011, pp. 78).
Cited provisions of the Company Law on the effects of the registered
limitation of the countersignature towards the third persons, may be applied to the
effect of limitation of “countersigning of documents with which the debtor
performs financial transactions during the delay of payments” as the measure of
protection of creditors’ claims in the procedure of amicable financial restructuring.
This indicates that the “countersignature”, i.e. mandatory co-signature, is the only
effective limitation of the debtor, i.e. authorisations of its representative, of course
provided that it is registered at the Company Registry.
The Rules on contents of the agreements on delay of payments allow
contracting other measures of protection of the creditors which are not explicitly
stated in them, in accordance with the principle of freedom of contracting, which
must be within the limits of the mandatory provisions, public order and good
practice (The principle of the autonomy of choice from the Article 10 of the Law
on Obligations).
In addition to the measures of protection of the creditors’ claims, the stated
rules enable contracting additional security instruments, i.e. guarantees and
warranties.
230 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE CONTENTS OF THE AGREEMENT AND MEASURES OF
FI NANCI AL RESTRUCTURI NG
The financial restructuring ends with the agreement on financial restructuring
(Article 14 of the Law on Amicable Financial Restructuring of the Companies).
The debtor is obliged to deliver the agreement on financial restructuring within the
two days from the day of conclusion to the company registry for registration of the
note on existence of such agreement, pursuant to the principle of legal security.
The agreement on financial restructuring is being notarised at the Serbian Chamber
of Commerce and recorded in a special book (according to Article 12 paragraph 2
of the Rules on terms and manner of institutional mediation in amicable financial
restructuring of the companies).
The agreement on financial restructuring may contain the following measures:
prediction of repayment in instalments, amendment of maturities, interest rates or
other terms of the loans, credits or other claims or security instruments;
encashment of the assets or transfer of such assets for the purpose of settling the
claims; discharge of the debt; execution, amendment or waiver of the lien; giving
additional security instruments by the debtor or third parties, including granting
warranties and guaranties; converting claims into capital; conclusion of the loan
agreement; issuance of the securities; other measures significant for realisation of
the financial restructuring.
Therefore, the law does not prescribe mandatory contents of the agreement on
financial restructuring, but lists the most often measures as an example, and allows
the possibility to contract other measures significant for realisation of the financial
restructuring.
The listed measures of the amicable financial restructuring are similar to the
measures within the homonymous institute of the privatisation process (Kozar,
2008, pp. 64-70), as to the measures for realisation of the plan on reorganisation
from Article 157 of the Law on Bankruptcy.
Faculty of Business Economics and Entrepreneurship 231
LEGAL NATURE OF THE AGREEMENT ON FI NANCI AL
RESTRUCTURI NG AND EFFECT OF THE I NNOVATI ON TO
THE TERMI NATI ON OF THE PLEDGE
By its legal nature, and depending on the measures envisaged for the
realisation of the financial restructuring, the agreement has legal nature of a
settlement from the Article 1089 of the Law on Obligations (e.g. if it provides
repayment in instalments) or innovation from the Article 348 paragraph 1 of the
Law on Obligations, if the existing obligations are replaced by new ones (e.g. if
there is a conversion – conversion of claims into capital) (Kozar, 2011, pp. 56).
In addition, it is possible to combine settlement and innovation, because by
settlement one can perform innovation of the obligation, and in such case the
guarantor is freed from liability for its fulfilment, and the pledge given by a third
party ceases (Article 1095 paragraph 1 of the Law on Obligations). If by a
settlement where was no innovation of the obligation (such as e.g. partial discharge
of the debt or repayment in instalments), the guarantor and third party who gave its
thing to a pledge remain still bound, and their liability can be reduced by
settlement, but not increased, except if they have agreed with the settlement
(Article 1095 paragraph 2 of the Law on Obligations).
However, when it comes to the effect of the innovation to the termination of
the pledge in general, even the pledge given by a third party, and not the debtor of
the secured claim, the Law on Amicable Financial Restructuring of the Companies
in article 15 makes a significant exception in relation to the cited general rule of the
obligation law by establishing the rule of continuity of the lien, and as it is in the
case of the mortgage, so when the claim is secured by a pledge on movables and
rights (Kozar, 2012, pp. 236-250).
SUBSTITUTE OF THE “SECURED CLAI M WHI CH I S BEI NG
RESTRUCTURED” “BY A RESTRUCTURED SECURED CLAI M”
The Law on Amicable Financial Restructuring of the Companies distinguishes
two types of the claims: “secured claim which is being restructured” and
“restructured secured claim”. Even though the used terminology may lead us to
think that it is a play on words, it is important to distinguish the difference between
these terms and two types of claims which are marked by them. For “secured claim
which is being restructured” is replaced by “restructured secured claim”. In this
way the legislator gave the restructuring unambiguously legal nature of the
innovation, because one claim which existed between the creditor and the debtor is
now replaced by new claim (Kozar, 2011, pp. 59), which corresponds to the
definition of the innovation from the Article 348 paragraph 1 of the Law on
Obligations which regulates substitution (innovation) by prescribing that the
232 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
obligation ceases if the creditor and the debtor agree to replace the existing
obligation with a new one and if new obligation has different subject or different
legal grounds. Article 350 of the same law, within the regulation of the effects of
the substitution, in paragraph 1 it is prescribed that by an agreement on substitution
the earlier obligation ceases and a new one comes into being, and in paragraph 2
that with previous obligation the pledge and warranty also cease, unless the
guarantor or pledger agreed otherwise, and in paragraph 3 the same goes for all
other secondary rights that were related to the previous obligation.
In order to avoid the stated unfavourable effect of the substitution (innovation)
in the financial restructuring to the security instruments, which would come to
occur according to the cited general provisions of the Law on Obligations, unless
otherwise was agreed with the pledger that with previous obligation do not cease
pledge or warranty, the Law on Amicable Financial Restructuring of the
Companies establishes continuity of the lien. The claim which is being restructured
and which is secured by a mortgage, i.e. lien on movables and rights (hereinafter
referred to as: a secured claim which is being restructured), is replaced by a
restructured secured claim, to that the mortgage, i.e. lien on movables and rights, as
secondary right related to the secured claim which is being restructured, continues
to exist as the security instrument of a restructured claim, in accordance with the
agreement on financial restructuring (Kozar, 2012, pp. 236-250). Real estate
cadastre, or other registry of lien, performs the amendment of the data of registered
mortgage, i.e. lien on movables and rights, according to the amount of the
restructured secured claim, and other terms of the restructured secured claim. The
mortgage, i.e. lien on movables and rights, represents a security instrument of
restructured secured claim to the amount of secured claim which is being
restructured, and in case that the amount of restructured secured claim is reduced in
relation to the amount of the secured claim which is being restructured, the real
estate cadastre, or other registry of lien performs the amendment of the data of a
registered mortgage, i.e. lien on movables and rights.
KEEPI NG THE ORDER OF PRI ORI TY – CONTI NUI TY OF LI EN
Considering that in the amicable financial restructuring of the companies
several creditors, above all banks, simultaneously conclude with a company as
debtor agreement on debt restructuring, which implies redefinition of the debtor-
creditor relations between the corporate debtor and creditors, this agreement
replaces the existing obligation with a new one, which, accordingly, has a new, i.e.
different legal ground. In terms of the mortgage, and in accordance with provisions
of the Law on Obligations, the Law on Mortgage and Law on State Survey and
Cadastre, as well as accompanying by-law regulations, due to this substitution of
the obligation, the creditor whose claim is secured by a mortgage, in lack of stated
special provisions on continuity of lien from the Law on Amicable Financial
Restructuring of the Companies, would be forced to re-register the mortgage in the
Faculty of Business Economics and Entrepreneurship 233
public records, which would make him lose the order of priority of already
registered mortgage. Having in mind a greater number and difference (often and
conflict) of interest of creditors, in practice it is rarely contracted the ability to keep
the existing mortgage in case of substitutions (innovations), in terms of the article
350 paragraph 2 of the Law on Obligations. The same problem would exist in
relation to the liens on movables and rights. Because of all this, the creditors, and
especially banks, would be discouraged to participate in amicable corporate
restructuring of debts, which would lead to bankruptcy of many companies and
other forms of businesses, which could financially recover and continue business,
and which could end in bankruptcy and discontinuance of business.
In addition, the costs of establishment of new mortgage are additional
demotivating factor for creditors, especially having in mind provisions of tariff
number 8 item 15 of the Tariff of fees for service provision, which is an
accompanying part of Rules of the amount of fees for service provision of the
Republic geodetic authority, in which it is prescribed that for registration of the
mortgage the fee is paid, which depending from the amount of secured claim,
amounts from 20,000 up to 150,000 dinars. However, in tariff number 21 it is
prescribed that for the change of data in registered mortgage (creditor, debtor,
repayment period, interest rate, grace period, currency) fee in the amount of 2,600
dinars is paid. In this way significantly lower fee is prescribed for service of
change of data of registered mortgage, and established the “change of data in
registered mortgage” as a procedure, i.e. process operation.
TAX I NCENTI VES
The Law on Amicable Financial Restructuring of the Companies does not
contain specific provisions on incentives in the process of financial restructuring,
but points to other legislation, which proposing and passing is in the jurisdiction of
the National Bank of Serbia, the Ministry of Finance and the Ministry of Economy
and Regional Development (Kozar, 2012, pp. 85-90). The tax incentives for
financial restructuring, in terms of tax exemption of debt discharge with the
creditors, and possibilities of reprogramming of debt based on taxes and other
public revenues, are determined by law which regulates tax on corporate profit, i.e.
law which regulates tax procedure and tax administration, while the National Bank
of Serbia in regulations from its jurisdiction regulates incentives for financial
restructuring (Article 16 of the Law on Amicable Financial Restructuring of the
Companies).
Amendments to the Law on Property Tax from 2009 (Article 8 of the Law on
amendments and supplements of the Law on Property Tax, Official Gazette of RS,
no. 5/2009) deleted item 3 in article 23 paragraph 1 of the basic legal text, which
provided that the tax on transfer of absolute rights is payable during the transfer
with compensation of the share in the legal entity and securities. Thusly measures
of conversion (replacement) of claims in the company’s capital (the corporative
234 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
debtor) were exempt from this type of tax, which represents significant incentive
for amicable financial restructuring of the companies, and for bankruptcy
reorganisation (Kozar et al., 2013, pp. 267). Such solution was maintained even
after the latest legislative amendments from May 29
th
2013.
Also, amendments and supplements of the Law on Corporate Income Tax,
which is now called Law on Profit of Legal Persons amended Article 22a
paragraph 1 so that at the expense of expenditures in the tax balance of a bank an
increase of adjustment of claims of balance sheet assets and reserve for losses on
off-balance sheet items are recognised, which are in accordance with internal acts
of a bank stated in the balance sheet at the expense of expenditures in the tax
period, up to the amount determined in accordance with regulations of the National
Bank of Serbia, which provides tax incentives for banks as creditors of a corporate
company with financial difficulties.
Regarding the process tax law, amendments and supplements of the Law on
Tax Procedure and Tax Administration provide incentives for amicable financial
restructuring, so that by added Article 74b it is prescribed that the competent
authority may, upon written and reasoned request of the taxpayer who had
concluded an agreement on financial restructuring, in accordance with the law that
regulates amicable financial restructuring of the companies, approve delay of
payments of tax debt in equal instalments up to 60 months, with possibility of
using delay of payments for the first 12 months. Approval of the delay of payments
of tax debt terminates the statute of limitations for collection of the tax debt whose
deadline was postponed, and time for which the delay of payment was approved
does not count into the statute of limitations, which means that in that period there
is a delay of statute of limitations. Minister or person authorised by him decides on
delay of payment of tax debt – based on written proposal of the head of the
organisation of the Tax Administration based on the principal place of business, i.e.
place of residence of the taxpayer – except for the source public revenues of the
local government units, when the decision is brought by the mayor or the municipal
president or person authorised by him, the local government units to which the
public revenues belong to whose collection is being delayed (Article 73 paragraph
3).
In this way, through delay and enabling the payment of the tax debt in
instalments, with grace period of 12 months, the same tax incentive was introduced
for amicable financial restructuring, which in the previous legal amendment was
provided in the procedure of the bankruptcy reorganisation. Additional benefit for
taxpayers who conclude the agreement on financial restructuring is that it does not
require provision of the security instruments when the amount of debt whose
payment is delayed up to 500,000 dinars (Article 74b paragraph 2 regarding the
article 74 paragraph 6 of the Law on Tax Procedure and Tax Administration).
Faculty of Business Economics and Entrepreneurship 235
RECLASSI FI CATI ON OF THE RESTRUCTURED BANKS’
CLAI MS
New Decision on Classification of the Bank Balance Sheets Assets and Off-
Balance Sheet Items (Official Gazette of RS, no. 94/2011, 57/2012, 123/2012,
43/2013, 113/2013), and especially its amendments from December 2012
envisaged incentives for reclassification of banks’ claims based on concluded
agreement on financial restructuring.
The said decision determines which balance sheet assets and off-balance sheet
items are classified, criteria for classification of the banks’ claims, and the manner
of calculation of reserves for estimated losses which may arise based on the bank’s
claims, and for adequate and efficient management of the credit risk to which the
bank is exposed in its business (item 1). The bank’s claims are classified into
categories A, B, V, G and D, according to the criteria for classification described in
item 20. Into the most favourable category A stand classified claims from debtors
with whom, based on the estimate of the financial status or creditworthiness, no
problems are expected, then claims secured by first-class security instruments (cash
deposit, pledge on gold along with fulfilment of some other conditions) and claims
according to which the debtor settles its obligations timely or is overdue no longer
than 30 days. In the most unfavourable category D stand classified claims from
debtors in liquidation or bankruptcy, then claims from debtors who do not act
according to the adopted plan of reorganisation, and claims according to which the
debtor is overdue longer than 180 days and similar.
Reserve for estimated losses is calculated on the gross carrying amount of the
claim, depending on the classification of the claim (item 34), and from 0% of the
claims classified into category A, 2% of the claims classified into category B, 15%
of the claims classified into category V, -30% of the claims classified into category
G and 100% of the claims classified into category D. Therefore, mandatory reserve
for estimated losses ranges from 0% up to 100% of the claims, depending on the
classification. The more favourable classification of the claim, the lower mandatory
reserve for estimated losses is, which represents deductible item from the banks’
capital (The amount of the required for estimated losses per balance sheet assets
and off-balance sheet items is deductible from the basic capital – item 12 paragraph
1 under 6 in relation to the paragraph 3 under 4 of the Decision on the Adequacy of
the Capital of Banks,Official Gazette of RS, no. 46/2011, 6/2013 and 51/2014) and
affects adversely the adequacy of the bank’s capital. The bank is obliged to
maintain a prescribed amount of capital for the sake of stable and safe business, or
fulfilment of the obligations towards the creditors, in the amount not lower than the
dinar equivalent of 10,000,000 euros. Capital adequacy indicator represents ration
between capital and risk-weighted assets. The National Bank of Serbia prescribes
the manner of calculation of capital and adequacy of the bank capital (Article 21
paragraphs 1 and 3, Article 22 paragraph 1 and Article 23 paragraph 2 of the Law
on Banks, Official Gazette of RS, no. 107/2005, 91/2010).
236 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Therefore, concluded agreement on financial restructuring is a basis for more
favourable reclassification of the banks’ claims, because delay is calculated to
subsequently agreed maturity date, and thusly accomplish more favourable
classification of the claim which is being restructured, or restructured claim. Item
23 paragraph 4 of the Decision on Classification of Bank Balance Sheet Assets and
Off-Balance Sheet Items it is provided that the provisions of paragraph 1 and 2 of
this item, which regulate calculation of the delay in payments according to the
original maturity date, are not applied to the restructured claims or to the
restructured claims which are restructured for the second time, only if the second
restructuring is made in accordance with the law which regulates amicable
financial restructuring of the companies, under the condition that the debtor, for at
least three months, i.e. three consecutive months made the payments according to
the agreed plan of repayment of its debt with delay no longer than 30 days. In order
to literally apply the cited provision, it would be desirable to provide in the
agreement on financial restructuring that the debtor in the first three months pays a
smaller part of the debt at once or in three instalments.
If the said conditions are met, the delay in collection of restructured claims is
calculated according to the subsequently agreed maturity date, which means that
according to the amended maturity dates from the concluded agreement on
financial restructuring.
This way the claim based on which the debtor was in delay longer than 180
days, and which was classified into the most unfavourable category D, based on the
agreement on financial restructuring is reclassified into one of more favourable
categories with far lower rate of calculation of the reserve for estimated losses.
Mortgage on real estate is considered an adequate security instrument, in terms
of the item 29 of the Decision on Classification of Bank Balance Sheet Assets and
Off-Balance Items only under the condition that the debtor settles the claims
secured by this mortgage with delay no longer than 720 days, or that the debtor is
not in bankruptcy, i.e. acts in accordance with the adopted plan of reorganisation in
terms of the law which regulates bankruptcy. The bank’s claims secured by
adequate security instruments can be classified into one category more favourable
than one in which it would be classified. That means that in case of delay in
payment of the claim secured by mortgage, which is longer than 720 days, the
claim is classified into the most unfavourable category D, with obligation of
calculation of the reserve for estimated losses from 100% of claims. The same
situation occurs when the debtor is in bankruptcy or if the debtor does not act in
accordance with the adopted plan or reorganisation. The obligation of reservation is
increased for 70% of claim secured by mortgage, in relation to the category G, for
which the prescribed rate is 30%.
The conclusion of the agreement on financial restructuring with repayment in
instalments, amended maturity dates, interest rates or other loan terms, at the same
time eliminates permanent inability to pay as the reason for bankruptcy from
Articles 11-12 of the Law on Bankruptcy, and thusly the opening of bankruptcy
proceeding over the debtor, which represents a criteria for classification of bank’s
Faculty of Business Economics and Entrepreneurship 237
claims into the most unfavourable category D with obligation of calculation of the
reserve for estimated losses to 100% of the claim.
This way the company in financial difficulties is enabled to survive and
continue business, bankruptcy is avoided, and banks as key creditors are given
incentives in terms of the more favourable classification of the claim and lower
obligation of the calculation of the reserve.
In item 2 paragraph 2 the definition of “restructured claim” is given so that it is
prescribed that by restructured claim, in terms of this decision, it is considered a
claim regulated by the agreement which redefines debtor-creditor relations of the
bank and debtor due to his financial difficulties. In addition, this agreement must
fulfil three cumulative conditions, namely: 1. that it replaces all balance sheet
claims from the debtor, or their greater part, 2. that it substantially changes terms
under which this claim is approved (under which it is especially considered
prolongation of the term for repayment of the principal or interest, reduction of the
interest rate or amount of the claim, substitution of the fulfilment, as well as other
changes of conditions which facilitate debtor’s position) and 3. that adequate
program of financial consolidation of the debtor is adopted simultaneously. In case
of debtor who is a natural person – that the bank, based on creditworthiness of the
debtor, estimated that the debtor is able to settle its obligations towards the bank
regularly in the following period, reduced the amount of the claims for the amount
of deposit placed in the name of securing claims in case that this deposit is placed
and contracted that the debtor after performed restructuring shall not be further
indebted.
Therefore, the stated three conditions must be cumulatively fulfilled in order
for the agreement on financial restructuring from Article 14 of the Law on
Amicable Financial Restructuring of the Companies represent valid legal basis for
reclassification of claims which is regulated by it, by redefining debtor-creditor
relations between bank and debtor, and thusly considered restructured claim in
terms of the Decision on Classification of the Bank Balance Sheet Assets and Off-
Balance Items (Kozar, 2011,pp. 66).
If the restructuring satisfies only the conditions from the Decision on
Classification of the Bank Balance Sheet Assets and Off-Balance Items, and at the
same time does not represent the financial restructuring in terms of the Law on
Amicable Financial Restructuring of the Companies, e.g. if at least two domestic or
foreign banks as creditors participate in it, then for securement of restructured
claim it is necessary to register new mortgage, considering that restructured claim
is defined as new claim (which replaces all balance sheet claims from the debtor, or
their greater part), and by that new mortgage ensure redefined bank’s claim
(Standpoint of the Legal Affairs Committee of the Association of Serbian Banks
from June 20
th
, 2011).
238 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON
Purpose of amicable financial restructuring is to timely recognize and resolve
financial difficulties and to create conditions for normal continuance of company’s
business (corporative debtor) if relevant creditors assess that existence and
recovery of a company which has financial difficulties economically justified and
doable.
One of basic assumptions of successful implementation of amicable financial
restructuring of companies is delay of payments (moratorium). Allowing to
contract special measures of protection of creditors’ claims is very important
instrument which contributes to decrease of business and legal risks of creditors
who engage into amicable financial restructuring, result of which cannot be
foreseen with certainty, and moratorium is its mandatory phase. Appointing a
person authorized for countersigning of acts by which a debtor performs monetary
transactions during moratorium, as measure for protection of creditors’ claims, is
of a greater legal and practical significance, since this person is obliged to deposit
his signature in a bank where a company’s account is, and limitation of
countersigning of act is being registered in business companies register.
Financial restructuring is completed by an agreement on financial
restructuring. Law does not prescribe mandatory content of an agreement on
financial restructuring, but indicates most common measures, the most significant
of which are: payment in installments, amendment of due dates and interest rates,
release of debt, conversion of claim into capital, and also allows possibility to
contract other measures which are significant for realization of financial
restructuring.
This agreement’s legal nature is settlement (e.g. if prescribes payment in
installments) or novation in case that current obligations are replaced by new ones
(e.g. if conversion is made – transforming claims into capital). Besides this,
combination of settlement and novation is also possible. Secured claim which is
being restructured is replaced by restructured secured claim. Legislator has
indisputably given to the restructuring a legal nature of novation, because one
claim, which is existent between creditor and debtor, is now replaced with new
claim, which corresponds to definition of novation. Continuance of a lien is
established, so that a mortgage, i.e. lien on movables and rights, as secondary right
in connection with secured claim which is being restructured, continues to exist as
mean of security of restructured claim, in line with the agreement on financial
restructuring.
Tax incentives for financial restructuring, in the sense of tax exemption of debt
release with creditors, as well as possibility of debt reprogramming on the basis of
tax and other public revenues, are prescribed by the Law on income tax of
companies, i.e. Law on tax procedure and tax administration. Also, in new
Decision on classification of balance assets and non-balance bank items, and
especially their novels from December, incentives for reclassification of claims of
Faculty of Business Economics and Entrepreneurship 239
banks based on concluded agreement on financial restructuring have been
prescribed. Based on analysis of said regulations it can be concluded that in
Republic of Serbia, a solid legal frame for amicable restructuring of companies has
been created, which is used in practice unjustifiably rare because of inaction of
companies, primarily banks as major creditors.
REFERENCES
[1] Decision on Classification of the Bank Balance Sheets Assets and Off-Balance
Sheet Items, Official Gazette of RS, no. 94/2011, 57/2012, 123/2012, 43/2013,
113/2013
[2] Decision on the Adequacy of the Capital of Banks, Official Gazette of RS, no.
46/2011, 6/2013 and 51/2014
[3] Duki?-Mijatovi?, M. (2010), Overview of law procedures in proceeding of
determining claims of bankruptcy laws in the region, Theme Collection of
Works Laws of Countries in the Region, Belgrade: Institut za uporedno pravo.
[4] Kozar, V. Po?u?a, M., Stankovi?, I. (2013), General bankruptcy procedure
(Comment to the Law on Bankruptcy with court practice and by-laws) 1st
edition Belgrade: Poslovni biro.
[5] Kozar, V. (2012), Legal consequences of the amicable financial restructuring
of the companies, Pravo i privreda. 4(6): 236-250.
[6] Kozar, V. (2012), Moratorium and protection of creditors in financial
restructuring, Pravna rije?. 32: 619-636.
[7] Kozar, V.(2012), Incentives for financial restructuring, Radno-pravni savetnik.
9: 85-90.
[8] Kozar, V. (2012), Prohibition of causing damages and other principles of
amicable financial restructuring, Insurance, damages and new Law on
Litigations. Belgrade: Intermex pp. 322-332.
[9] Kozar, V. (2012), Delay of payments (moratorium) in the process of financial
restructuring, Theme Collection from International Science Conference. Novi
Sad: Faculty of Law for Economy and Justice of University Commercial
Academy in Novi Sad, pp. 224-237.
[10]Kozar, V. (2011), Comment to the Law on Amicable Financial Restructuring
of the Companies, Belgrade: Poslovni biro.
[11]Kozar. V. (2008), Influence of restructuring and mandatory debt dismissal in
the privatisation procedure to the enforcement procedure, Radno-pravni
savetnik. 1:64-70.
[12]Law on Amicable Financial Restructuring of Companies, Official Gazette of
Republic of Serbia, no. 36/2011 from May 27
th
, 2011, effective as of June 4
th
,
applies as of June 24
th
, 2011.
[13]Law on Payment Operations, Official Gazette of SRJ no. 3/2002, 5/2003,
Official Gazette of RS no. 43/2004, 62/2006, 111/2009, 31/2011.
240 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
[14]Law on Procedure of Registration at the Business Registers Agency (Official
Gazette of RS, no. 99/2011)
[15]Law on Property Tax, Official Gazette of RS, no. 5/2009
[16]Law on Tax Procedure and Tax Administration, Official Gazette of RS, no.
80/2002, 84/2002, 23/2003, 70/2003, 55/2004, 61/2005, 85/2005, 62/2006,
61/2007, 20/2009, 72/2009, 53/2010, 101/2011, 2/2012, 93/2012, 47/2013,
108/2013
[17]Law on Banks, Official Gazette of RS, no. 107/2005, 91/2010
[18]Mi?ovi?, M. (2011), Amicable Financial Restructuring or Recovery of
Companies, Pravni život. 11:54.
[19]The Company Law (Official Gazette of RS“, no. 36/2011, 99/2011)
[20]Vasiljevi?, M. (2011), A Guide to implementation of the Company Law,
Belgrade: Intermex.
Faculty of Business Economics and Entrepreneurship 241
THE ADOPTION OF OPEN INNOVATION PRACTICES
IN SERBIAN ICT INDUSTRY
Jelena Lukic, MA
23
ABSTRACT
The main aim of this paper is to present the adoption of open innovation
concept in information and communication technology industry (ICT), and to
analyze key practices, strategic motives and concerns with its implementation
based on case study of Serbian ICT industry. The main reason for conducting
research in ICT industry is that Serbian ICT companies have understood best that
competition is no longer based on traditional resources, combining raw materials,
labor and capital, but that the competitive advantage is based on knowledge and
innovation. Also, many authors argue that knowledge-intensive industries are
incubators for innovation, and that open innovation practices are the most
advanced in high-technology industries. Our starting research questions were: 1)
What are the key practices of open innovation in Serbian ICT companies?, 2) What
are the strategic motives for engaging in open innovation practices?, 3) Which
partners are shown to be of the most importance in open innovation activities?,
and 4) What are the key concerns of companies when engaging in open innovation
practices. At first, we used desk-based research to analyze the open innovation
literature including academic publications, goverment reports and news articles,
and after that we designed a questionnaire in order to gather qualitative empirical
data about open innovation practices in Serbian ICT companies.
Key words: Open Innovation Concept, Open Innovation Practices,
Information and Communication Technology Industry
J EL Classification: O31, O32, M15
UDK: 005.591.6:[004:007 005.591.6:654
23
Jelana Lukic, PhD candidate at Faculty of Economics University of Belgrade, Belgrade, Serbia,
[email protected]
242 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
The environment of organizations has significantly changed comparing to their
surroundings few decades ago, challenging managers to achieve flexibility,
innovation and collaboration with others as factors that will guide towards a long-
term competitive advantage. Managers are aware that organizations cannot deal
with business using old routines, nor efficiently manage everything under their own
roof. In past, collaboration among partners is used as transitive step to enter to new
markets, reduce risks, share the costs of research and development (R&D)
activities (Porter, 1986), while today collaboration and partnership represent the
key components of corporate strategy (Koput,Powell, 2004). To achieve and
sustain competitive advantage in global economy, the need for collaboration with
various organizations, regardless of factors such as time, space and culture is of
tremendous importance (Mankin et al., 2004). Many organizations have shifted
their activities toward external sources of knowledge, developing more extensive
relationships with universities, public research organizations, customers, external
consultants, suppliers, manufacturers, and even competitors. In 2003, Henry
Chesbrough introduced open innovation concept and defined it as “the use of
purposive inflows and outflows of knowledge to accelerate internal innovation, and
expand the markets for external use of innovation, respectively” (Chesbrough,
2003, p. 1). Many organizations have recognized superiority of tearing traditional
boundaries (which lead to extensive separation of people and business processes)
down and collaborating with others striving for constant innovation, improvement,
quality, learning, new technology, new markets.
The aim of this paper is to examine the practices of open innovation in Serbian
information and communication technology industry. At first, we used desk-based
research to analyze the open innovation literature including academic publications,
goverment reports and news articles, and after that we designed a questionnaire in
order to gather qualitative empirical data about: general information about
companies - age, number of employees, key characteristics in conducting their
businesses; the key practices of open innovation in Serbian ICT companies;
strategic motives for engaging in open innovation activities; the satisfaction with
individual partners in open innovation practices; and the key concerns of engaging
in open innovation activities.
Faculty of Business Economics and Entrepreneurship 243
THE EVOLUTI ON OF OPEN I NNOVATI ON CONCEPT
Innovating in today’s environment characterized with hyper-competition,
increased technological advances, greater mobility of human capital requires from
companies to tear down their traditional boundaries and collaborate with other
organizations and individuals. Companies realized that creating organizational unit
for research and development (R&D) and forming cross-functional teams cannot be
stimulus for radical innovations and competitive advantage in the 21
st
century, and
that the locus of innovation is placed beyond their own roof. The concept of open
innovation points out that the purposive inflows and outflows of knowledge can be
used to accelerate internal innovation, and expand markets for external use of
innovation (Chesbrough et al., 2006) reducing the cost of innovation, sharing the
risks and rewards of innovation, and accelerating the time required to deliver
innovations to the market (Chesbrough, 2007). Regarding to traditional, closed
innovation concept, there are clear differences which are summarized in table 1.
Table 1: Closed versus open innovation concept
Closed Innovation Open Innovation
A company should hire the best and
smartest people
A company does not need to employ all the
smart people, but rather work with them inside
and outside the firm
Profiting from innovative efforts
requires a company to discover,
develop and market everything itself
Internal innovation activities are needed to
claim some of the significant value which can
be created by external innovation efforts
Being first to market requires that
research discoveries originate within
the own company
In order to win the competition, it is more
important to have the better business model
than getting to market first
Being first to market also ensures that
the firm will win the competition
Winning the competition does not require
coming up with the best and most ideas, but to
make the best use of internal and external ideas
Leading the industry in R&D
investments results in coming up with
the best and most ideas and eventually
in winning the competition
Proactive intellectual property (IP) management
allows other companies to use the companies'
IP. It also considers to buy other companies' IP
whenever it advances the own business model
Source: Adapted from Chesbrough, 2003
Many of the terms like collective, distributed, cumulative, democratized
innovation are focused only on users and thus make just the part of a broader
phenomenon – open innovation. Open innovation, beside customers and consumers
involves the collaboration with manufacturers, suppliers, universities, public
research agencies, and even competitors.
244 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Innovations will need to be aware of and solve many societal challenges in
domains such as climate change, sustainability, healthcare, youth unemployment,
financial stability, and to ensure benefits for whole society with improved quality
of life, and new jobs and services. Thus, the concept of open innovation 2.0 was
promoted as new innovation paradigm based on principles of integrated
collaboration, co-created shared value, cultivated innovation ecosystems, unleashed
exponential technologies, and extraordinarily rapid adoption (Curley, Salmelin,
2013, p. 2). The aim of open innovation 2.0 is to, by tearing down all barriers
among public/government, academic, business sector and citizens, create shared
value, sustainable prosperity and improvements in human well-being (Curley,
Salmelin, 2013). In open innovation 2.0 the citizens are recognized as very
important for innovation, so the Triple Helix model has become Quadruple Helix
model of innovation which encompasses public/government, academic, businees
sector, and citizens (Helms, Heilesen, 2011).
The key idea of open innovation 2.0 lies in the concept of shared value which
can be defined as set of “policies and operating practices that enhance the
competitiveness of a company while simultaneously advancing the economic and
social conditions in the communities in which it operates” (Porter,Kramer, 2011, p.
6). In practice, there are three key ways in which companies can create shared
value opportunities: by reanalyzing products and markets, redefining productivity
in the value chain, and enabling local cluster development (Porter, Kramer, 2011).
OPEN I NNOVATI ON PRACTI CES AND TRENDS
Companies can employ a variety of practices to make use of external and
internal knowledge innovation. Generally, there are two directions (Chesbrough,
Brunswicker, 2014): one, where external knowledge flows into the company
(inbound practices), and other, where knowledge flows out of the company
(outbound practices).
Faculty of Business Economics and Entrepreneurship 245
Table 2: Open innovation practices
Inbound Practices Outbound Practices
? Consumer and customer co-
creation
? Information networking
? University research grants
? Publicly funded R&D consortia
? Contracting with external R&D
service providers
? Idea and start-up competitions
? Intellectual property in-licensing
? Supplier innovation awards
? Crowdsourcing
? Specialized services from open
innovation intermediaries
? Joint venture activities with
external partners
? Selling of market-ready products
? Participation in public
standardization
? Corporate business incubation
and venturing
? Intellectual property out-
licensing and patent selling
? Donations to commons or
nonprofits
? Spinoffs
Source: Adapted from Chesbrough and Brunswicker, 2014
Open innovation is going to be of great importance for innovation
management in corporate practice. Regarding previous research and practice of
open innovation, some trends can be identified (Gassmann et al., 2010):
? Industry penetration: from pioneers to mainstream. The principle of open
innovation has penetrated pioneering industries such as software, electronics,
telecom, pharmacy and biotech.
? R&D intensity: from high to low tech. It can be identified new trend for the
low-tech sector to exploit the potentials of opening up their innovation
processes. Open innovation's principles have spread to different sectors
(machinery, medical tools, fast moving consumer goods, food, logistics), not
only in high tech.
? Size: from large firms to small and medium firms. Smaller and medium-
sized firms are also opening up their innovation processes.
? Processes: (1) from stage gate to probe-and-learn (highly structured stage-
gate process is becoming more interactive probe-and-learn process); 2) from
amateurs to professionals (industry is starting to professionalize the internal
processes to manage open innovation more effectively and efficiently).
? Structure: from standalone to alliances. It can be identified trend from strong
R&D partnership and alliances toward inter-organizational relationships.
? Universities: from ivory towers to knowledge brokers.
? Content: from products to services. The service sector is still underdeveloped
in terms of the innovation process.
? Intellectual property: from protection to a tradable good. Companies buy
intellectual property - mostly from universities and high-tech ventures and
leverage its value through professional management.
246 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Companies must be aware that too much openness can negatively impact their
long-term innovation success because they lose control, but on the other hand,
without open innovation approach they cannot achieve shorter innovation cycles
and reduced time and risk to market. Without cooperation and exchange of
knowledge, companies are losing their knowledge base on a long-term basis. It is
important for companies to create successful products and services using open
innovation philosophy faster than their competitor and at the same time to foster
the building of core competencies and protect their intellectual property (Enkel et
al., 2009).
EXAMPLES OF OPEN I NNOVATI ON PRACTI CES I N I CT
I NDUSTRY
Regarding key characteristics of information and communication technologies:
enabling better connection between different organizations and partners,
establishing and maintaining business-to-business relationships, communication
and coordination (Petkovi? et al., 2014), they are one of the key factors that enable
pursuing of open innovation activities (Dodgson et al., 2006).
Information and communication technologies provide large amount of real-
time data which are simply and faster available (Luki?, 2014a), they facilitate the
exchange of ideas and information moving them from one place to another
(Zuboff, 1988), and the flow of information through space is enabled, accelerating
life beyond the conceivable boundaries (Luki?, 2014b). Advances in ICT “brought
the firm to the world, but they also brought the world to the firm” (Walsh et al.,
2006, p. 665). Many innovation technologies are specially developed for creating
innovation including a wide range of design, simulation, modeling, and
visualization technologies, which are increasingly used in innovation processes
(Dodgson et al., 2006).
It is clear that in the 21
st
century, ICT represents the key enabling factor for
conducting open innovation activities. Many authors argue that open innovation
practices are the most advanced in high-technology industries (Chiaroni et al.,
2011) and that they are fertile ground for innovation (Fjeldstad et al., 2012).
Practices and maturity of open innovation concept varies by industry. Clear
example is status of open innovation in ICT, pharmaceuticals and fast-moving
consumer good (FMCG) industry, where open innovation practices are necessary
for survival (Golightly, 2012, p. 36).
Faculty of Business Economics and Entrepreneurship 247
Table 3: Different sectors and open innovation concept
Industry
Status of open
innovation
Drivers of open
innovation
Sector characteristics
ICT
Open innovation
maturity is high.
Innovation in products
and processes is
usually very high, and
moves quickly.
Rapid growth of start-
ups, disruption of
business and
technology, mobile
computing.
Very high customer
demand, technology
innovation by small and
medium companies and
start-ups.
Pharmacy
Shift from the
“chemical paradigm” to
the search for
innovative therapies
requiring mixed
disciplines and
integration of
technologies.
Regulatory pressure,
time pressure to bring
drug to market, and
cost reduction are
drivers for innovation.
Driven by incremental
and radical innovation
where the product and
process innovation takes
more time than other
market sectors.
FMCG
Open innovation
maturity is high due to
continuous incremental
innovation.
Competition is high
and the market is very
demanding. Short life
of products, rapidly
moving market and
customer needs.
Consumer demand is
high. Markets move very
quickly, hence product
innovation is very high.
Source: Adapted from Golightly J. et al., 2012, p. 35
ICT industry is at the top according to adoption of open innovation practices.
In continuation of this paper, we are going to present some of the key examples of
open innovations in ICT industry.
The Internet has facilitated mass collaboration as one of the form of open
innovation where anyone can participate electronically to solve some problem or
challenge, or to give some contribution. Among the best known examples of mass
collaboration as one of the practices of open innovation is well-known Wikipedia.
Wikipedia represents an online encyclopedia created in 2001 with aim to give a
free knowledge to everyone in the world in their native language. As of August
2014, Wikipedia includes over 32.7 million freely usable articles in 287 languages
that have been written by over 47 million registered users and numerous
contributors worldwide. On average, Wikipedia receives a total of 10 billion global
page views from around 495 million unique visitors every month, including 85
million global page views every day
(http://en.wikipedia.org/wiki/History_of_Wikipedia).
Among many examples, it is interesting to mention CAS, market-leader in the
customer relations management (CRM) software for small and medium companies
in Germany, which was founded in 1986 with the aim to achieve a high degree of
innovation. Annually, the company spends about 30% of its revenues in research
and development. Nowadays, CAS defines itself as a networked enterprise and as
an open innovator (Brunswicker, Ehrenmann, 2013). CAS has designed business
248 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
model based on principles of modularity – an integrated software system
embedding different applications and services in collaboration with over 200
partners in more than 24 countries. The results of CAS commitment to its
customers, suppliers, competitors, intermediaries are reflected in fact that more
than 200.000 people in more than 7.500 companies and organizations are using
CAS software solutions (Brunswicker, Ehrenmann, 2013).
Over the last 20 years collaboration between firms, suppliers and customers
has produced open source products such as Linux operating system, Firefox web
browser, Apache web server, etc. (West,Gallagher, 2006).
Open source software includes source code which can be modified by
geographically dispersed programmers which collaborate using virtual
collaboration tools, while at the same time acknowledge the original author’s
contribution (Raymond, 2004). The first question that we think of is what
motivates individuals to contribute to open source projects? The answer can be
found in two different types of motivation (Ryan,Deci, 2000):
? Intrinsic rewards include the enjoyment of creating something new, the
stimulation of an intellectual challenge;
? Extrinsic rewards include enhansed reputation, the signalling of technical
challenges to potential employeers and venture capitalists.
Table 4: Open source approaches, types and results of open innovation
Approach to open
innovation
Types Results
Structural approaches
Pooled R&D
? Linux
? Mozilla
Spinouts
? Jikes
? Eclipse
? Beehive
Product centric
approaches
Selling
Complements
? Apache
? KDE
? Darwin
Donated
Complements
? Avalanche
? PC Game „Mods“
Source: Adapted from West and Gallagher, 2006
Faculty of Business Economics and Entrepreneurship 249
KEY CHARACTERI STI CS OF SERBI AN I CT I NDUSTRY
Serbian ICT industry is an important exporter with rising tendency of software
export: in 2011, the software export amounted to 166 million euros, while in 2012
it exceeded 200 million euros (www.pks.rs), and in daily jargon it can be heard that
Serbia is "the country of farmers and IT specialists" (www.rtv.rs). Programming
and computer services dominate in the structure of export of computer and
information services, followed by embedded systems and system integration
(www.pks.rs).
Serbian ICT industry has understood best that competition is no longer based
on traditional resources, combining raw materials, labor and capital, but that the
competitive advantage is based on knowledge. It contributes to affirmation of a
cluster. Vojvodina ICT Cluster (VOICT), Nis Cluster of Advanced Technologies
(NiCat), ICT Network Serbia Cluster (ICT Net), integrate companies in this
industry, scientific-research institutes and supporting institutions. Financial data for
2010 show that one of the highest turnover is made by the member of two ICT
clusters (from ICT NET with around 87 million euros, and from Vojvodina ICT
with 44 million euros) (Mija?i?, 2011, p. 32).
ICT industry contributes to balanced regional development. Comtrade’
software development center has opened in Kragujevac, where is employed 200 IT
engineers, with promise that there will be more employees with government
support (www.comtrade.com). Also, the newest cluster in Kragujevac, in the
Business Innovation Centre (BIC), that brought together companies dealing with
information and communication technologies from Sumadija and Pomoravlje,
should get the full support from the Government and become the business model
for connecting young talents in the ICT industry (Kartalovi?, 2013).
Serbian Government adopted certain support policies for the ICT industry,
including The Strategy for development and support of the information technology
industry, that should encourage and support the industry in four segments: startup,
outsourcing, development and export of original software products, development
centers of large multinational companies (Službeni glasnik RS 72/12). In 2012, the
Directorate for Digital Agenda, as an organ of the Ministry of Foreign and Internal
Trade and Telecommunications, was established, and it is, among other things,
responsible for the use of information and communication technology, providing of
information services, research and development in the field of information society
and electronic communications, the implementation of standards in information
and communication technology (www.digitalnaagenda.gov.rs). The reduction of
customs duty on computers to 1% in 2004, the public call of Serbia Investment and
Export Promotion Agency for allocation of grants in the field of IT for
technological entrepreneurship start-ups and for organizing trainings and
networking in the field of IT entrepreneurship (www.siepa.gov.rs) represent
legislation and support measures, which indicate that the Serbian government has
recognized the importance and role of the ICT industry. Also, nearly all state
institutions have their Web sites. In this way, Serbian government sent a clear
250 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
message to potential investors that Serbia works on improving its information
space, which should make Serbian national economy more competitive globally.
Generally, ICT industry requires small capital investments, and offers
significant revenue opportunities, so some countries took advantage of it,
especially Ireland that was one of the least developed European countries and
became a real economic miracle by developing and exporting ICT products and
services (www.ictireland.ie). India where information technology almost did not
even exist, is becoming one of the world leaders in manufacturing and software
export, as well as Israel, China and Brazil that have achieved impressive results in
the production and sales of ICT products and services (Arora,Gambardella, 2005,
p. 4). Those countries should be used as a model for Serbia where in recent years
the awareness of importance of informatization of economy and society is
awakened.
RESEARCH DESI GN
The aim and the object of research. In practice, there is a lack of clear
understanding of open innovation practices. Companies face risks and many
challenges when they conduct open innovations. Our starting research questions
were: 1) What are the key practices of open innovation in Serbian ICT companies?,
2) What are the strategic motives for engaging in open innovation practices?, 3)
Which partners are shown to be of the most importance in open innovation
activities?, and 4) What are the key concerns for companies when engaging in open
innovation practices? The object of research are Serbian companies in information
and communication technology industry (ICT). The main reasons for conducting
research in ICT industry are that knowledge-intensive industries have been the
fertile ground for innovation, they first realized that the locus of innovation extends
beyond the individual company (Fjeldstad et al., 2012), and innovation practices
are the most advanced in high-technology industries (Chiaroni, Chiesa, and
Frattini, 2011). Also, the fact that large number of Serbian ICT companies are
micro and small companies (www.sito.rs) which do not have large financial
resources, technological and managerial skills, suggests that it would be of
tremendous importance for these companies to use open innovation practices as a
source of competitive advantage.
Design of research. Research was conducted by using the questionnaire
technique for data collection: the questionnaire was sent via e-mail to 300 ICT
companies which are members of ICT clusters and which launched new products
and services in past three years. It consists of 14 questions created by using one of
free Google services (Google Drive) which, among other things, provides creating
anonymous surveys and simple overview of responses.
Faculty of Business Economics and Entrepreneurship 251
The questionnaire encompassed four sections asking about:
? General information about companies: age, number of employees, key
characteristics in conducting their businesses
? The key practices of open innovation
? Strategic motives for engaging in open innovation activities
? The satisfaction with individual partners in open innovation practices
? The key concerns of engaging in open innovation practices
The questionnaire was answered by 25 companies, while 2 companies sent e-
mail in which they clearly stated that they do not use open innovation practices.
Collected data from the questionnaire were analyzed and interpreted by the
description method.
DI SCUSSI ON OF RESEARCH FI NDI NGS
Measured with the number of permanent employees, more than half of
surveyed ICT companies belong to group of small companies, while 36% are micro
companies.
Graph 1: Number of employees in surveyed ICT companies
Source: Author
More than one third of surveyed companies work more than 15 years, while
20% represent very young companies which operate less than 5 years.
252 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Graph 2: Age of the surveyed ICT companies
Source: Author
Key characteristics of surveyed companies can be summarized in the
following statement: Serbian ICT companies need to solve complex problems in a
short time with experts from various fields, not just ICT, and knowledge,
innovation and customer relations are of tremendous importance for them.
Graph 3: Characteristics of surveyed ICT companies
Source: Author
Bearing in mind all benefits of open innovation practices, it is important to
understand how ICT companies in Serbia engage in open innovation activities. We
asked them to evaluate inbound and outbound practices that had been identified as
most critical in literature and discussions with open innovation practitioners,
according to Chesbrough and Brunswicker survey (Chesbrough, Brunswicker,
2014).
Faculty of Business Economics and Entrepreneurship 253
Table 5: Open innovation practices in surveyed ICT companies
OPEN INNOVATION PRACTICES %
Inbound practices of open innovation
Networking with other organizations without a formal contractual relationship (at
conferences, workshops, events)
14%
Involvement of consumers and customers in generation, evaluation, and testing of
new ideas for products, services, processes
12%
Licensing of external intellectual property rights (e.g., trademarks, patents, etc.) via
formal licensing agreements
11%
Contracting with external service providers for specialized R&D services.
Including technology scouting, virtual prototyping
7%
Outsourcing innovation problem solving (including scientific problems) via an
open call to external organizations and individuals to submit ideas
5%
Participating in R&D consortia with other public or private organizations in which
R&D activities are fully or partly funded by governmental organizations
5%
Funding of external research projects by researchers and scientists in universities
to access external knowledge
4%
Invitation of existing suppliers to participate in innovation and submit innovative
ideas
3%
Outbound practices of open innovation
Licensing of internal intellectual property to external organizations via licensing
agreements or selling via single payment
9%
Participation in standardization activities via formal standardization agencies (e.g.,
ISO) or informal standardization consortia
8%
Sale of a market-ready novel product idea to a third party for sale to its customers 6%
Strategic and financial investment in independent joint ventures jointly with
external partners
4%
Corporate incubators or accelerators developing potentially profitable ideas and
offering supportive environments for entrepreneurs inside the organization to
identify novel paths to market
4%
Donations to commons or nonprofits (e.g., open-source communities) to support
external R&D
4%
Source: Author
Out results show that companies engage far more frequently in inbound open
innovation practices where external knowledge flows into the firm. Among most
used practices are networking with other organizations without a formal contractual
relationships, involvement of consumers and customers in generation, evaluation,
and testing of new ideas for products, services, processes, and licensing of external
intellectual property rights via formal licensing agreements.
254 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Reasons for engaging in open innovation practices are different. We created a
list of some of the most frequently named reasons for engaging in open innovation
practices according to JISC study Facilitating Open Innovation (JISC, 2009).
Answers of surveyed companies are summarized in following table.
Table 6: Reasons for engaging in open innovation practices in surveyed ICT
companies
Reasons for engaging in open innovation practices %
We did not have the required expertise under our own roof 20%
We did not have the capacity to carry out the work alone 20%
We wanted to bring “fresh blood” into the project to benefit from their
different approach and ideas
14%
Cost saving 14%
We believed that outsourcing of expertise would save money 9%
To enable exploitation of any intellectual property produced into other non-
competing markets
5%
Believed a multidisciplinary approach would produce more successful output 5%
Reputation of partners 5%
We wanted to become a member of a consortium to obtain eligible status for
funding
4%
We wanted to create revenue by acting as an intermediary to encourage and
facilitate open innovation
2%
We required someone else’s intellectual property 2%
We felt it was our only chance of commercializing our ideas 0%
Source: Author
Required expertise beyond the company, shortage of internal capacity, need
for fresh approach and need for cost saving are main strategic motives for engaging
in open innovation practices in surveyed ICT companies.
We also wanted to identify the importance of individual partners in open
innovation practices. Answers about satisfaction of individual partners show that
companies are most satisfied with their customers.
Concerning fact is that many companies are dissatisfied with universities and
public research organizations which indicates that there is a lot of space for
improvement of their activities and engagement.
Faculty of Business Economics and Entrepreneurship 255
Table 7: The satisfaction with individual partners in surveyed ICT companies
Partners
Hugely
satisfied
Largely
satisfied
Satisfied
Largely
dissatisfied
Hugely
dissatisfied
Customers
22% 57% 9% 12% 0%
Universities
5% 33% 24% 38% 0%
Suppliers
0% 41% 36% 9% 14%
Public research
organizations
5% 14% 32% 36% 14%
Entrepreneurs and
start-ups
5% 14% 50% 23% 8%
Competitors
23% 36% 27% 14% 0%
Source: Author
When engaging in open innovation practices, surveyed ICT companies are
most concerned about the ability to find the right people to be involved, costs,
intellectual property issues, and time constraints. Potential cultural differences and
trust among partners are of some, little or no concern at all.
Table 8: The key concerns and challenges in pursuing open innovation practices in
surveyed ICT companies
Answers
Huge
concern
Large
concern
Some
concern
Little
concern
No
concern
Intellectual property issues
16% 5% 37% 21% 21%
Costs
5% 32% 42% 21% 0%
Ability to find the right
people to be involved
26% 42% 21% 0% 11%
Potential cultural
differences
5% 0% 26% 37% 32%
Time constraints
5% 32% 21% 37% 5%
Project management
0% 26% 42% 16% 16%
How to build trust
0% 5% 42% 37% 16%
Source: Author
Regarding to the durability of open innovation practices in Serbian ICT
companies, we asked how long companies had been practicing open innovation.
56% of surveyed companies are engaged in open innovation activities less than
three years, while other 44% of the companies engaged in open innovation
activities from three to six years. 55% of surveyed companies answered that they
would engage in open innovation projects in future, only 5% stated clearly no,
while 40% answered that they are not sure about engaging in open innovation
practices.
256 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Beside 25 companies that answered to the questionnaire, there are 2 companies
that sent e-mail in which they clearly stated that they do not use open innovation
practices. Received e-mails indicate that top management manifest resistance to
change, it is not informed about all benefits that open innovation brings and that
there is a lack of understanding that links with external partners tend to
complement rather than replace internal R&D department and activities
(Chesbrough, 2006). Some of the surveyed ICT companies have illusion that their
internal R&D department is just enough for innovations, which is consistent with
some other results on open innovation where employees in R&D departments
believe that their technology is the best and requires no further development
(Rangus, Drnovšek, 2013).
CONCLUSI ON
The aim of this paper was to analyze open innovation practices based on case
study of Serbian ICT companies. Results show that Serbian ICT companies engage
far more frequently in inbound open innovation practices where external
knowledge flows into the firm. Among most used practices are networking with
other organizations without a formal contractual relationships, involvement of
consumers and customers in generation, evaluation, and testing of new ideas for
products, services, processes, and licensing of external intellectual property rights
via formal licensing agreements. The key strategic motives for engaging in open
innovation practices are: required expertise from partners, shortage of internal
capacity, need for cost saving, and need for fresh approach, which is not surprising
bearing in mind that large number of Serbian ICT companies are micro and small
companies. Answers about satisfaction of individual partners show that companies
are most satisfied with their customers which is very positive result according to
fact that involvement of customers and consumers in open innovation practices is
of tremendous importance for companies. Networking with other organizations
without a formal contractual relationships via conferences, workshops, seminars is
at the top of open innovation practices in surveyed ICT companies. Bearing that in
mind, result that many companies are dissatisfied with universities and public
research organizations is very concerning and indicates that there is a lot of space
for improvement of their activities and engagement. Results that more than one
half of surveyed companies are interested to engage in open innovation activities in
future, while 40% are not sure, highlight the importance of all challenges and
concerns that surveyed ICT companies are faced with. Surveyed ICT companies
are the most concerned with the ability to find the right people to be involved,
costs, intellectual property issues, and time constraints.
Taking into account that small number of companies respond on questionnaire
(27 companies out of 300 companies included in survey) making response rate of
9%, we can make just limited conclusions regarding ICT companies and their
general attitude toward open innovation practices. Some general proposals for
Faculty of Business Economics and Entrepreneurship 257
facilitating the practices of open innovation in Serbia are: to raise awareness about
key benefits and advantages of open innovation practices through education,
workshops and training of open innovation, to change the mentality of management
and employees and their understanding of open innovation activities, to establish
good regulatory environment, and to provide direct and indirect financial
incentives and initiatives for open innovation practices.
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Faculty of Business Economics and Entrepreneurship 259
II PART.
SOCIOLOGICAL AND SOCIAL PSYCHOLOGICAL
ASPECTS OF ENTREPRENEURSHIP
Faculty of Business Economics and Entrepreneurship 261
ROLE STRESSORS AND ORGANIZATIONAL
COMMITMENT: EMPIRICAL RESEARCH
Plama Hristova, PhD
24
Albena Krumova, PhD
25
Julika Novkova
26
ABSTRACT
Professional stress is a current research issue in modern psychology due to its
direct impact on health and subjective well-being of people all over the world.
Professional stress also leads to financial losses for the organizations. On the
other hand, organizations can benefit from employees who are committed to them.
Such employees contribute to the better quality of work and positive image of their
organizations. This paper studies the interrelations between the role stressors in
the workplace and organizational commitment of the employees in Bulgaria. The
research provides valuable conclusions or the employers and it will be helpful for
effective management of organizations.
Key words: Research, Organizational Commitment, Role Stressors,
Employees, Organization
J EL Classification: I15, J24, J28
UDK: 331.101.3 331.445:159.944.4
24
Plama Hristova, Sofia University “St. Kliment Ohridski”, Bulgaria, [email protected]
25
Albena Krumova, Sofia University “St. Kliment Ohridski”, Bulgaria, [email protected]
26
Julika Novkova, Sofia University “St. Kliment Ohridski”, Bulgaria, julika @abv.bg
262 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Professional stress is a widely discussed organizational phenomenon in modern
psychology due to its direct impact on health and subjective well-being of people at
work. However, regardless of the achieved scientific progress this problem continues
existing in professional lives of many employees and gains intensity over the last years
that are characterized by frequent changes in organizations – merges and bankruptcies,
layoffs, losses of jobs, various anti-crisis measures, decreased costs on healthcare, etc.
On the other hand, the high levels of unemployment stimulate minimum tolerance to
mistakes employees can make in the workplace and increase the requirements on
behalf of the management. The value of human labor becomes lower when the
employers believe there are many other candidates willing to replace the employees
who do not perform well. Thus we are witnessing a new organizational reality which
leads to professional stress and high health risks.
The negative side of stress, distress, is accompanied by a multitude of health
problems and risks. Both people and organizations are paying a high price for
poorly managed professional stress. For the individuals, the price of stress can be
physical, mental, behavioral or emotional. Organizations whose employees and
leaders experience high levels of professional stress which they cannot manage
suffer enormous financial losses due to absenteeism, turnover, work accidents and
decreased productivity.
On the other hand, organizations can benefit from employees who are committed
and loyal to them. Such employees accept the goals and values of their organizations,
are ready to put more efforts at work and are willing to remain in the organizations. It
has been found out that the higher the organizational commitment of employees, the
lower the chance of leaving the organization (?????, 2006). Committed workforce is
also less susceptible to stress as it will be discussed in this paper.
PROFESSI ONAL STRESS
Professional stress occurs when the perceived pressure exceeds the perceived
abilities of coping with it (Palmer et al., 2004). Everybody can suffer from professional
stress and there has been found no demographic characteristic which puts some group
of people in a more favorable position than the others. Stress is ubiquitous.
According to Palmer, Cooper and Thomas (2004), the role in the organization
is one of the major risks for professional stress. This role concerns clarity of the
functions people perform in the organization and whether the organization
guarantees that employees do not enter into conflict with these functions. The
authors state that the organizations can manage this risk factor by purposeful
avoidance of role conflicts and preparation of clear job descriptions.
Faculty of Business Economics and Entrepreneurship 263
Ambiguity at work or role ambiguity is characterized by the lack of clearly
defined work duties. When there is uncertainty about the obligations and
responsibilities employees experience professional stress (?????, 2006). The role
conflict also contributes to stress in employees. The simultaneous performance of
several roles in the workplace poses the evaluation of employees and their work
performance on a difficult test. The role ambiguity and role conflict are considered
as some of the factors for development of depression and anxiety related to work
(Lowman, 1993). The role ambiguity is most detrimental to work performance
(Gilboa et al., 2008). For the organizations, the negative consequences of
professional stress are mainly economic. Organizations suffer enormous financial
losses due to absences from work of their employees, turnover, work accidents and
reduced productivity. All these are consequences of professional stress (TUC,
2004, in Palmer et al.,2004).
Unfortunately, the detrimental effect of professional stress is not observed only
in the organizational life. In the modern world, professional stress takes even
bigger, epidemic sizes. (Cooper, 2010). From a psychological perspective, the
negative consequences of stress at work are worrisome. It affects both physical and
mental health of people. The physical conditions caused by acute and chronic stress
include: increased morbidity from cardiovascular diseases (Tennant, 1999),
hypertension (Ogden, 2007), suppressed immune response (Lazarus, 1993),
diseases of the respiratory (Lehrer et al. 2002) and muscular systems (Gevirtz et
al., 1996), metabolic syndrome and some types of cancer (Ogden, 2007). In
addition, the physiological changes caused by stress lead to poor memory
(Sapolsky, 2003) and difficulties in spatial orientation (Ogden, 2007).
Both chronic and acute stress lead not only to changes in physiology but also
to changes in behavior. In their attempts to improve their moods people suffering
from chronic stress show self-destructive behaviors: tobacco smoking,
consumption of alcohol, drug abuse (Sinha et al., 2000), excessive intake of
carbohydrates (Greeno, Wing, 1994) and non-observance of a healthy sleep and
wakefulness cycle (Ogden, 2007).
Badly managed stress causes physiological changes in the organism by means
of which it has a serious impact on the mental health as well. It has been found out
that stress is connected to anxiety, and the chronic stress in particular demonstrates
a specific relation with the onset of anxiety and depression (Esch et al., 2002).
This is why it is essential that employers pay more attention to creating less
stressful work conditions for their employees.
264 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ORGANI ZATI ONAL COMMI TMENT
In the scientific literature, there are different definitions of the term
‘organizational commitment’ but it is accepted that the original conception is based
on the work of Mowday et al., (1979) who identify commitment-related attitudes
and commitment-related behaviors. Today, a widely used model of organizational
commitment is the three component conception of organizational commitment,
which was developed by Meyer et al., (1993).
Organizational commitment can be considered as psychological identification
of the employee with the organization where he/she works. It consists of the
positive evaluation of the employee of the organization, the intension for
contribution to its success, as well as desire and striving for keeping their position
in the organization. Often, when the employee is alienated from the activities and
life of the organization, we can speak about lack of commitment. Some authors
define commitment as loyalty or even patriotism (??????, 1997; 1998; ??????,
????????? 2001) and they assume that organizational commitment expresses
involvement in the work process and emotional affection to the organization.
The employees’ commitment to the organization is a psychological state
determining the expectations and attitudes of the employees. Their behavior to the
organization is defined by how they perceive it: if they belong to the organization
or are outside it. From a managerial perspective, it is enormous success if the
managers build commitment to the organization in their personnel. It includes
internalization of the organizational goals and values, the ability to work to the
benefit of the whole organization and to overcome the individual needs (even in
cases when it is not profitable for the employee).
In the specialized literature authors very often connect the term ‘organizational
commitment’ with ‘identification’, ‘involvement’ and ‘loyalty’. Identification is
acceptance of the organizational goals as the employee’s own goals; involvement is
the desire to put personal efforts to the organization’s success, and loyalty is the
emotional commitment to the organization, the desire of the employee to be its
member (??????, ?????????, 2007).
Commitment to an organization inevitably includes the above stated factors
and assumes their inclusion in the self-image of each employee. By its nature
organizational commitment is equal to neither identification nor loyalty. A meta-
analysis conducted by Riketta (2005) reveals that although there is some similarity
between identification and affective organizational commitment, organizational
identification is weaker than commitment, correlates with job satisfaction and
intention to continue working in the same organization, and is strongly dependent
on involvement in work (Riketta, 2005).
The interrelation between organizational commitment and identification gave
grounds to Meyer et al. to develop an integrative model of the processes of
commitment and identification (Meyer et al., 2006). According to this model, the
various types of commitment are a consequence of the various types of
Faculty of Business Economics and Entrepreneurship 265
identification. The model was derived from the idea of Rousseau (1998) according
to which there are two levels of identification – situated and deep structural
identification.
Research conducted by Lovakov and Lipatov (???????, ???????, 2011) did
not find a relation between the current commitment and identification of the
employees and the results confirmed the hypothesis that the two constructs are
independent and different from each other.
One of the most popular models considering the essence of organizational
commitment is the one of Allen and Meyer (1990) called the three-component
model (TCM) (Allen, Meyer, 1990). This model consists of three types of
commitment: affective, continuance, and normative, which outline the relation
between the employee and the organization. The authors state that, “Employees
with strong affective commitment remain because they want to, those with strong
continuance commitment because they need to, and those with strong normative
commitment because they feel they ought to do so“ (Allen,Meyer, 1990; p. 3).
In their research, Allen and Meyer (Allen, Meyer, 1990; Meyer, Allen, 1991)
consider the first component, affective commitment, as consisting of three
elements: emotional ties, identification, and involvement in the organization. The
second component of commitment, the behavioral one, concerns the losses
perceived by the employee in case of a possible leaving of the job. The normative
component of commitment relates to the perceived obligations upon staying in the
organization.
Organizational commitment is formed in these employees who feel the
organization provides them with opportunities for growth and development and the
opportunity to do activities which they like. The strong affective commitment leads
to the desire of the employees to keep their job positions and to remain employees
in the organization. The employees having a strong behavioral aspect of
commitment remain at work because they need it. The employees who have a
leading normative component of commitment stay in the organization because they
believe they must stay. Allen and Meyer (1996) maintain that there is enough
evidence for validity of the three-component model of organizational commitment.
Alienation and opposition are an alternative to commitment (?????????,
2011). The organization is not perceived as ‘one’s own’ but as ‘alien’. There is a
high power distance between the employees and the management. The
organizational goals serve the managers’ and directors’ own agenda. The needs of
the person are put above the organizational ones.
266 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ORGANI ZATI ONAL COMMI TMENT AND PROFESSI ONAL
STRESS
Organizational commitment cannot be directly observed. An expression of
commitment to the workplace is the desire of the worker to put more efforts so that
the organization functions better, focusing on organizational goals and readiness
for self-sacrifice. Stress in the workplace is the harmful physical and emotional
responses to adverse and noxious aspects of work content, work organization and
work environment. Occupational stress is a very subjective concept, affecting every
individual differently and has been linked to absenteeism, decreased productivity,
increased health care costs and illness (Yahaya et al., 2012).
The factors of organizational environment play a major part in creating stress
in the workplace (Ivancevich et al., 1982; Jamal, 2010) and the employees with
various degrees of organizational commitment would perceive this stress in
different ways. The employees with a lower degree of organizational commitment
are likely to demonstrate higher levels of trust to the organization (Meyer et al.,
2002; Ouchi, 1981). Adversities, as, for example, high levels of stress, might not be
perceived by them as sufficient grounds for non-fulfillment of their obligations. In
contrast, the employees displaying low levels of organizational commitment
demonstrate a limited sense of loyalty to the organization (Jamal, 2011). Research
conducted by Jamal (2011) found out that organizational commitment acts as a
buffer against the aversive effects of job stress on individuals’ job performance.
Practically, it means that individuals who had high organizational commitment
appeared to be better off against the adverse consequences of job stress than
individuals who had low organizational commitment (Ibid).
Similar results were obtained by another research indicating a significant and
negative relationship between job stress and organizational commitment (Khatibi et al.,
2009). As the employees' job stress increases, their commitment to organization
decreases and vice versa. According to the authors, identification and minimizing of
the stress factors can decline the adverse effects of job stress and promote the
organizational commitment of employees. In addition, the research showed there was a
negative and significant relationship between job stress and affective commitment
(Khatibi et al., 2009). The results of the research of Khatibi et al. (2009) is to a large
extent consistent with the research results of Lee (2007), Lambert, Paoline (2008),
Omolara (2008), Boyas, Wind (2009), but inconsistent with the research results of
Wells et al. (2009) and Yaghoubi et al. (2008).
Organizational commitment should exist within every employee, from
managerial staff to non-managerial staff in order to determine the success of an
organization. Employee commitment is gained when the organization shows the
same amount of commitment as well (Bytyqi et al., 2010). Cooperation and
appreciation between each and every members of the organization is needed to
achieve the organization’s goal. This can be achieved only if strong commitment
exists within the members of the organization (Ratmawatti, 2007).
Faculty of Business Economics and Entrepreneurship 267
Job satisfaction and employee commitment are not a onetime process but
change constantly especially when the organization deals with high level of
employee work stress (Bytyqi et al.,2010). Work stress should not be taken for
granted but pragmatic measures should be employed to deal with it and void
eventual negative effect on organizational commitment.
ROLE STRESSORS AND ORGANI ZATI ONAL COMMI TMENT:
EMPI RI CAL RESEARCH
This research is a pilot project aiming to find out the interrelations between job
stress and organizational commitment of employees. For the purposes of the pilot
project the authors used a heterogeneous sample consisting of 43 subjects. The
tasks the researchers set to themselves are to study the interrelations between role
stressors and organizational commitment.
The methodology used in this research consists of two questionnaires for
assessment of role stressors in organizations and for assessment of organizational
commitment standardized by Radoslavova and Velichkov (???????????,
????????, 2005). The questionnaires are of self-assessment type and were
administered to the participants online on a random principle.
For assessment of the role stressors in the workplace a questionnaire of 41
items was employed. The questionnaire comprises two scales: role ambiguity and
role conflict. Each scale consists of three subscales measuring the job duties,
performance and results. The role perceptions of the subjects are evaluated by
frequency of occurrence in their everyday work life. The answers are on a five-
point Likert-type scale where 1 being almost never and 5 being almost always.
(???????????, ????????, 2005).
The role ambiguity scale covers statements describing ambiguity of the
employees about their job duties, planning of goals, tasks, the ways of evaluating
their results, the authorities. The role conflict scale includes statements which show
the necessity of the employees to perform unexpected and unusual tasks, to respect
different opinions and recommendations of other people concerning performance
of employees’ duties, as well as to assess the achieved results etc. (Ibid). The
internal consistency of the questionnaire measured by Cronbach’s Alpha is.94 for
the present sample.
The second questionnaire measures organizational commitment and consists of
24 items. The response scale is five-point, Likert-type and the answers vary from 1
being never to 5 being every day. This questionnaire includes 5 subscales: personal
importance, emotional involvement, identification, positive exchange and
dedication. The internal consistency of the questionnaire measured by Cronbach’s
Alpha is.83 for the present sample.
Bearing in mind the small sample used, the research hypotheses raised were
exploratory. The main research hypothesis is that there are interrelations between
268 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
role stressors and organizational commitment. The second hypothesis is that with
increase of stress organizational commitment decreases.
The additional tasks of the research is to study the relationships between the
above mentioned factors and the demographic characteristics of subjects like
gender, age, education, length or service etc. The expectations are that the
demographic characteristics will influence commitment to the organization and the
subjective evaluation of the role stressors in the workplace.
The demographic profile of the sample shows a relatively young sample. The
mean age of participants is 33 years. About 56% of the subjects are women. In
terms of education, the sample is dominated by holders of master’s degree
diplomas (77%), followed by bachelors (11%), persons with PhD degree of other
(7%) and only 5% have primary or secondary education. Length of service reveals
that most of the respondents have a total length of service between 6 and 10 years
(35%), followed by those whose length of service is between 16 and 20 years
(21%). 18% have served between 11 and 15 years, 14 percent between 3 and 5
years. The lowest percentages belong to the shortest (between 1 and 2 years) and
longest (more than 21 years) periods of service – 5% and 7% respectively. The
years spent with the present employer, divide the sample as follows: 67% of the
subjects have worked with the same employer between 1 and 5 years; 26%
between 6 and 10 years and only 7% above 16 years. In terms of family status, the
predominant part of the sample is taken by people who are married (53%) or living
with a partner (14%), followed by single people (26%) and widowed or divorced
(7%).
KEY FI NDI NGS
In order to test the two research hypotheses, correlation analysis was
conducted using the statistical software SPSS. The main research hypothesis is that
there are interrelations between role stressors and organizational commitment. The
second hypothesis is that with increase of stress organizational commitment
decreases.
Faculty of Business Economics and Entrepreneurship 269
Table 1: Correlations of Pearson (r)between role stressors and organizational
commitment
Organizational
commitment –
personal
importance
Organizational
commitment –
emotional
involvement
Organizational
commitment –
identification
Organizational
commitment –
positive
exchange
Organizational
commitment –
dedication
Role
ambiguity –
job duties
-,407** -,326*
Role
ambiguity –
performance
-,346* -,352* -,363*
Role
ambiguity –
results
-,335* -,340* -,347*
Role
conflict -
job duties
-,417* -,514** -,431** -,428** -,432**
Role
conflict –
performance
-,458** -,326* -,458** -,463**
Role
conflict -
results
-,393** -,430**
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
The results obtained by means of the correlation analysis demonstrate there is only
partial interrelation between the role stressors and organizational commitment. The
figures in the table represent only the statistically significant correlations. Most of the
correlations are of medium strength while only one correlation has large strength and this
is the correlation between role conflict concerning job duties and organizational
commitment concerning emotional involvement. The correlation is negative which
means that the higher the role conflict caused by inconsistent job duties, the lower the
emotional involvement in the organization the person is working in. There are three other
correlations which deserve more attention as they are close to being of approximately
large strength. These are the interrelations between role conflict concerning employees’
performance and organizational commitment concerning emotional involvement,
positive exchange and dedication. All of these correlations are negative showing the
detrimental effects of role conflict caused by unclear evaluation of employees efforts
invested in work. It is worth commenting that all statistically significant and insignificant
correlations the analysis yielded were negative. Thus, the two raised research hypotheses
were confirmed partially, i.e. there is a negative interrelation between role stressors and
organizational commitment but only in some aspects.
It was considered as necessary to study also the following demographic
characteristics – gender, education, total length of service, length of service in the
present organization and family status of the respondents. The main assumption
270 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
about these factors was that they will influence organizational commitment and the
subjective evaluation of the role stressors in the workplace.
For studying the influence of the demographic characteristics (gender
excluded) on the subscales one-way analysis of variance ANOVA was used.
The only statistically significant influence of a demographic characteristic was
found out in the subscale role ambiguity concerning results. It shows the length of
service in the present organization influences the role ambiguity in terms of results
of the employees. Table 2 demonstrates the specific differences for each group.
Table 2: Influence of the length of service in the present organization on role
ambiguity concerning results - one-way analysis of variance ANOVA
(I) Length of service in
the present organization:
(J) Length of service in the
present organization:
Mean Difference
(I-J)
Std. Error Sig.
1 to 5 years
6 to 10 years -1.05643 1.02916 .565
Over 16 years 4.03448 1.76264 .069
6 to 10 years
1 to 5 years 1.05643 1.02916 .565
Over 16 years 5.09091
*
1.89302 .027
Over 16 years
1 to 5 years -4.03448 1.76264 .069
6 to 10 years -5.09091
*
1.89302 .027
The test Tukey HSD demonstrates that in terms of role ambiguity concerning
results at the level p < 0.05, employees with length of service in the present
organization from 6 to 10 years (M = 9.09; SD = 4.27) are more strongly
influenced by the factor ‘length of service in the present organization’ than in the
case of the employees who have served in it for more than 16 years (M = 4.00;
SD= 0.00). Most probably this is due to the fact that with the long years of service
in the same organization employees from this sample have learned more about the
ways these organizations function and understand better the ambiguous messages
concerning evaluation of their work. It is an interesting finding which inspires
future research efforts in this direction.
For testing the influence of gender on role stressors and organizational
commitment independent-samples T-test was conducted. The results showed no
statistically significant differences in the responses of men and women and hence
the gender does not influence the role stressors and organizational commitment in
this pilot study.
The analyses of the demographic factors show that for this sample, with the
exception of length of service in the present organization, the characteristics of the
respondents do not influence their responses as only a single statistically significant
difference was found out.
Faculty of Business Economics and Entrepreneurship 271
DI SCUSSI ON
The pilot study the authors conducted on role stressors and organizational
commitment has two limitations: the sample is modest by its size and it is not
homogeneous. Nonetheless, the analyses conducted yielded interesting results which
can be very useful to the employers who want committed and healthy workforce.
The correlation analysis demonstrated statistically significant negative correlations
between most subscales of the questionnaires on role stressors and organizational
commitment. The strongest correlation discovered was the one between role conflict
concerning job duties and organizational commitment concerning emotional
involvement. This finding clearly demonstrates that employees in the present sample
respond strongly by decreasing their emotional involvement in the organizational
matters when they have inconsistent job duties. There are three other correlations
which have a practical value to employers although coming from a small sample.
These are the correlations between role conflict concerning employees’ performance
and organizational commitment in terms of emotional involvement, positive exchange
and dedication. All of these correlations prove the negative reaction of withdrawal
when the employees perceive their work efforts have not been evaluated properly.
The one-way between-groups ANOVA analysis of the influence of respondents’
demographic characteristics on role stressors and organizational commitment showed no
statistically significant influence, with the exception of one demographic characteristic –
length of service in the present organization. It proved to influence role ambiguity
concerning results of the work done in the direction that employees who have worked
between 6 and 10 years in the same organization experience stronger role ambiguity
concerning the evaluation of the results of their work as compared to the respondents
who have spent more than 16 years in the same organization. Most probably, this result
can be explained with the experience accumulated in an organization. However, the
modest number of subjects does not allow making definitive interpretations.
CONCLUSI ON
Professional stress will remain a challenge for the modern organizations as it
cannot be completely eliminated from organizational life. This is one of the most
difficult tasks of organizational leaders – to create organizations where stress is
well managed. At the same time, they have to stimulate and maintain
organizational commitment in their employees in order to keep them loyal and
devoted to the organization, on the one hand, and healthy and hard-working, to
ensure good financial results, on the other hand.
The results of the empirical research provoke future scientific explorations on
the topic. They can also serve the employers by providing them with better
understanding how to maintain the levels of professional stress in their
organizations low and the employees committed.
272 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
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Faculty of Business Economics and Entrepreneurship 275
DEVELOPING BUSINESS CULTURE THROUGH
MOTIVATION AND CONFLICT MANAGEMENT
Zarko Pavic, PhD
27
Marija Cukanovic Karavidic, PhD
28
ABSTRACT
Business culture, organizational culture and corporate culture are all terms
that different authors describe as values and norms held in common within a
particular business, whereas the “culture development” is a process of shaping
business culture over time. Cultural clashes in any international project or
organization have in this day and age greatly enhanced the emphasis on the
preparedness for potential conflicts residing in cross-cultural collaboration.
Corporate culture, at the same time, plays a significant role in providing a
framework in which different motivational issues can act. These issues require an
assessment of the influence business culture exerts on motivational practices, and
an assessment of probably existing differences in motivation management
practices. Our study investigates different influences using the sample comprising
247 education centers’ employees in terms of positive and negative motivation
factors and two specific conflict categories, namely: 1) real professional
differences, and 2) power struggles and personality issues. Consequently, the
objective of this research is to establish the relationship between organizational
culture and conflict management styles together with motivation approaches in the
workplace. Our main conclusions suggest that approaching conflicts with a
positive attitude is the best way to make the most of it and emerge at the end of the
tunnel with a more creative solution, and that business culture does influence
motivational practices that are further determined by whether the culture is task-
orientated or person-orientated.
Key words: Business Culture Development, Motivation Factors, Conflict
Management, Cross-Cultural Collaboration.
J EL Classification: J53
UDK: 005.32:331.101.3 005.958
27
Zarko Pavic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
28
Marija Cukanovic Karavidic, Faculty of Hotel Management and Tourism,Vrnjacka Banja,
University of ?ragujevac, [email protected]
276 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Society development and contemporary socio-economic relations create an
increasing need for an advanced business culture in solving a diversity of problems in
almost all areas of human activity. Globalization trends, democratization and political
decentralization, consolidation of capital and business networking in a common
business system, great turbulence in the global financial market, decreasing weight of
centralized decision-making, as well as the advancement of science and technology
with a highly pronounced practical application of acquired knowledge led to
unstoppable changes in the organizational structure and resurfaced the tendency to
provide explicit business culture support in order to ensure necessary prerequisites
significant for realizing objectives set by any organization.
The stated pursuit toward business culture was at first present only in the developed
world, however it has transferred to and engulfed the entire global market of knowledge
and goods, making decision-making increasingly mobile from higher to lower parts of
the system, namely, from one to several persons, members of the group. For that very
reason, collaboration, coordination of activities and teamwork represent prerequisites for
developing and successfully running any modern company, organization or
organizational system incorporated into one joint business network. The aim of
collaboration is to improve relations within an organization, to develop team work and
group decision-making climate, to timely and adequately resolve conflicts, and to thereby
enable a more efficient and effective work process in order to achieve the set plan of the
organization (Martin, 2010, Armstrong, Mitchel, 2007).
Aligning individual and common needs and interests is fundamental in
corporate culture in order to express and project tendencies and issues surrounding
motivation and conflict as disagreements between two or more members or teams
due to different statuses, goals, or perceptions. Fundamentals in any motivational
process and any motivational structure are needs, and resulting interests, values and
personality traits.
The aim of this study is to examine how motives and conflicts influence
business results and business culture projections within an organization with
particular respect for individual and general social needs and interests. For that
purpose original research surveys were prepared and implemented in accordance
with set goals and tasks. Set research goal produced research tasks using questions
on motivation and conflicts concerning the following:
? Defining motivation and conflicts;
? Identifying and interpreting motivation structure, main motivation elements
and conflict structure;
? Establishing relationships between motivation, conflict and other aspects of
a personality;
? Identifying other psychophysical, demographic and professional
characteristics of a personality and social socio-economic conditions for life
and work of employees.
Faculty of Business Economics and Entrepreneurship 277
Active interpersonal cooperation, developed good interpersonal relationships,
and an advanced level of corporate culture have proven essential for the
development and prosperity of an organization in the new political and economic
value system dominating the world today. The very concept of organization has
two aspects:
INSTITUTIONAL ASPECT
(Organization as an institution or functional group)
PROCEDURAL ASPECT
(Method for designing and presenting the system to the members of the organization)
Organizational process involves a detailed description of assigned tasks,
division of tasks and activities, coordination of activities and constant monitoring
and control of the increasing effectiveness. This requires implementing both
internal and external mission (Mi?ovi?, 2000).
Implementation of the external mission requires:
? Defining the position and the role of the organization/institution in the
society and the belonging environment;
? Defining the position and the role of the organization/institution in relation
to set objectives and tasks;
? Aligning the plan of activities with the external mission;
? Structuring the organization based on external demands;
? Appropriately integrating constituent parts for implementing the external
mission;
? Motivating its members in furthering the external mission;
? Timely monitoring and controlling achieved tasks;
? Employing necessary resources and caring for their rational use for the
purpose of implementing the external mission.
Implementation of the internal mission requires:
? A developed work plan on the most rational use of existing resources of an
organization/institution in order to achieve its objectives;
? More efficient execution of planned activities;
? Appropriate control of the assigned tasks and activities completion;
? Organizational structure optimization to facilitate reaching long-term
objectives;
? Delegating organizational units’ authorities and responsibilities to ensure
necessary conditions for performing their activities;
? Creating a positive working environment and motivation for successful
operation;
? Ensuring required financial resources for reaching set objectives;
? Rational use of available resources.
278 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Even though developing a system and an organization often involves structural
and technological changes, the main goal in the process is to bring about change in
people, i.e., in the nature and quality of their working relationships. Successful
development of an organization is therefore directed not only toward the
organization as an entity, but primarily toward individuals and/or groups
significant for the progress and achievement of stated goals of the organization.
In upholding the quality of business activities and depending on the situation
on a global, regional or local level as well as within the organization itself, it is
quite often essential to make and manage changes. Useful therefore is to be on
familiar terms with methods for adjusting to changes regardless of whether the
change is induced by external or internal environmental factors. The most
important methods that can be employed in the process of change (Mi?ovi? et al.,
1983) include:
? Problem solving;
? Organization renewal;
? Collaborative management;
? Cultural environment;
? Action research.
The authors additionally propose three approaches in the process of change
( Leavitt, H.J., 1964), namely:
I. Changes in the organizational structure;
II. Changes in technology;
III. Changes in people.
Human resources managers require good understanding of activities and
techniques that stimulate organizational development. They may be applied in
various situations, such as identifying certain problems and situation in which the
intention is to induce changes significant for organizational development. Three
main techniques are nowadays cited for stimulating development and prosperity of
an organization (DeCenzo, Robbins, 2010), namely:
I. Technique according to the target group;
II. Technique of feedback survey, group and network management;
III. Technique of improving collaboration.
Certain activities implemented with the aim to raise the quality of work in an
organization, ranging from individual training to improved general environment
and climate in the organization, may be based on the following target groups:
? Individuals - training individuals in small groups in order to improve their
skills, especially in the field of interpersonal relations, effective cooperation
and increased threshold for tolerance.
? Small groups - two to three persons training through the so-called
“transaction analysis” in which they practice communication styles and
communication content exchange in order to reduce destructive and
accentuate clean and creative messages.
Faculty of Business Economics and Entrepreneurship 279
? Teams or groups - training teams or group members to better understand
their working relationships. This is done by developing problem solving
skills within a team/group.
? Intergroup relations - training for confronting different opinions based on
which the situation in the organization is assessed. The ultimate goal is to
enable teams and/or groups to prepare action plans and improve job
activities and own efficiency. These meetings are organized following either
significant organizational changes or introduction of new technologies in the
work process.
? The entire organization - either a technique of reverse situation research in the
organization or a network technique for identifying different combinations for
caring for people and production within the organizational process matrix.
Communication studies and social and cultural studies unmistakably reveal a
direct correlation between positive climate in an organization and the achieved
level of communication and tolerance between individuals, groups and teams
within that organization. Technique for improving collaboration is therefore
extremely important and generally accepted in the modern world of management.
Main parameters for attaining a high level of cooperation and collaboration in an
organization include implementation of joint values and strengths, trust between
individuals, groups, teams and top managers, risk taking by responsible individuals
and departments, and finally, a clear representation of all stakeholders in the
organization in terms of higher goals of importance for organizational development
( ,
BUSI NESS CULTURE AND LEADERSHI P
Answering to many questions this day and age impose may help us to become
leaders with a high level of business culture. Introducing culture intelligence in
any business is a major challenge. Leaders ought to employ awareness and
adaptability skills to assess given business opportunities and align their
management with the amount of available power, the nature and values of their
followers and tasks to be achieved.
Leadership is generally defined as the ability to influence others to voluntarily
aim to realize a common goal. Crucial for every leader is building a leadership
style rich in cultural intelligence with a clearly defined and visible performance for
the organization. Achieving aforesaid requires utmost care for attaining
organization’s business and work objectives and care for relationships within the
organization, in other words, requires both organizational and business culture.
The above stated indicates a clear correlation between leadership style and
organizational performance. A great number of other factors also play a part, them
being the structure of tasks resulting from organization’s objectives, leader’s power
and behavior of subordinates, who naturally try to exert influence over their leader
280 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
just as often as he/she tries to exert influence over them. There is no defined ‘best
leadership way’ that can be applied in all organizations and business cultures
throughout the world. However, leadership examples in the world allow us to
understand the great complexity and finesse of business culture influencing forces
:
EXAMPLE 1)
Inherent to Japanese, as opposed to American culture, is a higher level of
power distance, in other words, they expect and accept that leader typically
conducts power. Japanese show more respect for their leaders simply based on
their position, whereas in the USA leaders must earn that respect with their deeds.
For that reason the success of leaders in Japan is largely based on their ability to
understand and attract followers.
EXAMPLE 2)
Leadership in the Arab society is directly ingrained in the historical and
cultural heritage, considerably shaping business tradition, management practices
and expectations from the leader. The management style emerging from such
circumstances is referred to as the “Sheikocracy”. This management style is
distinguished by strong elements of personal autocracy. Leaders shall instead of
respecting procedures appoint based on family relations and friendships.
EXAMPLE 3)
Leader’s legitimacy in Chinese culture is loyalty based, and in a modern
Chinese organization a word of the founder or chief executive is interpreted as law,
resulting in a specific relationship between the leader and followers.
EXAMPLE 4)
Management in France is influenced by a strong emphasis on social
development based on established hierarchy. A large group of middle managers
dealing with an abundance of rules and regulations acts as a mediator between top
management and employees (workers). Even though the system seems confusingly
inefficient, French organizations function rather reliably.
EXAMPLE 5)
The image of Russian leaders as powerful self-rulers is based on the long history
of the country run by centralized authority and responsibility. Centralization of power
created strong bureaucracy at the top. While Russian organizations are trying to find
their place in the new free market setting, Russian leaders are attempting to bring the
responsibility down to the lower hierarchical levels.
Given examples from the United States, Japan, China, Arab Countries, France
and Russia show the complexity of forces that influence leadership styles. The
significance of historical factors and tradition is not to be underestimated.
Individuals with a high degree of cultural intelligence consciously pay attention to
said facts and work hard to improve own knowledge. An aspect of leadership that
ought to be considered focuses on followers rather than leaders, meaning that in a
certain way everyone is responsible and everyone has potential to become a leader.
Faculty of Business Economics and Entrepreneurship 281
The leader needs to consider not only how to persuade, but how the interaction
between his/her exerted influence and influences exerted by others may lead to a
positive outcome. A skilled leader may set goals for his/her followers just the way
they expect him/her to do, and still use formal and informal processes ingrained in
their culture. Managing an organization or a group with a culturally diverse
workforce generally requires strong cultural intelligence.
Respecting diversity and recognizing the principle “Think globally, act
locally!” is a positive objective of any organization. Additionally, leaders must
possess appropriate knowledge and respect earned based on that knowledge. The
advantage of a leader is in the ability to ‘read’ other leaders or colleagues from
other organizations by taking into account their national culture and related
peculiarities. Thoughts on leadership in most recent decades have shifted towards
the idea of a modern leader who ought to transform and improve the management
process primarily through encouraging employees to overcome their immediate
personal interests and goals, and to not only accomplish the desired outcome, but
exceed projected expectations. A leader who truly wants to succeed in this quest
must not merely reward a certain performance of his/her employees and thus
motivate their further work and advancement, but rather, he/she must present a
compelling vision of the future and lead by own example, modeling the desired
employees’ behavior and showing personal interest in each one of them.
However, even with the common comprehensive definition of the
transformation management, employees from different countries have different
expectations regarding their leaders’ behavior. In any case, it is possible that the
implementation of the transformation management requires a specific set of
personal traits not present in every leader. In short, leader must primarily be
familiar with organizational rules. If he/she desires to be recognized as a leader
distinguished by cultural intelligence, he/she must use knowledge and awareness to
develop behaviors that can be adapted to any particular situation or context.
We can conclude that a leader who distinguishes himself/herself by cultural
intelligence can select a management style that will create a balance between
his/her usual leadership style, expectations of followers and demands of the
situation. A good illustrating example authors use is found in the fact that “when
riding the waves, skiing or cycling, in the beginning it is very difficult to find a
balance, but over time it gets easier and easier and more natural” (Tomas, Ikson,
2011, 141-142).
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MOTI VATI ON AND MANAGI NG MOTI VATI ON
Working with people by employing effective communication and adequate
staff motivation, and managing by authority, responsibility, power and influence
today represents a great challenge and task for all managers. Motivation, and in the
narrow sense “work motivation” has proven to be one of the most important
assumptions for effective performance and achieving set tasks for both individuals
and entire organizations. Motivation in an organization is directly proportional to
the quality of results achieved and the level of organizational development. For this
specific reason, every manager wants to have a large number of motivated
individuals and groups in an organization, which is why planned and systematic
work on improving employees’ morale and motivation, an aspect falling within the
scope of work of experts in human resources management, is of utmost importance.
Academically speaking, motivation is an inner impulse that can urge a person to
appropriately react to a series of internal events happening on different
psychological levels (Mi?ovi?, 1983), such as:
? Ensuring basic needs
? Ensuring social needs
? Ensuring personal satisfaction.
From the organizational behavior perspective, motivation is the way in which
drives, aspirations or needs manage, control or explain behavior of an organization.
If motivation is understood as “an effective network of ideas and thoughts”, then
every person has the motivation, although it is either qualitatively and
quantitatively similar or different, and very rarely identical with that of other
organization and/or team member. If motivation is viewed solely through the lens
of a work process and realization of set goals of the organization, then it is either a
“process of stimulating people to act to achieve desired goals”, or it is more a
“management process that affects people’s behavior with regard to manager’s
knowledge on human behavior in a given situation” ( ). The
attitude towards defining motivation in an organization has been changing due to
changes in the very nature of managerial work, in direct correlation with
civilization factors, including: new scientific and technological disciplines, new
approaches in applied psychology, introduction of meditation, relaxation and
physical exercise skills, changes in the substance of expert-employer relationship,
mobility of employment, new jobs, new managerial approaches, computerization of
the society in its entirety, high degree of alienation, alteration of ethical awareness
and morality, etc. The most influential factors in terms of attitude towards
motivation in the workplace include:
? Psychological characteristics of people and their dedication;
? Complexity of work and new technological circumstances;
? Effectiveness of management approaches;
? Social aspects in relation to the organization and its environment.
Faculty of Business Economics and Entrepreneurship 283
Previous research on the importance of motivation for improving work
processes clearly indicates a direct link between the degree of motivation and the
effectiveness of results, even though there are numerous other important
parameters that either directly and/or indirectly affect the level of achieved goals of
the organization.
These include: personal skills, talent utilization, material resources, level of
improved professionalism within the organization, hierarchy of values and
positions, morals, ethics, culture, socialization level, personal and collective
responsibility, commitment to the idea and assurance in strategic guidelines, and
management method of the top management in the organization.
Motivation factors represent different values, situations, standards and norms
that either positively or negatively affect the level of motivation. Major positive
motivation factors or so-called “motivators” are achievement, recognition, personal
work, responsibility, advancement and personal development. Negative motivation
factors or so-called “demotivators” include inefficient administration, incompetent
supervision, poor interpersonal relations and inadequate personal qualities of a
manager, insufficient reward, and poor working conditions.
Common for all demotivators is “deviation from the expected” both in terms
of efficiency and accountability of administration, lack of professional qualification
of superiors, unfair and unequal managerial treatment in respecting those who
really work hard and those with poorer results who, nevertheless are protected from
superiors due to managers/team leaders’ inadequate knowledge, integrity and job
understanding, unequal or insufficient reward as well as unsuitable work conditions
in terms of employees’ needs for good performance of assigned responsibilities and
duties.
In a practical sense, approaching different motivation theories must
differentiate between three paradigms that are based on:
I. Needs
II. Processes
III. Behaviors.
Even though motivation, based on the definition, is a personal phenomenon, in
an organization it represents a systemic problem that must be addressed and
modified based on the structure of the organization, its objectives and real
achievements. Certain authors suggest first analyzing the entire system in which
members of the organization work, and then looking at the impact motivation and
behavior of individuals produce on work efficiency (
. They believe the system itself comprises three following
groups of variable parameters that affect motivation in an organization:
1. Individual characteristics (interests, positions and needs a person brings to
the organization. Given that prior to arriving into an organization people
differ based on their individual characteristic, they clearly harbor different
or possibly similar motives. That is why same motivation does not
produce the same effect with everyone!)
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2. Job characteristics (tasks and job qualities employees consider satisfactory,
further resulting in greater responsibility and work motivation),
3. Work situation qualities (factors in the work environment that stimulate
productivity. A particularly important aspect is the system for evaluation
and reward managers implement, along with the reached level of interest
the organization shows for its employees).
A particular aspect in the systemic approach to motivation is modification of
employees’ behavior that includes a set of various techniques managers can use to
generate individual behavior that would be adequate for assumed work tasks or set
objectives. The most common methods or techniques managers can use to timely
and positively change the behavior of their subordinates include:
? Positive reinforcement or support,
? Learning by avoiding negative consequences,
? Absence of reinforcement or support,
? Punishment.
Managing work motivation is one of the most important aspects of work of
every manager, especially manager who cares about human resources in an
organization. A global economy and proliferation of new technologies,
informatization with a precise control of the entire work process and various forms
of inter-organizational business networks in consolidating capital and prestige in
the market have imposed the importance of motivation at the level of the
organization and its members ( ). Hence, managing work
motivation may be conducted on a macro (focused on the organization) or micro
level (focused on the individual).
A. Measures and activities that may be undertaken to manage motivation on
the macro level include:
? Researching relationships in the organization
? System development
? Analysis of regulatory procedures and rules
? Motivation factors incentives
? Support for factors concerning “business hygiene”
? Improving communication
? Improving participation in decision-making
B. Measures and activities that may be undertaken to manage motivation on
the micro level include:
? Legalizing personal needs
? Creating opportunities for development
? Influencing individual efficiency
? Positive reinforcement in the workplace
? Reward
? Continuity of success
Faculty of Business Economics and Entrepreneurship 285
? Type of reward
? Advancement
? Improvement
? Culture within an organization
? Cooperation and communication
? Expected task performance
? Feedback
? Leadership
? Realistic estimate
? Self-confidence and faith
? Sense of personality
CONFLI CT AND MANAGI NG CONFLI CT
Conflict in an organization represents a disagreement between two or more
members, groups or teams because they have to share insufficient resources or work
activities, or have different statuses, objectives, positions or perceptions. Modern
approach to conflict suggests that conflict is inevitable, and in many aspect even useful
for successfully and efficiently resolving certain situations and issues. Even though
literature differently interprets the mere essence of a conflict given the approach and
the method of its resolution (conflict of interest or values, disagreement with general
objectives, low level of interpersonal relations, influence of demotivation factors,
dysfunctional tendencies in outward or inward organizational development, etc.), it is
evidently one and the same process. It can have both positive and negative qualities
that must be diagnosed in time and the negative impact on the entire organization or
work of individual teams or individuals in the organization prevented.
It is very important to distinguish early on between conflict and competition, since
the two phenomena are often jointly presented (Stoner,Wankel, 1986). Competition is
created when group’s or team’s objectives are not equal and harmonized, and when
groups or teams cannot interfere or influence each other. If a window for interfering
with or influencing work between groups and/or teams arises, the conflict ensues. As
opposed to competition, cooperation and conflict do coexist, as the opposite of
cooperation is not conflict but absence of cooperation. Based on the definition,
cooperation is a process in which two or more groups/teams work together to jointly
achieve common objectives. Based on the aforesaid, a common denominator in a
modern understanding of conflict is that conflict is far more functional and positive in
an organization than it is directly destructive, and therefore human resource managers
and managers in general must timely recognize conflict and manage it by minimizing
its detrimental effects and accentuating useful aspects the conflict may produce
(Rahim, 1985). Experienced and skilled manager must be able to not only identify
conflict but also the conflict phase.
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Conflict process has 6 following phases:
? Potential conflict
? Emerging conflict
? Identified conflict
? Personal conflict
? Conflict episode
? Conflict consequences
Even though the spectrum of conflicts is very diverse in terms of the adopted
resolution approach, emergence aspects, relations within an organization, team
structure and personal traits, one of the educationally most explanatory conflict
classifications is the following (Mi?ovi? et al., 1983):
? Conflicts based on the source and cause (include subjectively induced
conflicts due to poor interpersonal relations, negative personality structures,
opposing attitudes, opinions and interests, and those objectively determined
due to various organizational, technological or economic problems),
? Conflicts based on actors and levels (there are three types of conflicts based
on actors: within oneself, between individuals, and between groups/teams,
whereas based on levels we can differentiate between five possible types of
conflicts: within oneself, between individuals, between individuals and
groups/teams, between groups/teams within an organization, and between
organizations),
? Conflicts based on onset phases (include potential, emerging and identified
conflicts),
? Conflicts based on work and management levels (include vertical, between
various work and management levels within an organization, and horizontal
emerging between individuals or groups working within the same
organizational level),
? Conflicts based on its character (include destructive, due to emotional intolerance or
disagreement with work objectives and work methods, and constructive emerging
due to aspirations to increase individual creative capacities).
Before we proceed with explaining the conflict management procedure, it is
important to learn about potential conflict prevention activities within an
organization. Human resource manager must permanently monitor and insist on the
importance of human potentials, value objectives and needs of members of an
organization, work on risk minimization, create a climate of understanding and
respect, support informal groups in their strive to resolve problems, support the
culture of self regulation in relation to the culture regulated by authority, influence
the division of responsibilities according to levels, encourage innovations and
practicality and be active in harmonizing new strategic interventions with
structures and processes in an organization. Since conflict and the entire
collaborative process significantly influence the functioning of an organization, it
is necessary to recognize models, procedures and methods for managing conflicts.
Faculty of Business Economics and Entrepreneurship 287
World Health Organization has suggested the following measures and activities the
manager must undertake in managing conflict situations (WHO/EURO, 1981):
? Pay particular attention to individuals or groups that are “troublemakers”
? Work intensively on improving communication
? Precisely define “superior objectives”
? Examine the nature of mutual dependence
? Accept and take the risk for proposed changes
? Show authority and “power” when needed
? Limit the activity of opposing sides
? Work on building mutual confidence
? Work on joint acceptance of satisfaction and motivation
? Work on creating empathy towards the opposing side.
Modern management refers to three main outcomes in resolving conflicts with
three outcome options, namely when both sides either win or lose, or when one
side wins and the other loses. Pragmatic approach in managing conflict involves
support for both cooperation and rivalry within the same process as they are not
mutually exclusive. One of the current approaches in managing conflict presumes
precise positive traits that must be adequately stimulated. Managers and human
resource managers nowadays have at their disposal three most important methods
for managing conflict, namely:
I. Conflict stimulation
II. Conflict minimization, and
III. Conflict resolution.
Managers should stimulate and control conflict in instances in which it is
evident that conflict may be useful for organizational development or teamwork
efficiency. Stimulating methods include:
? Bringing people from the outside,
? Supply,
? Organizational restructuring,
? Rivalry support,
? Appointing appropriate managers.
Application of the conflict minimization method is far more present than
conflict stimulation, as it reduces antagonism created by conflict. This method is
mostly employed in situations in which the conflict has already gained its full
intensity as a destructive and disharmonic force for the organization.
Conflict resolution method should be applied once conflict reaches a phase in
which any further postponing may produce serious consequences for the organization.
For that purpose four methodological forms are applied (Muller, 2009):
? Changes in the organizational structure (targeted restructuring of an
organization, changes in sections of the main organizational matrix, with
different links, adequate increase in responsibility where required and new
more efficient groups/teams in the organization).
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? Authoritarian problem overpowering (situation in which the problem is not
resolved but overpowered by forcing the losing party to accept the position
of a higher authority or higher force).
? Compromise (situation in which managers try to convince opposing sides to
‘sacrifice’ some of their positions or requests in order to allow themselves to
‘live’ with their problem even though they have not resolved it completely).
? Joint problem resolution (method for resolving intergroup conflicts with
three possible problem resolution options: consensus, confrontation or
acceptance of a higher, superior objective. It is important to note that
conflict between groups leads to a greater cohesion within a group, whereas
acceptance of a joint, higher goal creates greater cohesion between groups).
REPRESENTATI ON AND I NTERPRETATI ON OF RESEARCH
RESULTS
Research measures a wider set of elements comprising motivation and conflict in
order to study the structure and relations between those elements with employees in
education, by employing the so-called “factor analysis”. The research included a
sample of 247 respondents working in high schools. Respondents were presented with
two groups of questions. The first set of questions included questions concerning work
motivation, whereas the other set of questions were directed toward conflict.
Respondents were within each question provided with answers, each carrying a certain
number of points ranging from 1 (as the least significant) to 5 (as the most significant).
Respondents within each question assigned values from 1 to 5 to oprovided answers
based on which we gathered results further presented in this study:
Table 1: Overview of main characteristics of respondents
Characteristics N %
Gender Female 149 60.32
Male 98 39.68
Total 247 100
Education
High School 23 9.31
Associate Degree 47 19.03
University Degree 167 67.62
Masters Degree 7 2.83
PhD 3 1.21
Total 247 100
Work type Administrative staff 22 8.91
Teachers 47 19.03
Professors 151 61.13
Pedagogues and 7 2.83
Faculty of Business Economics and Entrepreneurship 289
psychologists
Lawyers and economists 14 5.67
Science workers 6 2.43
Total 247 100
GROUPS I N THE MOTI VATI ON FACTORS SAMPLE
First question “Motivation for professional orientation” explains the largest
number of the total variance, where “motivation at work” is defined by the
following elements:
Figure 1:Motivation for selected professional orientation
Analysis of obtained results represented in Figure 1 indicates that personal
income is a priority in selecting a professional orientation. The second most
important factor is personal development, i.e. intention to realize professional
desires of employees. Opportunities for professional advancement at work:
individual is motivated to professionally educate and train only if he/she is
convinced that such behavior will realize personal priority objectives regarding
professional advancement, and consequently an adequate salary. Personal
development in correlation with personal salary leads to the next specific factor,
namely “success at work” or participation in the latest work advancement
developments in a selected business activity.
Second question, “What demotivates you the most at work” is defined by the
following elements:
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Figure 2: Demotivation factors in the workplace
Selected element that influences demotivation of employees the most is
incompetent supervision, clearly pointing to the organizational management or the
organizational process within the organization. Inefficient control leads to poor
results, and therefore demotivates employees.
A third question refers to variables directly defined by the following
motivation factors:
Figure 3: Factors influencing motivation the most
The first most important variable defining the third motivation factor at work
is the “work situation characteristics”, whereas the second is “job characteristics”
indicating the significance of attitudes towards opportunities for and levels in
accomplishing work tasks in terms of their development, mutual disharmony,
partiality, lack of organization and formalism in regards to the opportunities,
expectations and social significance.
Faculty of Business Economics and Entrepreneurship 291
Conducted analyses show specific interdependence between work and
motivation in all organizational systems. The analysis also shows that work
motivation, namely positive and negative effects thereof, must be considered from
psychological, economic, sociological and other aspects, in other words, with an
interdisciplinary approach.
Scientific studies confirm that motivation is an unavoidable work and
development factor playing a significant part in encouraging and satisfying diverse
employees’ needs. Timely insight in multiplicity of human needs and motivational
impulses ensures grounds for designing and creating suitable motivational strategies
that will allow all employees to search and use available options. Changes in the work
content may further encourage and speed up introduction of new work methods and
techniques, directly and positively influencing a range of human abilities and creativity.
WORK CONFLI CT SAMPLE GROUPS
The first factor is a portion of the total “work conflict” variance defined by the
following elements:
Figure 4: The most significant positive effects of work conflict
The first response in a sample was “better understanding of the other side”,
indicating a need to work on building mutual trust and creating empathy towards
the other side. The second answer was “better decision and assessment” indicating
a need to improve communication and joint acceptance of satisfaction and motives.
The third answer was “new ideas and approaches”, in other words, creative
possibilities of opposing sides or individuals as support for innovative processes.
The fifth answer was “possibility for change” indicating a desire for change
through different types of connections, adequate increase in accountability and new
efficient teams in the organization.
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The second factor is defined by the following elements (Figure 5):
Figure 5: Causes of conflict
The first answer in the sample was “relations within an organization”,
indicating a need for joint efforts in resolving issues, considering that conflict
between groups and individuals leads to a greater cohesion within an organization
either by accepting joint objectives through a consensus and confrontation or by
accepting greater and superior objectives. The second most commonly provided
answer was “interpreting the situation”, whereas the third most commonly
provided answer was “personality structure”, indicating the significance of
situation and individual determinants of a personality (conscience, independence,
interests, values, needs, academic level, intelligence, etc.). There are also other
personality determinants such as: creativity, moral values, social status, training,
prestige, etc.
Variables presented in Figure 6 define the third factor:
Figure 6: Created conflicts by character
Faculty of Business Economics and Entrepreneurship 293
The most commonly given answer concerning the third factor was “interest” as
a consequence of different goals, different statuses, positions, etc. The second most
commonly given answer was “rivalry” containing vertical conflicts (conflicts
between various job and management levels within an organization) and horizontal
conflicts (between individuals and groups within the same level in an
organization). The third most commonly provided answer was “emotional
intolerance” including either destructive conflicts due to emotional intolerance or
disagreement with goals and/or work methods, or constructive conflicts emerging
in an attempt to increase certain creative capacities.
Prescribed scope has limited our study of these complex issues. Respondents
were able to select their priorities between three motivation factors and three
conflict factors in a work environment. All respondents provided answers to given
questions (previous ranking of answers) regardless of their group affiliation, age,
gender, employment tenure and education. The study found that there are
differences in ranking answers based on said categories, just as there are certain
correlations between said motivation and conflict factors in the work environment
and their influence on the business culture.
CONCLUSI ONS
? We investigated different influences using a sample comprising 247
education centers’ employees regarding positive and negative motivation
factors and two conflict categories: real professional differences and power
struggles and personality issues.
? The objective of this research was to establish the relationship between
organizational culture and conflict management styles together with
motivation approaches in the workplaces.
? Approaching conflicts with a positive attitude is the best way to make the
most of it and emerge at the end of the tunnel with more creative solutions.
? Business culture does influence motivational practices in terms of whether
the culture is task-orientated or person-orientated.
? Future studies on organizational and business culture must focus on a greater
number of variables, in order to learn about, understand, explain and foresee
professional and individual participation of groups and individuals in
business processes and realization of business results of any organization or
organizational unit.
? Studying these complex issue requires complex theoretical, empirical and
interdisciplinary research, which in addition to motives and conflicts must
include professional capabilities, psycho-social personality traits,
employees’ attitudes towards work and profession, and in particular,
attitudes towards acquiring knowledge and skills.
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REFERENCES
[1] Armstrong, S., Mitchel, B. (2007), The Essential HR Handbook: A Quick and
Handy Resource for Any Manager or HR Professional, Career Press, str. 173 –
174.
[2] Cheese, P., Thomas, R., Craig, E. (2008), The Talent Powered Organization.
Strategies for Globalization, Talent Management and High Performance,
Kogan Page Limited, 11.
[3] DeCenzo, D. A., Robbins, S. P. (2010), Human Resource Management, John
Wiley & Sons, Inc, 21-23.
[4] Dessler, G. (2011), Human Resource Management, Pearson, New Jersay, 33 –
34.
[5] ?or?evi?-Boljanovi?, J, Pavi?, Ž. (2011), Osnove menadžmenta ljudskih
resursa, Univerzitet Singidunum, Beograd.
[6] Grinberg, J., Baron, J. (1995), Behavior in Organizations, PHI, USA.
[7] Kanfner, R., Heggestad, E.D. (1997), Motivational traits and skills: A person-
centered approach to work motivation. Research in Organizational Behavior,
19, 1-56.
[8] Leavitt, H.J. (1964), Applied Organization Change: Structural, Technical and
Human Approaches, N.Y. Wiley.
[9] Martin, J. (2010), Key Concepts in Human Resource Management, Sage,
London, 7 – 8.
[10]Mi?ovi?, P. (2000), Menadžment zdravstvenog sistema (Health System
Management), ECPD, Belgrade, 167-179.
[11]Mi?ovi?, P., Chattopadyay, S., Ramaiah, T. (1983), Management of Conflict,
Collaboration and Team Work, WHO/SEARO.
[12]McClelland, D.C. (1961), The Achieving Society, Princeton N.J., Van Nostrand
and Business.
[13]Maslow, A.H. (1970), Motivation and Personality, New York: Harper and Row.
[14]Muller, M. (2009), The Manager’s Guide to HR, Amacom, Society for Human
Resource Management, American Management Association.
[15]Rahim, M.A. (1985), A Strategy for Managing Conflict in Complex
Organizations, Human Relations 38, No. 1, 81-89.
[16]Stoner, J., Wankel, Ch. (1986), Management, 3rd Edition, PHI, USA.
[17]Thill, J. V., Bovee, C. L. (2011), Excellence in Business Communication,
Pearson, 45.
[18]Tomas D.K., Ikson K. (2011), Kulturna inteligencija (Culture Intelligence).
Belgrade: Clio, 141-142
[19]WHO/EURO (1981), The Design of Training in Health Planning and
Management, Report on Working Group, Berlin, Germany
Faculty of Business Economics and Entrepreneurship 295
THE TRANSFORMATION OF TRADITIONAL
ORGANIZATIONS TOWARDS A MODERN APPROACH
BASED ON QUALITY MANAGEMENT AND EMPLOYEE
MOTIVATION
Marina Gasic, MSc
29
ABSTRACT
Companies must seek to optimize their business rather due o increasing
competition. Profitability is the biggest reason why companies do business, and
thus develop new approaches and ways to make operations more efficient.
Modern business is different from traditional in several aspects. First,
employees are better informed, with better systematically education. Physical work
is replaced by the intellectual and service sector dominates the production. Apart
from this, there are also changes in the business that are very fast acting, and thus
decisions are made at the time the problem occured.
The task of recruiting and retaining quality people in every organization is a
part of human resource management. Appropriate human resources are the
individuals in the organization who contribute largely achieving the objectives of
the management system.
The leaders of modern organization are significantly different from those of
traditional, because today´s economic situation often leads to layoffs to reduce labor
costs in order to improve decision-making processes, whereby to be more effective and
efficient with the aim of improving the overall quality of the organization´s business. It
is in these new situations we distinguish new styles of management such as
transformational leadership, training, „superleadership“, servant leadership and
entrepreneurial leadership. Those who stand out are leadership styles that allow the
inclusions of employees to demonstrate their abilities.
One of the main tasks of a manager is to fully understand the process of
motivation to better influence the behaviour of followers and thus make it more
consistent implementation of the organization´s objectives.
Motivating subordinates is implemented with various strategies such as
managerial communication, then the theory of x-y theory, design work place,
behaviour change, Likert management systems, in-kind and cash incentives.
Key words: Leadership Style, Employee Motivation, Human Resource
Management, Intellectual Capital, The Competitiveness of Enterprises
J EL Classification: B50, M54
UDK: 005.591.4 005.32:331.101.3 005.336.4 005.336.3
29
Marina Gasic, Croatian Employment Service, Osijek, Croatia, [email protected]
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I NTRODUCTI ON
Knowledge is becoming crucial, and thanks to globalization and the
development of technology innovation has become key to global competition.
Flexible workers are becoming a central factor in business and thus encourage the
achievement of competitive advantages. The unification of the world into one
system makes globalization that is actually achieved by constant information and
technological progress. Thus enables the transition from a traditional economy to
the "New" economy, which is also called "knowledge economy". Classic resources
of production are land, labor and capital, but in today’s modern world, the main
resource is knowledge. The only thing that could be recognized through people is
their knowledge and the most important is that it can be constantly renewed.
Employed invest their knowledge in the company in which they work, so the
employees pay should not be considered a cost, all the benefits that are focused on
employees should be considered an investment. Human resources are very
important backbone of management and governance, as well as a mechanism of
forming effective, accountable, transparent and quality of public administration.
Management flexibility creates new demands of human resources.
About mergers and acquisitions of companies is written for many years, as
well as their activities where there are numerous studies. Within society there is
divided opinion on the effectiveness of acquisitions, taking into account the fact
that the performance of the company after the takeover is affected by many factors,
that opens up space for scientific contribution in identifying the impact of the style
of management to successfully manage change in firms that are taken over.
Today, this modern world is ruled by knowledge and technology, education,
expertise and innovation of employees, and the elements which are crucial to
master change and competitive advantage for organizations, and societies as a
whole. Training and development of employees is in constantly growing, so there
is an investment in the skills of employees, regardless of whether they are on the
macroeconomic or microeconomic level.
Unfortunately the Republic of Croatia and its organizations are not particularly
aware of the level and quality of education, which is actually a key to success.
Specifically, in Croatia there are no similar studies specifically based on the
microeconomic level.
From the earliest beginnings of the existence, man was forced to learn,
develop and prosper. Hence the definition of how human learning actually is
preparing to meet their needs. The history also came to the distribution of work and
work organization, and contrast study also belongs to some kind of preparation for
life in a society.
In the twentieth century, industry and later tourism and transport have
experienced unimaginable development and progress. There have also been major
changes within the community as well as the economy. When it came to the oil
crisis in the early seventies, it comes to question the environment that become
Faculty of Business Economics and Entrepreneurship 297
unstable. The reason for this is the so-called completion of so-called Cold War and
the disintegration of the socialist and communist social system that major problems
are due to a market economy and market relations. In contrast, East Asian states
provide great economic progress, regardless of the crisis that has engulfed the late
nineties. Globalization is increasingly becoming the rule in the society and
economy and slowly affects all parts of the world. Some economic activity in some
parts of the world were created in the 21st century, and some are still in the
developmental process, and therefore there is a crisis of certain professions, while
some propulsive branches are enable to progressively develop.
The progress of the economy and economic relations is reflected in the
struggle for consumer’s preference and service users themselves. Many
international organizations are in the process of closing, while others manage to
turn their attention to other activities. Due to such situations there is a clear line
between rich and poor.
Information technology experienced the largest and fastest development. It is
important to notice that the time from discovery to using specific applications is
reduced, while the process of obsolescence of certain knowledge accelerates, which
corroborates the fact that knowledge knows obsolete before another generation of
students or student ends in their education.
Technical education of employees in production and development institutions
must follow changes in the environment in order to be competitive. Social changes
in recent times require more general education, so the general social and
technological progress must use it. It was concluded that education has become the
rule in all sectors of production, but in the economy as well as in science.
Many authors, like (Vuji?, 2004) repeatedly warrned us that a major factor in
successful organizations is to adapt to change, as well as their monitoring in the
environment. The continuous process is an ongoing training and education.
In the world there is a major problem for graduates who allegedly do not have
enough knowledge and skills to work. Therefore, many countries are trying to
incorporate mechanisms for rapid adaptation process in their education systems,
reviewing the major changes in the environment. These school systems are joined
by numerous representatives of chambers of commerce as well as scientific
institutions so the programs become more contemporary.
Science, engineering and technology are in great progress and require a quality
education. Accordingly, there is a development of organization that has its own
interests, and individuals with their needs and desires. Thus, interests are opposed, and
the success of the organization comes aligning the interests of the one and the other.
Interests of the organization and the individual one are completely different
and can lead to conflicts. It is necessary to satisfy the interests of the organization
as well as the interests of the individual, whom sometimes is not easy to achieve,
but we must weigh the effort of education and training of employees. Knowledge is
part of the organizational structure that is increasingly gaining in importance and
affects all aspects of society. Education is not only the area of human resource
professionals and managers, but the whole enterprise, which covers all employees.
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It is very important to recognize motivation as a means of managing human
resources, also recognizing the important when choosing a motivator that will in
the course of this work be the target. In addition to human capabilities and
knowledge there is increasing weight to the interests of individuals and their
motivation. Unfortunately, today's managers forget that in front of each machine
still stand a man, and his knowledge and skills they possess.
Quality management, good team spirit, meaningful planning and good
organization, in a familiar environment, encourages and rewards knowledge and
skills, thus achieving the desired business objectives in the interest of the company
and its employees.
According to Maslow theory, by Abraham Maslow (1943) Vuji? (2004) says
that every man is trying to satisfy five basic needs - physiological needs for love
and security, social needs, the need for respect and power and the need for self-
fulfillment. All needs are psychological in character part the first, which business
linked is primarily related to money.
There are many theories, like the theory of scientific management and the
theory of achievement, they try to explain the nature of motivation and especially
help explain the behavior of individuals in specific situations. There are also a
number of motivational techniques that are available to managers.
In the entrepreneurial society individual staff as well as their motivation and
specialization and promotion become part of the development program of
integrated enterprise quality. The most productive firms become one that fully
includes the premise of employees in their work. Firms has differ two different
types of strategies that must be closely linked with the way of competition in the
market, and by the development, engagement, guiding and motivating and
controlling internal resorce. Compensation strategy should be integrated with the
business strategy, formulated and to enable the achievement of long term
objectives of the business policy and human resources policy.
MOTI VATI ON, I TS THEORY AND MEASUREMENT OF
MOTI VATI ON
In the process of introducing into work it is necessary to inform applicants that
the volume of his work relates to the structure of the organizational unit, to point
out the role that the unit has in the overall enterprise. It is very important to create a
sense of importance, because it will be because of that candidate socialize in the
company. On top of the charts is to develop strong motives, to describe the goals of
behavior.
Motivation may ultimately be viewed as a series, which consists of a need to
feel, and needs lead to the goals to which we aspire, which eventually leads to
satisfaction or dissatisfaction, depending on the performed action.
Faculty of Business Economics and Entrepreneurship 299
The motivation is affected by many factors, which can be divided into three
groups
1. Individual characteristics
2. Characteristics of work
3. The characteristics of the company.
Individual characteristics are those that describe the needs, interests and
character of the individual. Some are in turn driven by money, some with work
security; some are looking for adrenaline, so forth. Characteristics of individuals
almost always have to be in the form of companies to encourage employees who
contribute to the achievement of company objectives.
Job characteristics describe a job where unanimity is essential, team-
mindedness, and above all the responsibility. It is necessary to harmonize the
relationship between individual characteristics and job characteristics.
Characteristics of companies are simply all the elements that contribute to the
efficiency of the company, or company rules, personnel policies, a well-established
management and process rewarding. They are designed to attract new and retain
current employees.
In the modern system of business, knowledge and application of the foregoing
represents an exceptional way to direct the individual and thus successfully predict
individual and organizational goals.
Motivation precedes motif that represents the inner psychological and
emotional boost for a particular activity. One can look back at a few parties; it may
be of material or psychological character.
Defining motif come to the idea that motivation is defined as the collective
notion of human behavior where it involves a lot of interconnected and interacting
factors transforming into a motivational system.
Motivational system is a system of employed measures, advancement
opportunities and training, achieving compliance and more.
The motivation for the work is the totality of the various methods and
procedures for finding, maintenance and growth of the activities of labor. It
represents the activity to encourage success at work.
The person who is responsible for making motivational system must be
prepared to anticipate the interests and reactions of employees, because, of course,
they are all of the different nature. Therefore, the motivational elements affect
different on each person.
We distinguish several incentives for work, most notably are content and
process theories of motivation.
The content theories (Vuji?, 2004) include the theory of scientific
management, followed by interpersonal relationships, then known Maslow's theory
(Vuji?, 2004) of needs, a theory of two factors and three stage hierarchy theories
and the theory of achievement.
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The theory of scientific management, by author Frederick Winslow Taylor
reduces the human motivation to one motive, and that is paid. It occurs at a time
when the earnings of employees were so low that they were concerned with
existential needs.
The theory of interpersonal relationships, by author George Elton Mayo
describes the relations within the group and the relationships between employees
and managers of the company.
Hierarchy of needs theory or Maslow's theory is one of the most researched
and most prominent theory as the author points out that motivation is a process that
never ends. It warns that greater emphasis should be placed on continuous
employee development. It is based on the assumption on the complexity of the
human personality and its needs that are hierarchically structured.
The theory of two factors, the author Frederick Herzberg described as job
satisfaction as an intrinsic factor, and job dissatisfaction as extrinsic factors.
Intrinsic factors to motivators are achievement and recognition for a job well done.
Extrinsic factors are caused by interpersonal relationships, financial or material
incentives, work environment and more.
Theory of three stage hierarchy is also known as the "erg" and is based on
Maslow theory. According to Aldelfereru there are existential needs, the needs of
the connection, and the demands of growth and development. Existential needs are
basic physiological and material needs; the needs of connectivity are needs of
social character. The needs of growth and development describe the initial needs of
individuals who use and develop their potentials where lower needs need to be
saling, in order to execute multiple purposes.
The theory achievements of Mc Clelland and Atkins (Vuji?,2004) highlight
strong desire of employees for achievement and success. It is based on individual
assessment of probabilities.
Further studies of individuals, groups and entire system of an organization are
finding new strategies and principles of scoring, stimulation of workers. The
process theories talk about it. It is such rules mostly are applied in procedural
theory.
Process theory defines how a man motivates and how he makes each decision
in certain situations (Vuji?, 2004). Therefore, we distinguish between the theory of
"path-goal", "VIE" theory, Fishbein model since 1975 (Vuji?, 2004), the theory of
commitment, fairness and expectations.
The theory of "path-goal" describes the path worker chooses in order to meet
his personal goals. He will conduct them in a way that he ordered his vision of
leading the line for their own advantage.
"VIE" theory was given by Victor Vroom in 1964 (Vuji?, 2004) as a theory of
valence, instrumentality and expectations. Valencia is assessment of the
achievements of a particular goal. Instrumentality estimates that the employee may,
for example to achieve a higher salary. Expectation is the attitude with which the
individual can achieve his goal.
Faculty of Business Economics and Entrepreneurship 301
Fishbein model describes how some people can not make certain decisions
without the opinion of others that are very important in their lives.
The theory of commitment by Patricie Smith and C. J. Cranny since 1968
(Vuji?, 2004) is described as a model of what the ultimate effect of employees does
not only depend on the amount of wages, but also on the amount of satisfaction
level. Sometimes the only effect acting on his personal commitment.
The theory of justice J. Stacy Adams since 1963 (Vuji?, 2004) evaluates the
relationships between profit and investment. It is unfair if two people are taken for
comparison, and are not really equal.
The theory of expectations by Edwards since 1954 (Vuji?, 2004) is the driving
force of a man with multiple goals should be and will always choose the one goal
that makes the most impact.
Measuring motivation should be done at least once a year, because this is a
very complex and demanding job. In the process of measuring motivation to work
the problem arises because individuals are not aware of their behavior, and given
that, they are unaware of their motives that initiate their behavior. When
implementing the measures of motivation it is especially important to pay attention
to the shape, weight and tone of the questions, if it is through conversation
Satisfaction at work is an individual's mental attitude towards work
environment.
Various studies (Maruši?, 2001, p. 264) have led to a ranking list of motives
which is led by wages, then advancement, is the work interesting, working
conditions. Most interesting in the above ranking is that wage-led, and in last place
as the motive is knowledge. The problem in Croatian organization is because there
is no built system of evaluation of human capital and promotion of staff.
Manager in order to predict the behavior of employees must know something
about its goals and methods in order to know what to do to achieve those goals.
I NNOVATI ON KNOWLEDGE AND ACHI EVEMENTS OF
EMPLOYEES
Innovating knowledge of employees is contributing to their independence and
greater business excellence. New knowledge takes time before it goes into
technology and application, and it can not acquire and limited to the school.
Knowledge is life-long and very important because it changes the person and
makes it more capable for different and more effective action.
The modern economy is constantly renewed, it's advancing due to the large
investment, but that investment can not exceed those investments relating to
knowledge. The European Union has proposed to allocate at least 6% of the gross
national (Vuji?, 2004) income of all member countries for education. Investing in
knowledge should be seen as an investment in existing and future business.
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The effectiveness of economic and other activities are increasingly dependent
on the general state of science and the level of development of technology,
especially in manufacturing. Science is not just learning or gaining knowledge, but
also the educational activities of people. Technology becomes the sum of
knowledge.
Employer somehow becomes an educational institution, and the manager
professor of his fellow colleagues.
In Croatia, the labour law even prescribe obligations to the employer, it is
obliged to comply with the conditions of work and business, to provide employee
training, but there is also a law in reverse (Vuji?, 2004).
The policy consisted of principles, criteria and specific requirements is an
integral part of the business and development policy of the company.
We distinguish between formal, unformal and informal education. Formal
refers to the classical education through regular educational system and its
institutions. Informal education is reflected in the guild associations and is
available to all citizens through the Internet and other communication flows
individuals which are more accessible than teachers or mentors.
Performance management of employees is an important part of the job of
management of human capital because it contributes to improving satisfaction of
staff and business enterprises. Without effective feedback between managers and
employees that process will be resulted in poor business success or a failure.
Throughout the year, employees are monitored and measured their working
ability in the form of an unformal conversation or in more elaborate form lasting
several days, which includes a variety of procedures. Such a process, depending on
the results of the assessment, contributes to increased wages, then a higher level of
hierarchical work, various benefits and personal development career.
Personal career combines individual and social interests as individuals and
organizations actually become partners. It reflects the ability, interest and
motivation of the individual through its activation during education and work.
Professional development includes a period from sixth year of human life until
retirement. Career progressively advancing depending on the status, remuneration
and responsibilities.
QUALI TY MANAGEMENT AND THE REMUNERATI ON OF
EMPLOYEES
Management has multiple functions, most prominently is the conduct. The key
competitive advantage is the ability to lead, leadership. Leadership is a very
important element of business success of the company. Leadership is a process in
which an individual influences a group or organization in achieving a common
aim.
Faculty of Business Economics and Entrepreneurship 303
The functions of leadership are setting goals, then the motivation of others to
achieve these objectives, management processes during the achievement of goals,
the achievement of unity of effort, innovation knowledge, and adaptability of
groups to local and global changes.
The difference between leaders and managers is that leaders have to take a
vision, people and business excellence, and strive to keep together a group of
people leading them in the right direction while managers are preoccupied with
efficiency. Knowledge, temperament and other capabilities of leaders are important
elements in the process of leadership.
Rational leaders listen subordinates, it participate in decision-making, and is
accessible and tries to solve all the problems in its domain. Often this style is called
socially sensitive. The leader structure and assigned tasks, highlights expectations
that are expected of employees, as well as terms which subordinates must abide by.
Further research is drawing a line between autocratic and democratic
leadership style. Autocratic style is based on a decision by one person that has
completely unlimited power. In this style of management employees have no right
to participate in decision-making, but subordinates are only notified of changes.
This style allows for fast decision making, no employee view, and thus the leader
increases its power. Contrary to this style of democratic leadership style, where
employees are involved in the decision making process. Sometimes leaders held
meetings on a particular topic, where employees share their opinions and base that
counted the votes.
Author Renesis Likert in the 1970s (Vuji?, 2004) developed four models of
management systems: authoritative-exploitation, authoritative-benevolent,
consultative and participatory democracy. Authoritative-exploitation consists in the
fact that employees have no motivation, no communication in the organization's
work, but only receive decisions from the top. Accountability is centralized at the
top of the organizational hierarchy. Authoritative-benevolent system is described as
approachable style of leadership where there is still some kind of reward system, as
well as the communication and teamwork that is on a deeper level than the
previous system. In addition, the authority is not only at the top, but it is distributed
to the secondary level. In consultation system employees are involved in decision-
making, communication is developed in all directions, there is developed teamwork
as well as the system of motivation and responsibility extends throughout the entire
organizational structure. Participatory democratic system is a leadership style in
which the complete trust is in employees hands. In addition, we recognized a
laissez-faire style of leadership where the leader does not behave like the leader.
Actually they provide complete freedom to employees who are trying to achieve
the goals set by managers. I can say that laissez-faire leadership style stands out as
the most successful when managers collaborate with doctors, engineers and other
professionals.
Reward system is located inside the motivation of workers, but also the system
itself can cause unwanted behavior of workers. Reinforcement theory defines the
access to the worker who has earned the award, and to repeat the same behavior in
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the future, whereas expectancy theory emphasizes he expected rewards. In such
cases, we distinguish between external and internal motivation where external
depends on the rewards and inner stems from the very nature of work. From this
context, it can be concluded that it is not always the rule that money is the only
way to motivate employees.
Award program for results and operations in various companies is based on the
criteria for calculating the bonus. Total bonus fund is determined for business year
and consists of the sum of individual bonus amount for each employee. The criteria
for calculating bonuses are systematized for each employee depending on
workplace in organizational structure and the structure of the competence of the
organization. Bonus performance is defined for each employee and contracted by
annex contract for the current business year. The amount of possible realization is
determined in advance by the rank and structure of competence.
Linkage between success criteria with the annual business plan is based on a
monthly basis. Bussines rebalancing plan is ssociated with the share of the total
prize fund. Standards are associated with monthly operating results to a practical
way eliminating the problem about pre paid bonus that was not made.
Organizations typically set limits bonus payments ranking between minimum and
maximum realization of the plan, to the prize fund was stable and thus not be
subject to constant revisions.
The criteria are related to the indices of gross accounts of individual
companies and are connected to the system of calculation of wages. This system is
suited for lower-ranked jobs with the criteria for a larger share of customer
managers.
The sum of the individual criteria for each employee created a set of key
elements of successful performance. The purpose is to select the criteria for the
calculation of the annual bonus and the amount of shares in a percentage.The level
of competence is different, and so is a measure of success, so as the amount of
realized bonus. Employee accomplishing the tasks in a satisfactory manner has
provided a constant bonus for months. But, for example, the Commercial Manager
in addition to the task achievement of sales growth and profit must provide
accounts receivable and purchase high-quality resources. As to his level of
assessment is less, but consequently the work is judged on a stricter manner.
The annual bonus is provided for payment at the end of the bussines year and
is a good mechanism for development workers. The organization benefits from a
quality and efficient operation in terms of increasing the volume of business
results, while the owner is assigned with a motivated and committed to the work
employees, which, moreover, rewarde themselves with operating results. With this
procedure it is achieved its main task, to transform the business environment in a
modern system. Realized are the investments in the most important resource of a
business organization, which are people.
Faculty of Business Economics and Entrepreneurship 305
CONCLUSI ON
In modern society, knowledge is a key factor in achieving competitive
advantage. Employee knowledge and skills are the basic resource of organizational
success, and continuing education and development have become a basic need.
Organizations in the Republic of Croatia, unfortunately not sufficiently improve
the knowledge and skills of their employees to meet the requirements of new
technologies, increase their productivity and become more competitive. Hence
there is a need for significant investment of Croatian organizations in the education
and development of their employees, not only in order to be successful in the
domestic market, but also to achieve competitive advantage in a growing and
integrated European and world markets.
Productive forces such as land, labor and material capital that in an industrial
society were the main elements of competitiveness in the modern information
society is increasingly replaced by intellectual capital, and human resources. To
help organizations become competitive is not so more essential to have the latest
equipment, but people who are capable at all levels and who are willing to
constantly improve their knowledge. Rapid changes in the business environment
had a significant impact on changes in business philosophy and turning the man to
knowledge. Education and training is no longer a privilege of only managers, but
have to be implemented at all levels of the organization. Employees have become
the most important resource of the organization, and their satisfaction is placed in
the first place. Labour productivity and business performance mainly depends on
the knowledge and motivation of staff. Many authors consider that the motivation
should be the sole task of human resources management as motivated staff
provides their full potential.
Education and training, and motivating employees is one of the most important
forms of management and human resources development, and the transformation
of human capital as the biggest investment of each company. People represent
potential which is valid for a maximum, because by innovation knowledge and
skills also with motivation is necessary to improve staff and converte them into
equity by which the organization achieves competitive advantage.
Giving autonomy to employees relating to their work performance is
something to deal with the psychological and managerial research. It may surprise
you how much this case giving autonomy really powerful and how can help only if
used correctly. Let's look in the mirror and think about what we would require to
accomplish a good deal with customers every day.
People have to have a reason that will make them happy when they wake up in
the morning and the reason it should not be the only one that applies to wages. It is
not enough motivation. As a good employer it is necessary to allow employees to
know exactly why they do their job and the best methods to get the job well done.
It makes the difference between an employer who cares and one that does not care
about people in its own company.
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Flexibility plays an important role, not one that is obtained when the job is
complete, but one that allows employees to do the job in the way they think is best.
It is necessary to involve employees in the whole process of doing business so that
they felt the importance of the work itself. Employees must have a good excuse
why they go early in the morning for work, and if they are motivated on this issue
means that they are well explained about the work and if there is a fair worksharing
for the job. Payment only for quality work is not enough, because the quality work
done will be difficult to become a reality if employees do not get the impression
that something about them depends. It is that freedom that employees receive, and
the employer it gives them because it gives them the importance they deserve and
the space they need to be creative and the more the better.
REFERENCES
[1] Babi?, M. (2006), Just a happy employee is a good employee. World Insurance
9 (4): 64-67.
[2] Pološki Voki? N.; Grizelj, H. (2007), Education and Employee Development in
Croatian organizations. Economic Review 58 (12): 851-880
[3] Šunje A.; Rahimi?, Z.; Filipovi?, D. (2012) The role of the compatibility of
management styles to successfully manage change in firms taken over.
Economic Review 63 (8.7): 379-396
[4] Vuji?, V. (2004), Management of human capital. Zagreb: Grafo Mark d.o.o.
Faculty of Business Economics and Entrepreneurship 307
ENABLING EMOTIONAL INTELLIGENCE: EXPLORING
THE SOURCE OF MOTIVATION
Vaibhav Birwatkar, PhD
30
ABSTRACT
To optimize organizational performance and ensure their long term
competitiveness and sustainability, organizations need to be able to fuel their
employees to work at or near their peak level. It is difficult to understand what
motivates people without assessing what people need and want from their work.
Motivation is commitment and obligation to perform tasks without discouragement
or despair in face of failures and as well optimism regarding the future. Decades of
interest in better understanding the determinants of and the processes though
which employees decide to extend varying levels of work effort has resulted in a
proliferation of work motivation theories into the determinants of work related
behaviours. Emotions are a significant determinant of an employee's judgement
about referents, rewards, and equity. Emotional intelligence is emerging paradigm
discussed and researched widely in many organizations to improve businesses and
employee performance. It can help an employee to identify his/her emotion and
deal with it in a more effective manner. Once employees understand their subtle
emotions, they can break the circle of causality and are motivated by the
opportunity to develop their skills or capabilities.
Key words: Emotional Intelligence, Motivation, Emotional Management,
Empathy, Interpersonal Skills
J EL Classification: J28
UDK: 005.32:331.101.3 159.942:159.95
30
Vaibhav Birwatkar, YCMOU, Maharashtra, Mumbai, India, [email protected]
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I NTRODUCTI ON
The major concern of man has been work which has been a cogent and potent
feature of both the old and modern societies. Work plays an important role in the daily
lives of a person, in that it allows individuals to support themselves and others. It also
takes a considerable part of the overall time at man's disposal during his life time, and
the economic benefits accruable to him become a major index of his standard of living.
Attitude is the single most important factor that directly translates into the
level of success achieved in many situations. It impacts success because it
influences perspectives, interpretations, decision-making, actions, and results.
Workplace emotions and attitudes are receiving a lot more attention these days in
many other organizations. That is because emotions and attitudes can make a huge
difference in individual behaviour and success, as well as in the organization's
performance and productivity. Over the past decade, the field of organizational
behaviour has experienced a sea change in thinking about workplace emotions. It
has been said that people join organizations but leave their supervisors. It is a
problem of relationships which is one of those core motivators.
Successful employees present an attitude that reflects positivity, competence, self-
confidence, and a genuine intent to tap their full potential. The emotional drives and
behavioral tendencies that feelings motivate are part of emotional intelligence.
Emotional intelligence is the set of personal characteristics that have an impact on the
way we feel, behave, relate to others, and handle job responsibilities. Emotional
intelligence strengths help employees in remaining optimistic about their work
challenges and in maintaining a high level of work ethic. Factors such as courage,
consideration, and sociability are some other outputs of good emotional intelligence. In
today's challenging world where uncertainties and cutthroat competition are virtually
indistinguishable phrases, motivation is key to success. Motivation keeps employees
interested and drives them to focus their efforts and take actions that help them attain
their targets and taste success. Absence of the right attitude, lack of good emotional
intelligence, and a low level of motivation could make them incompatible with others,
lose direction, feel dissatisfied with their career choices and jobs, underperform in their
roles, lose self confidence, and sub-optimally handle stress.
To be effective, today's leaders have to connect with people on a personal level
and understand what drives their people. Emotionally intelligent leaders are attuned
to their people. They see their people's strengths and weaknesses clearly, so they
can foster that essential sense of competence. They become aware of how their
words and actions support each employee's autonomy, competence and relatedness
and either build or flatten relationships.
Emotional intelligence is the primary driver in leader effectiveness because
leadership is about using influence and building effective relationships, which are
largely emotional tasks. Leaders who put emotional intelligence into action are able
to foster genuine collaboration. This fuels stronger interpersonal connection,
motivating people through relatedness.
Faculty of Business Economics and Entrepreneurship 309
EMOTI ONAL I NTELLI GENCE
Emotional intelligence is defined as "the capacity to deal effectively with one's
own and others" emotions', and encompasses a range of personal, emotional and
social skills that help a person to cope with environmental demands and pressures.
Emotional intelligence and understanding the role of emotions with regards to
behaviour, performance, and development and maintenance of relationships is a
new and emerging area.
It is an important factor in determining a person's ability to succeed in life and
will influence their psychological wellbeing. Emotional intelligence provides an
individual with an understanding of their emotional skills, and therefore a better
understanding and awareness of how to use emotions effectively.
Our thoughts influence our emotions, and in turn our emotions influence our
behaviour and actions. Therefore, given that leadership largely involves personal
interaction and people management, it is essential that leaders possess the skills to
access their thoughts and emotions, and to display sufficient emotional intelligence.
People with better emotional intelligence typically have more success in personal
and interpersonal interaction compared with people who have less effective ways
of dealing with emotions.
The emotional intelligence is a subject that attempts to describe and explain
the emotions status, feelings and human capabilities ( Zadeh, 2007). The emotional
intelligence has been defined as the ability to comprehend and understand the
emotions as to appraise thoughts and dispositions and adapting hem in such a way
that results in the emotional and rational elevation and growth (Goleman, 1995).
The concept of the emotional intelligence has given a new profound depth to the
human intelligence. This is the tactical capability intelligence (personal
performance) while the cognitive intelligence is the strategic ability (long term
ability). The emotional intelligence allows for the prediction for the achievement,
because it shows how a person immediately applies his knowledge for
achievement. The emotional intelligence is a form of the social intelligence that is
efficiently a suitable predictor with respect to the specific areas such as
professional and educational performance. In other words, the emotional
intelligence is the ability to control one's own feelings and emotions as well as the
others' (Bar-on, 2000).
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TWO EMOTI ONAL I NTELLI GENCE MODELS (THE ABI LI TY VS
MI XED MODEL)
There are two predominant models of emotional intelligence: the Ability
Model (Mayer, Salovey, 1997; 2002) and Mixed or Trait-based Model (Bar-On,
1997; Goleman, 1995). The ability model is represented by Mayer and Salovey
who view emotional intelligence as an actual domain of intelligence composed of
specific emotional and mental abilities (Mayer, Salovey, 1997). Ability emotional
intelligence requires the use of maximum performance tests with correct and
incorrect responses and pertains primarily to the realm of cognitive ability, which
is accordingly most appropriately measured by performance tests (Petrides,
Furnham, 2000). The latter, mixed or trait-based model, takes a narrow approach to
emotional intelligence combining emotional abilities with elements of personality,
motivation, and social skill (Bar-on, 1997, Goleman, 1998). This type of emotional
intelligence pertains to the realm of personality which can be assessed by self-
report questionnaire (Petrides, Furnham, 2000).
Mayer and Salovey's (1997) emotional intelligence model encompasses four
interrelated abilities: perceiving, using, understanding and managing emotions.
Each of the four abilities is discussed below.
? Perception of Emotion is the ability to perceive emotions in oneself and
others as well as in objects, art, stories, music, and other stimuli. It entails
identifying information conveyed by facial expressions, tone of voice,
gestures, body posture, colour and other cues.
? Emotional Facilitation is the ability to generate, use, and feel emotion as
necessary to communicate feelings or employ them in other cognitive
processes. This entails the capacity to associate mental images and emotions.
It also includes knowing how emotions influence cognitive processes such as
deductive reasoning, problem solving, creativity and communication.
? Understanding Emotion is the ability to understand emotional information,
to understand how emotions combine and progress through relationship
transitions, and to appreciate such emotional meanings.
? Managing Emotion is the ability to be open to feelings, and to modulate
them in oneself and others so as to promote personal understanding and
growth.
The mixed model of emotional intelligence, represented by the work of Goleman
and colleagues (Goleman, 1998; Boyatzis et al., 2000), includes emotional abilities, but
also a number of elements that are best described as personality dimensions, as well as
some aspects that may have little to do with emotions or personality (e.g., recognising
the need for change; challenging the status quo, choosing team members based on
expertise). The most recent version of the Goleman mixed model measures 20
competencies which can be organized into four dimensions: Self-Awareness, Self-
Management, Social Awareness, and Social Skill. According to Goleman (1998), these
emotional intelligence abilities are considered independent (each contributes to job
Faculty of Business Economics and Entrepreneurship 311
performance); interdependent (each draws to some extent on certain others with strong
interactions); hierarchical (the emotional intelligence capabilities build upon one
another); necessary, but not sufficient (having an emotional intelligence does not
guarantee that the competencies will be demonstrated); and generic (different jobs
make different competence demands). Each of the four emotional intelligence
dimensions is discussed below:
? Self-Awareness concerns knowing one's internal states, preferences,
resources, and intuitions. Self-awareness involves emotional awareness,
which is deemed as the fundamental core ability of emotional intelligence,
and ability to know one's strength and limits and self-confidence.
? Self-Management refers to managing ones' internal states, impulses, and
resources. The self-management cluster contains six competencies, including
self-control, being trustworthy, conscientious, adaptable, taking initiative,
and having a drive to achieve.
? Social Awareness refers to how people handle relationships and awareness
of others' feelings, needs, and concerns. It involves empathy, a service
orientation toward customers or clients, political awareness and
understanding others as well as ability to cultivate opportunities through
different kinds of people.
? Social Skills concerns the skill or adeptness at inducing desirable responses
in others, including general communication ability, ability to influence
others, manage conflict, inspire others via a vision, recognize and catalyze
change, collaborate with others, and promote teamwork.
WHY EMOTI ONAL I NTELLI GENCE?
In recent years, widespread attention has been given to the concept of
emotional intelligence. Much of this can be attributed to the popular book
Emotional Intelligence written by Goleman (1995). In this book, Goleman made
strong claims about the contribution of emotional intelligence makes to individuals'
success and work performance. He identified IQ as contributing 20 percent towards
life success and intimated that the remaining 80 percent of life success may be
attributable to emotional intelligence. Bar-On et al.,(2000) conducted a study
examining the impact of emotional intelligence on occupational performance, and
the results indicated that the ability of emotional intelligence on identify
occupational potential accounts for approximately four times (25 percent) more
variance than IQ (6 percent) when compared with Wagner's extensive meta-
analysis of emotional intelligence (Wagner, 1997). In addition, Stein and Book
(2000) in their book entitled The EQ Edge, which draws on research across 30
professional and managerial career fields, revealed that anywhere from 47 percent
to 56 percent of work/life success is the result of emotional intelligence, with the
range being related to job type. Although there is not a consensus amongst
researchers as to the extent to which emotional intelligence predicts one's
312 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
performance, these studies have revealed that emotional intelligence is a strong
predictor, even more powerful than IQ, in determining one's success and
performance (Abraham, 2000; Ashforth, Humphrey, 1995; Ashkanasy,Daus, 2002;
Goleman, 1995, 1998).
Martin (2004) noted that people are sometimes successful not because of their
knowledge of the tasks, but due to their ability to manage people socially and
emotionally by using charismatic personalities in their communications. This is
embodied in the emotional intelligence concept as "the ability to effectively reason
about emotions and use emotions to aid cognitive processes and decision making"
(Mayer et al., 2000). It reflects the ability to understand and manage emotions and
their interrelations with cognition both in the self and in others to enhance effective
functioning. Martin (2004) suggested that people with high levels of emotional
intelligence have a natural aptitude for emotional perception and can utilize this to
move people to respond positively to them. Mount (2006) conducted a study to
examine the relationship between IQ and emotional intelligence in five roles in an
international petroleum industry, and the results revealed that emotional
intelligence competencies, such as self-confidence, empathy and teamwork, act as
catalysts that enable the cognitive intelligence competencies and the individual's
skills and knowledge (expertise) to achieve international business successes.
In other words, the emotional intelligence competencies created an
environment that allowed the other competencies to be maximized, thereby giving
them traction for performance. Most importantly, emotional intelligence is thought
to be highly malleable and can be developed through appropriate learning
interventions, life experience and is amenable to training (Goleman, 1995; Mayer,
Caruso, 1999; Jaeger, 2003, Lopes et al., 2006). This statement is supported in the
research conducted by Sala (2002) in developing a programme to increase
emotional intelligence at work. The results showed an improvement in emotional
intelligence of individuals who had participated in an emotional intelligence
training programme compared to those who had not.
MOTI VATI ON OF EMPLOYEE
Increasing motivation, commitment and engagement levels are key organizational
aspects nowadays. The development of compensation policies has an important role in
motivating workforce to deliver high levels of performance, discretionary effort and
contribution. The process of motivation usually starts with someone recognizing an
unsatisfied need. Then a goal is established to be reached and that way to satisfy the
need. Rewards and incentives can be established for people to better accomplish the
given goal. The social context will also affect the motivation level. This context
consists of organizational values and culture but it also includes leaderships and
management as well as the influence of the group or team in which a person works.
Motivation can be intrinsic or extrinsic. Intrinsic motivation can be described as the
process of motivation by work itself in so far as it satisfies the personal needs of the
Faculty of Business Economics and Entrepreneurship 313
employee. Intrinsic motivation is self-generated and it is thought that people seek for a
job they think will most satisfy their needs. The factors affecting intrinsic motivation
include for example responsibility, freedom to act, courage to use and develop persons
own skills, interesting tasks and opportunities for advancement. Extrinsic motivation is
the amount of effort other people give to the person to motivate them. Extrinsic
motivation is for example the rewards management provide such as pay rise, praise or
promotion. Extrinsic motivators are efficient but the influence doesn't last long.
Intrinsic motivators tend to have a longer effect as they are inherent and not imposed
from outside. As the needs of individuals differ a lot, it is important to concentrate
carefully on the attachment of goals and incentives given when goals are
accomplished. Motivation theories help to understand different motivators. Motivation
theories have been examined for decades. These theories can be implemented to the
company's human resource policies to get the best out of the employees.
EMOTI ONAL I NTELLI GENCE AND EMPLOYEE MOTI VATI ON
Emotional intelligence can contribute to the achievement of a person. For
example, reflected with the salaries, salary increases with the increase of the
position of the company. Emotional intelligence allows a person to build positive
relationships at work, work well in teams, and build social capital (Yao, 2009).
Motivation often depends on the support, advice, and other resources that available.
Emotional intelligence also can contribute to the motivation of a person to enable
someone to set their emotions in order to cope with stress and perform well under
pressure, and it also can help someone to adapt with organizational change.
Thus, organization is a social system in which members always interact with
each other and also with the external members. The interaction with the external
member is referring to the interaction between customers, suppliers and others.
These interactions are usually needs the great of emotional that can form the basis
of human behavior. The employee that has a high level of emotional intelligence
can clearly feel the emotions of colleagues and managers and accurate
understanding of the meaning of other behaviors, until they can make the accurate
evaluation about their working role that expected by others, and then performs
adaptive behaviors. Therefore, they are more harmonious and more quickly
integrated into in organization, and achieve higher performance.
In conclusion, there are many researches that have shown a positive
relationship between emotional intelligence and motivation. Therefore, this study
was conducted to propose a theoretical framework highlighting the link between
emotional intelligence and motivation.
314 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE THEORETI CAL FRAMEWORK
The sample was delimited to managers from various manufacturing as well as
service sectors including equal representation from domestic as well as MNC
companies. The study was further delimited to managers of only Mumbai corporate
sector. The population consists of all the managers of the various industries in the
Mumbai corporate sector. This includes managers of both domestic as well as
MNC companies.
The sample of the study comprised of 780 top management level managers
from manufacturing and service companies of the Indian corporate sector. A total
of 52 companies were selected as the final sampling unit. Out of these 52
companies, 26 companies were of manufacturing type and 26 companies were
belonging to the service sector. Out of the 26 companies of manufacturing 13
companies were domestic and rest 13 companies were MNC's and from each
company 15 managers were selected.
Emotional intelligence levels and competencies will be assessed through a pre-
designed Questionnaire. The areas covered by this questionnaire can be briefly
summarized as follows:
? The first part was related to finding the awareness level regarding emotional
intelligence as well as its related competencies.
? The second part consisted of a 5 point rating scale of 20 questions related to
the four clusters of emotional intelligence namely self-awareness, self
management, social awareness and social skills.
? The Part 3 consists of a 5 point rating scale consisting of questions related to
leadership whether managers used emotional intelligence to enhance their
leadership skills.
? The Part 4 consists of a 4 point rating scale consisting of questions related
multiple constituents and how far the managers recognize emotions of
multiple constituents and attend them in designing organization functions.
A Two (2) hour workshop on emotional intelligence was conducted in each
company and the data was collected and analyzed quantitatively for each objective.
In the present study both Descriptive Analysis as well as Inferential Analysis were
used. The data was analyzed in terms of frequency and percentage. Mean and SD
were computed and 't' Test and ANOVA were used as part of inferential data
analysis.
Awareness level of emotional intelligence amongst managers
? Informed Awareness - Unprompted awareness
The study proved that that nearly all managers of both Manufacturing as well
as Service did not know as they were not able to name the component with no
prompting.
? Prompted Awareness – Manufacturing – Service comparsion
Faculty of Business Economics and Entrepreneurship 315
Table 1: Prompted awareness - Manufacturing – Service comparison
Manufacturing Service
Emotional Self Awareness 4% 5%
Accurate Self Assessment 2% 2%
Self Confidence 10% 9%
Self Control 8% 7%
Trustworthiness 6% 6%
Conscientiousness 3% 3%
Adaptability 5% 6%
Achievement Orientation 3% 3%
Initiative 7% 6%
Empathy 3% 5%
Organizational Awareness 5% 4%
Service Orientation 3% 3%
Developing Others 6% 5%
Leadership 8% 8%
Influence 4% 4%
Communication 8% 7%
Change Catalyst 2% 2%
Conflict management 3% 4%
Building Bonds 3% 4%
Team work & Collaboration 8% 8%
Total 100% 100%
The levels of prompted awareness varied considerably by the specific sub-
competency concerned. In particular, awareness among the sample of self-
confidence competency was the most widespread in both manufacturing and
service sector of the 20 sub-competencies covered, and awareness of accurate self-
assessment and change catalyst was least widespread.
Table 2: Emotional intelligence of Managers in Manufacturing and Service sector
(both Domestic and MNC)
Manufacturing
N=26 companies
390 managers
Service
N=26 companies
390 managers
Mean SD Mean SD 't' value 0.01 0.5
Self Awareness 8.93 1.6 8.78 1.69 1.26 NS NS
Self Management 16.16 2.9 16.04 2.91 0.58 NS NS
Social Awareness 8.12 2.52 8.21 2.09 0.54 NS NS
Social Skills 22.84 4.6 22.57 4.96 0.79 NS NS
Total EI 56.05 8.78 55.6 8.62 0.72 NS NS
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Table 3: Leadership skills – Managers in Manufacturing and Service sector (both
Domestic and MNC)
Table 4: Multiple Constituents – Emotional intelligence of Managers in
Manufacturing and Service sector (both Domestic and MNC)
Manufacturing
N= 26 companies
(390 managers)
Service
N= 26 companies
(390 managers)
MEAN SD MEAN SD 't' value .01 .05
Employees 13.66 2.40 14.03 1.78 2.49 NS S
Customers 10.78 1.76 10.72 1.67 0.50 NS NS
Investors 7.97 1.68 8.12 1.52 1.30 NS NS
Competitors 7.66 2.69 7.55 1.89 0.66 NS NS
Total 40.07 6.52 40.42 5.31 0.83 NS NS
Table 5: Experience wise comparison using ANOVA
Sum of Squares df Mean Square F Sig.
Self-Awareness
Between Groups 2.269 2 1.135 .412 .662
Within Groups 2077.362 755 2.751
Total 2079.631 757
Self-Management
Between Groups 14.249 2 7.124 .846 .430
Within Groups 6359.515 755 8.423
Total 6373.764 757
Social Awareness
Between Groups 5.039 2 2.519 .464 .629
Within Groups 4100.412 755 5.431
Total 4105.451 757
Social Skills
Between Groups 192.953 2 96.477 4.213 .015
Within Groups 17290.251 755 22.901
Total 17483.204 757
Total EI
Between Groups 345.733 2 172.866 2.279 .103
Within Groups 57279.634 755 75.867
Total 57625.367 757
Manufacturing
N=26 companies
390 managers
Service
N=26 companies
390 managers
Mean SD Mean SD 't' value 0.01 0.5
Leadership skills 13.57 4.18 13.94 3.51 1.33 NS NS
Faculty of Business Economics and Entrepreneurship 317
Table 6: Education wise comparison using ANOVA
Sum of Squares df Mean Square F Sig.
Self-Awareness Between Groups 20.594 2 10.297 3.776 .023
Within Groups 2059.037 755 2.727
Total 2079.631 757
Self-Management Between Groups 32.498 2 16.249 1.935 .145
Within Groups 6341.266 755 8.399
Total 6373.764 757
Social Awareness Between Groups 25.142 2 12.571 2.326 .098
Within Groups 4080.309 755 5.404
Total 4105.451 757
Social Skills Between Groups 597.716 2 298.858 13.363 .000
Within Groups 16885.489 755 22.365
Total 17483.204 757
Total EI Between Groups 1472.253 2 736.127 9.898 .000
Within Groups 56153.113 755 74.375
Total 57625.367 757
Table 7: Age wise comparison using ANOVA
Sum of Squares df Mean Square F Sig.
Self-Awareness
Between Groups 10.358 3 3.453 1.258 .288
Within Groups 2069.272 754 2.744
Total 2079.631 757
Self-Management
Between Groups 93.319 3 31.106 3.734 .011
Within Groups 6280.445 754 8.330
Total 6373.764 757
Social Awareness
Between Groups 3.766 3 1.255 .231 .875
Within Groups 4101.685 754 5.440
Total 4105.451 757
Social Skills
Between Groups 191.358 3 63.786 2.781 .040
Within Groups 17291.847 754 22.933
Total 17483.204 757
Total EI
Between Groups 680.263 3 226.754 3.002 .030
Within Groups 56945.103 754 75.524
Total 57625.367 757
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Table 8: Gender wise comparison
Gender N Mean Std.
Deviation
Std. Error
Mean
't'
value
.05 .01
Self-Awareness Male 594 8.89 1.640 .067 0.424 NS NS
Female 164 8.70 1.717 .134
Self-
Management
Male 594 16.10 2.993 .123 0.141 NS NS
Female 164 16.02 2.550 .199
Social
Awareness
Male 594 8.18 2.128 .087 0.249 NS NS
Female 164 8.04 2.949 .230
Social Skills Male 594 22.82 4.902 .201 0.907 NS NS
Female 164 22.15 4.416 .345
Total EI Male 594 55.98 8.939 .367 1.090 NS NS
Female 164 54.90 7.868 .614
FI NDI NGS
Amongst the sample a strong correlation was found overall and between each
of the four emotional intelligence abilities (self-awareness; self-management;
social-awareness; and social skills) and leadership skills, emotions of multiple
constituents were recognized in designing organization policies.
In essence what the study revealed was that most of the managers in the
manufacturing sector and in the service sector not very well informed about the
concept of emotional intelligence indicating the lack of awareness regarding
emotional intelligence. Managers in the service sector were more informed
regarding the concept of emotional intelligence in comparison to manufacturing
sector. The managers of both manufacturing as well as service were not able to
name the components of emotional intelligence without prompting. Since scores
were mostly below average, efforts to improve emotional intelligence among
managers has to be implemented. Managers were fairly aware of the emotional
intelligence however they are not capable of expressing or describing the term
emotional intelligence in a verbalized way or be unable to even know that they are
using it as they use. The reason behind this could be that managers are not skilled
at expressing themselves and their beliefs or opinions.
The second objective in the present study concerned the measurement of
managers emotional intelligence level for both manufacturing as well as service
sector including domestic and MNC company managers. Emotional intelligence
concerns the degree to which you are able to repair negative moods and emotions,
Faculty of Business Economics and Entrepreneurship 319
and maintain beneficial positive moods and emotions both within yourself and
others at work. Proficiency in this area is typically reflected in congenial
dispositions such as genuineness, warmth, optimism and charisma. The results
indicate mostly an average emotional intelligence among managers. Emotional
intelligence levels for managers of both manufacturing as well as service
companies did not show much difference with most of the managers in the
manufacturing as well as service sector showing to have average level of emotional
intelligence. Self awareness, self management, social skills and social management
all were in the average category. It may be that managers in both types of
organizations possess similar skills that prepare them for their managership
positions. That is, perhaps the manager's share similar experiences overall and
those experiences result in similar levels of emotional intelligence.
The overall leadership skills for manufacturing sector as well as service sector
(both domestic as well as MNC) was found to be moderate with most managers in
the average range closely followed by high range. Differences in emotional
intelligence scores among managers by type of organization showed no significant
differences. Scores indicated that the managers of these organizations were
average, indicating adequate emotional capacity. It may be that managers in these
companies of both the sectors possess similar skills that prepare them for their
managership positions. That is, perhaps the manager's share similar experiences
overall and those experiences result in similar levels of emotional intelligence.
Managers were far below the satisfactory range as far as considering emotions
of multiple constituents in framing organization policies was the concern. To be
adept at an emotional competence like customer service or management of other
multiple constituents requires an underlying ability in emotional intelligence
fundamentals, specifically, social awareness and relationship management.
However, emotional competencies are learned abilities: having social awareness or
skill at managing relationship does not guarantee that one has mastered the
additional learning required to handle a customer adeptly or to resolve a conflict. A
person be highly empathic yet poor at handling customers if he or she has not
learned competence in customer service. Although emotional intelligence
determines the potential for learning the practical skills that underlie the four
emotional intelligence clusters, the emotional competence shows how much of that
potential one has realized by learning and mastering skills and translating
intelligence into on-the-job capabilities.
For self-awareness, self-management, social awareness and total emotional
intelligence there was no significant difference in the mean scores of managers
having different number of years of experience. However for social skills, the
difference was significant. Low emotional intelligence scores in terms of social
skills can be attributed to problems with interpersonal relationships as well as
difficulty changing or adapting. As the number of years of service progress, the
tendency to become adjustment in particular mould becomes intense with the result
that one tries to shun any external changes which might prove to be a hurdle in
routine way of working to which he is accustomed.
320 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
As far as self-awareness, self-management and social awareness is there is no
significant difference in the mean scores of managers having different educational
qualification. For both social skills as well as total emotional intelligence there
exists a difference in the mean scores of managers with different educational
qualification. Improving managers' emotional intelligence would involve education
and specific job-related training. Managers should also be encouraged to enhance
their skills through continuous self-learning.
As far as self-awareness, social skills, social awareness and total emotional
intelligence are concerned there is no significant difference in the mean scores of
managers belonging to different age groups. One possible explanation could be that
emotional intelligence is not a function of age and with the advancing years it does
not get strengthened. Emotions are individual and their expression and
manifestation depend upon individual's profile. Managers belonging to different
age groups may not remarkably differ in their emotional intelligence competencies.
Emotions can be trained probably with experience and exposure.
There is no significant difference in the mean scores of emotional intelligence
gender wise with respect to self-awareness, self-management, social awareness,
social skills as well as total emotional intelligence. The findings indicate that
women score somewhat higher on measures of emotional intelligence than men.
Extensive reviews of the data on leadership and gender indicate that women leaders
are devalued in comparison to their male counterparts, but especially when women
employ a stereotypical male leadership style, namely an autocratic as opposed to
democratic, style. If emotional intelligence plays a role in effective leadership, and
if women, as a group, are higher in emotional intelligence than are men, then we
need to realize that women possess a critical leadership skill.
RELEVANCE
In so far as the management of social behavior involves the management of
emotions (Hochschild, 1983), emotional intelligence has the potential to be a
strong predictor of performance. Hence many organizational researchers have
recently called for more focus on the role of emotions at work.
As the competition heats up and the pace of change is getting faster and the
world more complex, we cannot continue doing business as usual. We need a new
approach that transcends linear thinking and goes across barriers. As organizations
downsize conflicts arise and undue stress is placed on every person within the
organization. Extra pressure from increased workloads and financial stress, coupled
with intra-individual conflict has created the need for and understanding and
regulation of emotions in the workplace. Emotion detection is particularly
prevalent at critical periods for instance during appraisals, promotions or
retrenchment. However, since emotional processes can work faster than the mind,
it takes a power stronger than the mind to bend perception, override emotional
circuitry, and provide us with intuitive feeling instead. It takes the power of the
Faculty of Business Economics and Entrepreneurship 321
heart. The senior and middle level managers' behavior and treatment of their people
determine turnover and retention. They interact daily with individuals who have
distinct needs, wants, and expectations. They significantly influence the attitudes,
performance, and satisfaction of employees within their department and of other
departments.
As organizations begin to understand and implement emotional intelligence
training they can reestablish the sense of a secure caring and people first
atmosphere in their organization. This reestablishment is a key element in meeting
the fundamental need described by Maslow's Hierarchy, of security and sense of
belonging. Emotional intelligence is a simple yet effective route to establishing this
sense in an organization. Furthermore, establishing an emotional intelligence
organization now will ready an organization for the future influx and prepare them
to become a streamed lined and more effective organization.
I MPLI CATI ONS OF THE STUDY
The implications of this study for organizations include a more socially
interconnected, motivated, emotionally healthy workforce, the retention of talent in
Mumbai in the global economy, and increased revenue. A practical implication of a
manager recognizing and developing improved emotional skills, that is, exercising
emotional leadership, is improved individual performance with inherent benefits,
including improved health and well-being, status in the organization and financial
reward.
Organizations may use the results of this study to design training activities to
enhance particular components of emotional intelligence. If these professionals
know the emotional intelligence levels of their managers, they can design
programmes around specific emotional intelligence components. Knowing the
emotional intelligence levels of managers in different types of organizations would
help identify areas for further managerial development.
Furthermore, this study revealed that managers in all of the organizations
studied were average or low in their emotional intelligence scores. If a managerial
program aspires to train managers with exceptional emotional intelligence – like
skills, then this study is of value because it illustrates the need for emotional
intelligence training among all organizations.
Results of this study may also be used by organizations for human resource
development practices and assigning the work profile. If managers are aware of
their strengths and weaknesses in relation to emotional intelligence
subcomponents, then they may be persuaded to participate in managerial
development programs that help them strengthen areas of weakness. Managers may
also use the results of this study to further their understanding of how to enhance
their emotional intelligence in relation to managerial and organizational activities.
322 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Activities that promote active involvement and a sense of commitment will
develop a sense of dependability and collaboration among the membership.
The implication of this study is that by using their own emotional
competencies managers can encourage subordinates to enhance their problem
solving strategy. The perception of subordinates of their supervisors' use of these
skills may have compound positive impact on the subordinates' problem solving
strategy of managing conflict and job performance. Therefore, the challenge for a
contemporary organization is to enhance the emotional intelligence of their
managers. Improving managers' emotional intelligence would involve education
and specific job-related training. Managers should also be encouraged to enhance
their skills through continuous self-learning. Organizations should provide
appropriate reinforcements for learning and improving employees' essential
emotional competencies needed for specific jobs. Education and training may be of
limited value when it comes to improving supervisors' emotional intelligence.
Organizations may have to adapt the policy of recruiting managers with vision and
charisma who are likely to be high on emotional intelligence.
VALUE
The value of this research resides in the directness of the approach, the insight
gained in the experience of managers going through processes of self-management
and regulation. This research provides analysis on the emotional skills of managers
and perceptions of senior executives and managers on the influence and importance
of emotional intelligence for organization effectiveness and individual
performance.
The research points to the need for organizations in Mumbai to establish
emotional intelligence at the forefront of their employee value proposition and
focuses the need for training in emotional intelligence if companies are to compete
successfully in the global economy.
Faculty of Business Economics and Entrepreneurship 323
CONCLUSI ON
The idea of emotional intelligence, and the findings of this research which
supports it, indicates that organizations which select managers on the basis of IQ and
other "traditional" measures will not develop the talent and capabilities which will
deliver their future success. It is clear that managers with high levels of emotional
intelligence have greater career success, foster stronger personal relations, have more
effective managership skills, and are healthier than those with low emotional
intelligence. Further, they are able to monitor and evaluate others' feelings empathize
with others and excel in interpersonal skills It is recommended that organizations seek
out managers with high emotional intelligence and seek ways to enhance the EQ of
current managers. Because this component of managerial success can be developed, it
is also suggested that firms develop programs that enhance the EQ of their managers.
This will enable them to motivate themselves and their subordinates and to work in
more creative, more fulfilled, and more enthusiastic ways.
Results of this study may also be used by organizations for human resource
development practices and assigning the work profile. If managers are aware of
their strengths and weaknesses in relation to emotional intelligence
subcomponents, then they may be persuaded to participate in management
development programs that help them strengthen areas of weakness. Managers may
also use the results of this study to further their understanding of how to enhance
their emotional intelligence in relation to managership and organizational activities.
Activities that promote active involvement and a sense of commitment will
develop a sense of dependability and collaboration among the membership.
An important area of future research concerns carefully designing and
evaluating the effects of intervention on supervisory emotional intelligence in
enhancing positive conflict management styles and effectiveness. Additional
research in this field could be conducted in an attempt to correlate managerial
practices and organizational climate with concepts of emotional intelligence.
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[6] Boyatzis, R.E., Goleman, D., & Rhee, K.S. (2000). Clustering competence in
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Faculty of Business Economics and Entrepreneurship 325
THE MORAL VALUES OF BUSINESS IN VIRTUAL
ORGANIZATIONS
Katarina Majstorovic, MA
31
Dejan Radulovic, PhD
32
ABSTRACT
The context of stakeholder theory specifies the aim of business in a complex
way, taking into account the need to attach importance to the interests of all
stakeholders in an optimal way. Thus defined the framework of business leaves
room for evaluation in terms of ethical standards. The beginning of this evaluation
is the determination of corporate social responsibility. That fact brings researchers
in the position to separate economic and moral values of the business. Our focus is
on moral values. The aim of this paper is to point out the specific articulation of
moral values of business within the virtual organization. First, we`ll point out
which are the basic moral values of business in general, and then we`ll try to
determine how they seem in the framework that is defined by the parameters of the
virtual organization. The theme that emerges as central in this context is the value
of trust and its place in traditional and virtual business concept.
Key words: Social Responsibility, Moral Values, Virtual Organizations, Trust,
Confidence
J EL Classification: Z19
UDK: 005.71-021.131:174
31
Katarina Majstorovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected].
32
Dejan Radulovic, Deputy Minister of the Regional Development and Local Self-Government,
Belgrade, Serbia
326 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
The times we live in set up the requirement to consider the finality of every
experience in which we participate as an imperative. So the research of such a case
is dominantly turned into the functional analysis. If there is something we do, if we
act in a certain way, we sense his actions and proceedings largely founded on
purpose or reason. If you deal with what in ancient times was considered the crown
of our building knowledge, knowledge for knowledge, you can easily be declared a
futile man. In this paper we will try to find the purpose of our business practices,
looking back at the foundation of business practices that comes from the area of
moral values. This will, hopefully and at least partially, be enough for avoiding the
label of futility. First, let us consider the relationship between the action, purpose
and value, the notions that we have already used to announce the topic.
Let's try to find a place in human nature which belongs to the activity of setting
purposes. The will is the power to set purposes. The action is the subject of ethical
analysis. That action is intended, and a presumption of intent is the freedom of the actor
to choose stages on his path. Striving to reach the set purpose is the feature of the
action so conceived. In other words, the decision of reaching the end is mortgaged in
the action. When it comes to values, things are different. Namely, if we have
successfully attained the aim, our action may be declared as valuable from the
standpoint of value that we call success. If so, the actor feels pleasure and happiness.
But such an action is not automatically assessed as valuable in the moral sense, that is,
from the standpoint of moral right. There are at least two reasons for this. First, the
successful realization of the objective can be fully or partially beyond the power of the
actors, so the result is not a matter of their responsibility. Then, it is possible that the
very thing that makes the action positively marked from the success standpoint, to
classify the same action as morally wrong (Babi?, 2007). In terms of axiology the items
that define the actions are not the same if we look from the success as a value
standpoint as if we look from the moral values point of view.
We pointed out that the subsets of successful and morally right actions do not
match, because the values that determine these subsets are not constituted on the
basis of identical characteristics. Their overlapping is accidental, as far as we are
concerned for the characteristics that constitute these values. Let us concern now to
the moral values. What is it that defines an action as morally right? The answer to
this question is different for philosophers whose teachings represent different
ethical theories. Our response arises from deontological ethical theory. We believe
that utilitarianism, as the strongest rival option, is a form of rationality that does not
provide strict ethical arguments. The main reason for that becomes from the very
value field, because utilitarianism defines ethical values through values of utility,
pleasure and happiness, and we have already seen that they are completely
different values and they do not form the basis for the moral evaluation of the
action. In Kant's ethical theory is morally worth action is the action that has been
Faculty of Business Economics and Entrepreneurship 327
done from motives of duty, or out of respect for the moral law. So, if something is
morally right, it is because it is done in accordance with the express intention of
respecting moral standard, and that standard is the moral law. Kant so clearly
points out that the fulfillment of duties is made in the form of serious desires, not
by the indirect causes of success (Kant, 1975, pp. 330). In other words, the
question is not whether we are happy, which occupied a prominent place in the
utilitarian estimates, but whether we are worthy of happiness, as Kant holds.
After these short basic settings, it is clear that we are interested in the nature of
standard for moral right action, when it comes to business practices. So, on the
source of Kant's ethical preferences, we wonder if we are worthy of happiness in
business? In particular, we are concerned by the values that are particularly
important if we ask the same question about virtual teams.
CONCEPTI ONS OF THE NATURE OF BUSI NESS
What are the characteristics of the business practices area? What complicates
the simple application of ethical standards is precisely what defines business
practices. If the goal of business practices is achieving success as measured by
economic parameters, it is difficult to apply the standard of moral right to
something that is defined using the value of success, because we have found that
substantial heterogeneity parameters constitute these values. It is therefore
important to address in the goals that determine the nature of the business more
carefully. On this basis it will be possible to determine the scope for ethical
analysis, and thanks to this we will be able to realize the importance that belongs to
ethics in business.
There are two basic views about the nature of the business, as seen through the
way in which we define its goal. The first point of view is the traditional
stockholder (or shareholder) theory, while the second one is the stakeholder theory.
These theories are confronted primarily in the way they envisage the aim and tasks
of the business subject, ie. In the way they consider the social responsibility. The
traditional approach, whose founder is an American economist and Nobel laureate
Milton Friedman, argues that the sole purpose and obligations consist in profit
maximization. And that defines the corporate social responsibility too. Stakeholder
theory, advocated by Edward Freeman points out that the direct social
responsibilities of the company can`t be reduced to the profit maximization, but to
the obligations concerning social responsibility. Which interest groups and whose
interests should be taken into account? Who are the stakeholders? Stakeholders are
all those who affect the company's operations, or those in which the business of the
company affects. There are several ways to clearly determine who are stakeholders
that should be taken into account. Frequently, economic theorists referred to
primary (directly involved in business) and secondary stakeholders. In more
detailed list we can found shareholders (owners), managers, employees, consumers
(customers), suppliers, creditors, competitors, local communities, government,
328 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
environment, international community and humanity. Each interest group has its
own aim: shareholders want capital (money for his independent values), the
managers want to succeed against the competition, employees want cash and
promotion, consumers want cheaper and better products, etc. Since resources are
limited and there are many preferences, the optimal result involves scarcity and we
have a range of unmet interest. In this conflict of interest situation it is not possible
to find a solution that can make everyone be happy. It is crucial that one gain and
others lose. The manager can`t remain innocent, because the manager is the one
who decides whose interest to sacrifice, and whether that sacrifice was "worth it."
The manager does not bring his money into the business, and his freedom of
decision making is less than the freedom of capitalists, and he deserves his freedom
by his successful enterprise. This does not diminish the complexity of his position,
and daily efforts in making decisions. Sometimes the sacrifice of interest, which is
attached to someone who seems to be far away from business in question, turns out
to be much more expensive for the company's image. So, it turns out that the long
run fact is important moment in the decision making.
What are the limitations of managerial decisions? In the framework of the
classical theory, the manager is required to make decisions that will lead to the
maximization of profit, while respecting the legal restrictions and general rules of
the game (derived from the basic guidelines of business practices and values of the
society). This is often referred to as the principle of moral minimum mandatory for
the business world, because it should, equally as the law and business practices, set
limits to decisions. The moral minimum in business practice determines the
prohibition of harming others. Does this mean that companies have a duty to
prevent harm and are they in the position not to do good? The answer to this
question would require that we thoroughly expound the problem of perfect and
imperfect duties, as well as the concepts of positive and negative responsibility,
which is not the part of our ambition in this paper.
According to the proponents of the theory of interest groups, the task of the
manager when making a decision is to take into account (and to give them weight
to the extent they estimate is necessary and appropriate) all the conflicting interests
of different stakeholders and to respect them, in proportion to their importance. The
regulation, which is present in the business world is legal (external coercion, often
reactive character), derived from the internal code of the company, the normal
behavior and business culture. What would it actually mean, depends on "company
policy", the people who make decisions and those people who are affected by such
decisions. Discussion about the stakeholders is connected with the ethical analysis
of the duties of managers. Do they have a fiduciary duty to shareholders, or they
have a duty of equal respect for the interests of all stakeholders?
What is the ethical aspect of the dispute over the determination of business
purposes? We have found that it does matter whether we're in the business on the
ground of only material interests that require the sacrifice of something that is not
recognized as valuable, or our position is the one that allows us to determine values
that business should affirm, even because that is the way to make some effect on
success of business practices. Business ethics should perceive the target business
Faculty of Business Economics and Entrepreneurship 329
more realistically, in order to have a chance to success in this area. We'll call for
the words of Peter Drucker, who claims that handy epigram of satisfied and happy
employee who is also efficient, shows only half the truth, because "the company
does not have a task to produce happiness, but to produce and sell shoes" (Drucker,
1961, pp. 313). Thus, the world of business is clearly defined with values that are
instrumental. In that area the measures of the success are efficiency, money,
knowledge of opportunities and knowledge, if unfailingly manages to find its way
to the application, ie. cashing. And it would be the best that monetize is
"monetize", ie. not to be at the level of cash, but on the level of capital. On the
other hand, ethical norms are focused on our actions, and we, as people whose
conduct is partly manifested in the business, follow their dictates. We should apply
these standards to the successful and the less successful actions, and these
standards are not defined in terms of instrumentality. But, it is not possible to act
on business alone, in the sense that the field of business has absolutely nothing to
do with morality that is incorporated in us (as well as in business, and society in
general) and with, more or less expressed, awareness of it. Sphere of morality does
not match with the sphere of success in business. But the sphere of morality in the
context of successful operations of business is determines business subject through
the dimension of its social responsibility. Socially responsible corporations have a
greater chance of long-term good business image, and that is certainly something
that significantly affects the performance of the corporation.
The real determination of the business aim as well as the determination of the
factual situation when it comes to responsible business, can use the results of
relevant researches. At this point our attention should focus only on one of them,
which monitors the impact of compliance with ethical standards and principles of
CSR on corporate governance in Serbia. Research has shown (Pržulj,
Radovanovic) that Serbian managers believe that companies have a responsibility
to their stakeholders, and that moral behavior and business success go hand in
hand. Immoral behavior in business is considered unjustified. However, business
practice in Serbia currently testifies that the actual situation is not in accordance
with these views. If the practice is the only criterion, then the request for ethical
and responsible conduct would rest without its base.
BUSI NESS AND MORAL VALUES OF BUSI NESS PRACTI CES
From the standpoint of business values, it looks like the manager within the
classical theory has the task of fighting for one value- profit, and that he is
accountable only to the owner (shareholders). According to stakeholder theory of
values, the profit is one value among others (in addition to personal, legal, moral,
civilized, cultural). The decision about the dominant theoretical conception is the
decision about the acceptance of the sole economic value or the holistic horizon of
values, where the economic value is only one among others. If we include the long
life moment into consideration, making profit as the primary objective that defines
330 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
business, requires that we take into account the values that are not strictly
economic. Thus, the struggle for social responsibility is at the same time the
struggle to build a successful corporation. If so, traditional and stakeholder theory
meet at some point (Beauchamp, Bowie, 2004, pp. 49).
Ethical business means morally right business. Good business can be
determined according to the functional analysis of good, which has been in use
since ancient times. As this analysis assumes that the quality good is attributed on
the base of the use of things, its role and its intended purpose, good business
means business that is successful, which brings profit. Within the stakeholder
theory, which determines the purpose of business by relying on the concept of
corporate social responsibility, business success, by definition, involves respect for
the moral standards. Is the successful business at the same time morally right
business, and what is the nature of this connection? Ethical behavior in business, in
a situation where the moral and successful requests are inconsistent, has a price,
but, as we have seen, brings profit. Here the aspect of the situation in which to get
to the goal involves the elimination of unethical competition cross our mind. But it
is necessary to have knowledge about the tendencies of competition behavior
(problems of game theory and strategic behavior) if we want to make that happen.
We should consider how in this case the hierarchy of interests look like in decision-
making, and whether the costs (care for the environment, employees and the like)
which turns out the dictate of morally right are greater than the profit it is about to
bring.
Thus, we have good reasons to believe that the basic ethical value of business
is trust. If the value of trust defines the functioning of business frame, it`s easier to
understand how does the quest for respecting the moral integrity of the business
participants fit into the broader evaluative picture that shapes the bases of business
practices.
Without trust there is no agreement or contract. The value of confidence can
be attributed to the expression of the moral integrity of the actors, and the respect
for these values at the same time makes room for professional integrity. Observing
the cruel capitalism through the prism of trust as a basic value might seem utopian.
This is justified if we are concerned only with bare facts about business practice.
The basis of business ethics can only be stable and meaningful if it is defined in the
way that affirms values that we claimed to be the basic ones. Also, we believe that
trust as a basic ethical value of business can provide the performance and
profitability of the business. It would be good to address the arguments that support
that thesis, and to show how the idea of ethical business contributes the affirmation
of business values that have nothing to do with ethics. Such an argument would
follow instructive observation of Kenneth Arrow:
"If we look closely, we`ll discover that a large part of the vitality of economic
life depends on a certain limiting degree of commitment to ethics. Completely
selfish behavior of individuals is totally incompatible with any regulated economic
life. Almost without exception there is an element of trust and reliability. A lot of
work is done on the basis of verbal guarantees" (Arrow, 1963, pp. 314).
Faculty of Business Economics and Entrepreneurship 331
If we need to do the job on the basis of a verbal guarantee that anything else
does not ensure, we can`t skip the evaluation of the reliability of the other side. It is
important to explain what it means reliability. In business our expectations of other
stakeholders are related to the expectation of their reliability (trustworthness), ie.
their actions should be such that we can trust them. To specify, they should not
cheat, ie. should not lie, should fulfill promises and respect contracts. That requires
that we should really believe them, and that is our faith (trust) to other participants.
But some authors, such as Ed Soule, distinguish between reliability as confidence
and reliability as trust, holding that only the reliability as confidence has inductive
origin that means that it stems from previous experience that confirmed positive
behavior. And that is why the basic activities in the work place require just the
reliability as trust, for which there is no precise inductive support. Just because of
the risk that is part of this kind of reliability, as there are no guarantees, we
emphasize the need for it; its necessity for the sake of functioning and most basic
business transactions is used instead of the guarantee, we do not have.
We see that the relationship of trust is formed in a complex game of
interdependence, whose duration is uncertain. That fact prevents withdrawal of
strategic moves from one side in favor of purely personal promotion. Without trust
there is no reciprocity. If one of the parties in this relation is worse or weaker, you
never know if the other party will interact in the way to abuse the weakness, if
there is recognition of the fact that trust is not complete. Bearing in mind that it is
almost impossible to do business if the business moves are drawn only within
precise guarantees, it is irrational to claim that cheating in business is a natural
thing. Albert Carr (Carr, 1968, pp. 145-148) is famous just for that position, but he
mistakenly placed contradiction of the business world, arguing that the game of
poker, which mostly resembles the business practices, requires not to trust other
players and to ignore requirements of the friendship.
WHAT ARE VI RTUAL ORGANI ZATI ONS?
There have been many attempts to define a virtual organization. As an
illustration, we will give two definitions: „To the outside observer, it will appear
almost edgeless, with permeable and continuously changing interfaces between
company, supplier, and customers. From inside the firm the view will be no less
amorphous, with traditional offices, departments, and operating divisions
constantly reforming according to need. Job responsibilities will regularly shift, as
will lines of authority- even the very definition of employee will change, as some
customers and suppliers begin to spend more time in the company than will some
of the firm`s own workers” (Davidow, Malone, 1992, pp.5-6) or „virtual
enterprising is a process through which companies team their capabilities, building
upon their ability to define and redefine multiple cross- functional team as needed.
These teams may include not only members of the company, but also people from
vendor or customer companies“ (Savage, 1996, p.231). Without exaggeration, we
332 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
can say that the concept of virtual organization follows and represents the
development of business skills. If we follow the definition that the authors such as
Mowshowitza (Mowshowitz, 2002) have suggested, we will notice that lots of
features are specified but they all are around the basic idea: the virtual organization
is a term used to encompass the capacity of management to meet, again and again,
permanently changing demands of business. Initially, the virtual organization is
supposed to signify that a corporation has a greater capacity than is actually
manifested in a given time. So this concept originated by analogy with the concept
of virtual computer memory (Mowshowitz, 2002, pp.xiv). However, the term
virtual organization is very flexible and includes many forms of business practices
today. Many organizations do not realize that they are in fact a true example of a
virtual organization.
Due to the complexity of the definition of virtual organization and the scope of
literature with this topic, we have chosen to consider the characteristics of the
virtual organization using the example of virtual project teams, for the needs of this
particular study. The reason is based on the simple fact that the virtual project
teams are one of the most modern editions of virtual organizations (the text from
the following paragraph till * is modified according to the source Majstorovi? et
al., 2013, pp. 54-71).
Virtual project teams are teams that have appeared as a result of new demands
caused by the globalization of business. They consist of groups of people who achieve
cooperation almost exclusively via computer and communication networks in order to
get the common goal they have. Face-to-face communication is an exception.
In order to highlight the degree of change, we compare the virtual team with
traditional one. In the traditional business environment, employees physically depend
upon each other. These are people who share office space. Their communication is
manifold in formal and also informal levels. Their manager is a man who knows a lot
about employees and maybe even about their families. He is monitoring their work and
interaction every day. He invites them to individual counseling if needed, and makes
efforts to improve their motivation. Manager includes the new-comer to the collective
by considering his qualifications, as well as examining his ability of fitting into the
existing team. This concept, according to a growing number of virtual teams, dies.
New web technologies (LAN, WAN, Internet) radically altered the appearance of the
project team. What has not changed is the fact that members of the team are also
working on a common goal, and that there are resources that are necessary to achieve
this goal. Everything else is different. The teams bring together people who live in
different countries. It happens that there are people from 26 countries in a team of 35
people (Schneider Electric), and this is just one example. Their office is our planet, as
well as information they possess are limited only by achievements of web technology.
So, these people do not meet in offices, nor are they able to lead informal discussions.
In the traditional model, moving to another place because of business requirements was
a major problem. It isn't easy to leave family and friends, and to put aside relationship
with people at work. Virtual Team was set up as a team of experts in a particular field,
not in a specific country. People in the labor market have become available and are
able to offer their skills to a wider market. The concept of a virtual team saves the cost
Faculty of Business Economics and Entrepreneurship 333
of frequent travel for business meetings, and at the same reduces the effort that travel
brings to people (fatigue, sickness, frequent adaptation due to climate changes). Lot of
money must be invested in improving the informational infrastructure that is supported
by the new technologies. The team members and their managers do not meet at the
same desk in the office, but in front of the web camera, sitting at home in front of the
computer, participating in web conference.
Now, let us mention one important feature of virtual teams, and that is cross-
culturalism. The request for gathering the most competent people, typical for the
virtual team, erased geographical and cultural borders. Geographic dispersion of
the team resulted in a cross-cultural nature of the team. Cross-culturalism is
demanding brand new conditions.
Cross-cultural aspect became an academic and scientific challenge in 1937.
Then Peter Murdock (Murdock, 1940) led a project organized at the Yale
University with the aim to draw attention to specific sociological and
anthropological problems that this phenomenon entails. Today, in the context of
the business problem, specific features that multiculturalism brings seek an equal
effort from researchers. On the one hand, it is necessary to preserve and if possible
enhance focus all team members toward a common goal. On the other hand, it is
important to note the differences that could lead to weakening of pursuit of an end.
It is necessary to know which the differences and to what extent are threatening the
functioning of the team and develop an appropriate treatment for these differences.
It is important to take into account the fact that the funds that can be used are
limited, because the dominant or exclusive communication model is virtual
communication.
What does the aim of managing the cross-cultural virtual team imply? At the
beginning it is necessary, as with any team, to make a team. This means
transforming a group of individuals into a coherent team, able to create a plan of
action that meets certain tasks defined by that plan. This is achieved through
teamwork orientation, which becomes integrally connective tissue of the group.
Creating a team is crucial task. After that, performance management and team
development are two other tasks (HunsakermHunsaker, 2008).
If you gather experts and agree to specific geographically dispersed company,
we have to deal with the requirement to minimize the importance of cultural
differences in order to have successful and effective team. To minimize does not
mean to eliminate cultural differences, because that could harm the integrity of
individual and lock creativity. We should not forget that cross-culturalism makes
coming to creativity and innovation easier. To make this actually happen, it is
necessary to provide an atmosphere that will encourage these values.
It seems that the position of manager of virtual team is extremely delicate. He
needs to mitigate the cultural specificities of the team members, in order to make
them achieve appropriate level. On the other hand he needs to keep them at the
right level and also to encourage those constructive among them. He has to find the
principle of limiting cultural freedom that is legitimate from the interest of the
company point of view. This principle shouldn't harm the moral and business
334 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
integrity of team members. Inventing this principle is a remarkable effort, which
will lead managers to the position of the multidimensional challenges, requiring
substantial ethical weighing. This manager has a much more complex task than
managers in traditional team. Hence his qualifications have to be different.
There are many challenges for managing the cross-cultural virtual team.
Virtual team manager's role looks like the role of manager of traditional team, but
only in some respects. It could be argued that their roles share the same formal
frame. This frame is defined by the prescription of responsibility for their choices
and through connection of the realization of these decisions and the expected
effects. That, in long term conditions, must be interpreted as beneficial. Within this
frame, there are different settings. The work of the virtual team is determinated by
virtual settings. The most prominent challenge in this specific set is the value share
challenge, with the problem of trust as its main subject.
MORAL VALUES OF VI RTUAL ORGANI ZATI ONS
As we have already stated, the crucial condition for making a successful team is
trust. Trust is a value that limits many business practices and makes ethical norms and
principles useful for business. Management theorists have discovered trust as an
important ingredient for competitive success. They needed trust because lack of trust
raises transactional costs and complicates collaborative efforts. It is easier to have trust
as an assumption in business relationships, because without it everything would be
impossibly complicated and expensive. For example, think about the role of contracts
in everyday business, and how often we use them. Without trust as an assumption,
contracts would be endlessly long, spelling out every possible contingency and
defining every conceivable obligation (Fukuyama, 1995, pp. 152).
Some authors name five main disadvantages to a virtual team as: lack of
physical interaction, loss of face to face synergies, lack of trust, greater concern
with predictability and reliability and lack of social interaction (Cascio, Shurzgalio,
2003). In our opinion the problem of trust, which is closely related to specific
treatment of predictability and reliability, is the basic value problem for virtual
teams. The issue of trust is increasingly complex in a virtual environment, though
trust is important condition for the success of any team. Furthermore, this problem
is much more visible in the virtual cross cultural team setting, than in the
traditional one. There are many reasons for this claim, and the first one is
concerned with the way we build trust among each other.
How does phenomenology of coming-to-trust look like? According to one
model (Zaccaro, Bader, 2003) there are three stages of trust. The first stage is the
trust that economists hold to be calculative: there is a good reason for each side to
trust the other. In the new team this stage of trust is recognized as the benefit of
working together. The problem for virtual settings is that there are no guarantees of
future contact, so the calculus, as the base of trust, can’t work. If the only reason
for trustworthy is “because it pays” when we move the possible transaction, we do
Faculty of Business Economics and Entrepreneurship 335
not have the reason that leads to action any more. Trust must rely on the more
solid ground, and maybe that ground can be reached on further stages. *
We may address the problem of trust in various ways. Trust is recognized as
an important issue in organizational psychology, management, public
administration, organizational communication, education (Bachmann, Zaheer,
2006, pp.15). The authors agree on the view that the focus of the management
literature of the 1990s is topic of virtual organization and confidence. As an
example, we refer to the observations that amount to Jones and Bowie (Jones,
Bowie, 1998, pp. 273-292). The authors talk about the economic and social reasons
due to which the trust is recognized as a value that underlies the success of the
virtual organization. Significantly, their observations concern the paradoxes of
virtual corporations (ibid. 273). In fact, it is clear that coming to an agreement in a
short period of time and in terms framed by standard specificity of virtual
organizations may not be possible if we don`t have mutual trust and strong bonds
of cooperation that connect participants of business transactions. The relationship
of trust that we talk about is the trust that no contract can guarantee. Indeed, the
situation in which are stakeholders in the business situations of which we speak
looks like the situation in which are people in so called natural position, before the
occurrence of the state. Their confidence in the political entity that has yet to occur
recalls the confidence of businessmen. There is no contract that guarantees that the
government will fulfill its promise and ensure people the security of life and
property. Nevertheless, people still give up the part of their freedom in exchange
for security services. This is one of many explanations of the origin of the state.
According to that we can interpret the state as a protective agency. However,
although this theory about the origin of the state is commonly called the social
contract theory, there is no contract, because the state can only provide the
contract. If you want to find a contract that is basically in the name of the famous
theory, the most appropriate concept would be determined by a psychological
contract. This agreement has its basis in the will of individuals on both sides, when
it comes to business transactions, too. When it comes to the analogy of the political
sphere, the state guarantees the validity of the contract, and the emergence of the
state enables trust. Such confidence is essential in the business we're talking about.
Jones and Bowie argue precisely the thesis that only such, they call it the moral
concept of trust, which is ethically-based and which does not have the usual
guarantor, can enable business success.
This is a very strong notion of trust, and thus there is a demanding condition
posed to virtual organizations. Ethically-based trust, hard-core trust, as otherwise
we call is a conditio sine qua non for the success of virtual organization. One
justification for this claim is found in Norman Bowie`s arguments. Bowie`s moral
treatment of trust provides the answer to our normative ethical orientation of
Kantian type. Bearing in mind our core ethical beliefs, Bowie's arguments are very
interesting to us. He argues that the definition of the capacity of the negligence of
trust as inappropriate maxims that express the neglect of trust can`t be practically
universalised. Drawing on observations of Kosgaard, he emphasized that there
actually is a pragmatic contradiction, which occurs whenever the success of
336 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
achieving a goal depends on the exception to the application of certain practices.
Thus, a false promise is a pragmatic contradiction, because the success of such a
promise in reaching the specific goal (money), depends on the fact that most of the
promises we do not use in that way. This means that a false promise is not
promising paradigm, on the contrary, it is an exception, and can lead to target only
accompanied with the background assumption that it is the exception to the
standard cases of promising. This way Bowie's argument fits into standard of
practical universalization- the maxim of a false promise passes the test of logical,
but not of practical universalization. And practical universalization is the
paradigmatic ethical test, which detects the moral right. Finally, we can conclude
that if the Bowie`s argument of ethical grounding of trust is valid, it would have
important implications to the way we comprehend the notion of trust. Trust is not
only a descriptive term, but essentially a normative concept. Thus, the requirement
for trust in business can`t be excluded by the fact of numerous scandals, as they
miss the nature of the real requirement.
Virtual organizations are very specific. So, people whose conduct would be
otherwise in accordance with the ideal of education and the aim of moral autonomy
would be the best to engage in virtual organizations. That is partly because the fact
that only autonomous personality can successfully take part in the organization that
incorporates laissez-faire style. The main feature of such a style is high level of
individual freedom. Virtual organizations are much alike such model of leadership,
and that is why management has a coordinating role unlike its role in the classical
styles of guidance.
CONCLUSI ON
We offered factual and normative arguments to demonstrate the essential
importance of the existence of trust in business practices. To ignore the trust means
not to understand the purpose of business, because without trust this purpose
generally is not achievable. As we have focused on the trust that does not an
inductive origin, so- called hard-core trust, it is clear that we don`t have strong or
any guarantees for that kind of trust. The insistence on the affirmation of the trust
value within the overall business environment goes hand in hand with the
insistence on giving priority to moral reasons (which is an essential feature of
moral integrity) at the individual level, when speaking of participants in the
business activity. And that is a significant task for business ethics.
Faculty of Business Economics and Entrepreneurship 337
REFERENCES
[1] Arrow, K. (1963), Social Choice and Individual Values. Yale University Press.
[2] Babi?, J. (2007), Sre?a i moral. Filozofski godišnjak, pp.121-151.
[3] Beauchamp, T.,Bowie N.(2004), Ethical Theory and Business. New Jersey:
Prentice Hall.
[4] Carr, A. (1968), Is Business Bluffing Ethical?. Harvard Business Review,
january- february, pp. 143-153.
[5] Cascio, W.F.,Shurygailo, S. (2003). E-Leadership and Virtual Team.
Organizational Dynamics, 31 (4), pp. 362-376.
[6] Davidow, W.H. ,Malone M.S. (1992), The Virtual Corporation. New York:
Harper Bussines.
[7] Dirks, K. (2006), Three fundamental questions regarding trust in leaders, in
Bachmann, R. and Zaheer, A. (ed.), Handbook of trust research. Glos UK:
Edward Elgar Publishing, pp. 15-27.
[8] Drucker, P. (1961), Praksa rukovo?enja. Zagreb: Privreda.
[9] Friedman, M. (1962), Freedom and Capitalism. Chicago:Chicago University
Press.
[10]Fukuyama, F. (1995), Trust. New York: The Free Press.
[11]Hunsaker, P.L.,Hunsaker, J.S. (2008). Virtual Teams: A Leaders Guide. Team
Performance Management, 14 (1/2), pp. 86-101.
[12]Kant, I. (1975), Kritika mo?i su?enja. Beograd: BIGZ.
[13]Majstorovi?, K., Pavi?, Z., ?ilerdži?, V. (2013), The challenges of managing
cross-cultural virtual project teams, in Entrepreneurship, finance and education
in the digital age, Germany: LAP Lambert Academic Publishing, pp. 54-71.
[14] Mowshowits, A. (2002), Virtual organization. Westport: Quorum books.
[15]Murdock, G.P. (1940). Cross-Cultural Survey. American Sociological Review
vol 5, No 3, June, pp. 361-370.
[16]Pržulj Ž., Radovanovi? B. Affirmation of principles and improved governance
in Serbia- Business ethics and corporate social responsibility.http://www.ien.bg.ac.rs/images/stories/download/managestr_ch18.pdf
(20.04.2014.).
[17]Savage, C.M. (1996), 5th generation management: co-creating through virtual
enterprising, dynamic teaming and knowledge networking. Boston:
Butterworth – Heinemann.
[18]Zaccaro, S.J.,Bader, P. (2003). E/Leadership and the Challenges of Leading E-
Teams: Minimizing the Bad and Maximizing the Good. Organizational
Dynamics, 31 (4), pp. 377-387.
338 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ORGANIZATIONAL DIAGNOSIS AND MANAGEMENT
OF CHANGE IN ORGANIZATIONAL CULTURE OF
BANK INSTITUTION
Miryana Stancheva, PhD
33
Snezhana Ilieva, PhD
34
ABSTRACT
The identification and comparison of the current state of an organizational
culture and the desired future state allow the planning and implementation of
subsequent interventions in the ways an organization functions. This article aims to
present the results of a study of organizational culture in a bank institution and to
outline the main areas in which the necessity of future organizational change is
proved. A profile of this organizational culture is established, which represents it
as a purposeful, clearly structured, and highly market-oriented one. The good
relations, cooperation, and willingness to disclose innovation and development are
highly appreciated. Stability and continuity between current and desired
organizational culture are established with emphasis on the need of strengthening
the orientation of the external environment, on one hand, and on the other, on the
need of autonomy and independence of the employees in the working process and
also on the importance of good relationships and traditions. The results of the
study of the preferred future organizational culture in the banking sector can be
obtained in process of change management and in determining the domains where
an intervention is needed to achieve an organizational change purposes. They can
be combined in the following sectors: providing more independence and flexibility,
and improvement of the inter-bank communication channels.
Key words: Organizational Culture, Organizational Change Management,
Types of Organizational Culture, Bank Sector
J EL Classification: L20, M14
UDK: 005.32:336.71
33
Miryana Stancheva, Sofia University “St. Kliment Ohridski”, Sofia, Bulgaria,
[email protected]
34
Snezhana Ilieva, Sofia University “St. Kliment Ohridski”Sofia, Bulgaria, [email protected]
Faculty of Business Economics and Entrepreneurship 339
I NTRODUCTI ON
Bank sector is one of the most dynamically developing and strongly
competitive sectors in which mergers and acquisitions are often applied. This
requires of its management not only to manage the process of continuous changes
implementation in service quality and to resist the pressure of the competitors, but
also to know how to build and maintain an organizational culture which is
congruent to the requirements of the external environment, and, in the same time,
reflects the specifics of the particular bank and gives it an uniqueness.
Culture is broadly defined as a “system of basic assumptions, beliefs and
values found, identified, developed and taught by a group in the process of dealing
with its problems of external adaptation and internal integration, and adopted as
valid by all members of the organization for the correct way to perceive and solve
problems” (Schein, 1992).
In order to make a successful change in the organization it is necessary the
totality of intentional and goal orientated actions to be precisely planned on the
base of organizational diagnosis of the recent state of the organization, which
results in developing of strategies for accomplishing the change and applying the
relevant approaches, interventions and organizational practices. The main goals of
the organizational change include increasing of the organizational ability to adapt
to the external environment and to integrate the changes that were done, which
reflects in change of the organizational culture and behaviour of the employees, i.e.
organizational change should achieve simultaneously adaptation to the market
environment and internal integration, on one hand, and shared values and patterns
of behaviour, on the other.
Exactly because of this, the success of organizational changes can be evaluated
by the dimensions of organizational culture which not only differs one organization
from the others in the same sector, but also ensures sustainable development and
effectiveness. The organizational culture has many functions which prove its
significance for the development of one organization. The most important among
these functions are the adaptation function or adjustment to the changes in
organizational environment and context, and the integration function which is
focused on the processes within the organization (Schein, 1985). The role of the
integration function shows itself in the influence of the organizational culture on
team effectiveness, and on the commitment and identification with the organization
as well as in the coordination and communication between different structural
sections which ensures internal organizational stability regardless of the crises that
occur outside the organization (Ilieva, 2006 b).
According to S. Robbins, there are six major forces that promote
organizational change: the changing characteristics of the workforce, technology,
economic shocks, changing social trends, the "new" world politics and changing
characteristics of competition (Robbins, 1983). All these destabilizing forces affect
340 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
organizations because they put them in a new situation, which imposes new
internal and external conditions of existence. For this reason, organizations must
continually adapt to the environment and this is only possible if there are changes
in the culture of the organization according to the context requirements.
Achieving these two main organizational culture's functions - external
adaptation and internal integration (Schein, 1992) can be found in bringing to four
main types of organizational culture, which are subject of research in the
competitive model of organizational values (Quinn, 1988). This model provides a
possibility to compare the main types of organizational culture and to assess their
influence according to the dominant value orientation in every one of them. The
four types differentiate between themselves according to two main value
orientations - orientation towards internal and external environment, and
orientation towards flexibility and independence in actions, and towards stability
and control (Cameron, Quinn, 1999).
The values inherent for the organizational culture of clan type include traditions,
loyalty, interpersonal relationships, team work, and accepting the organization as bigger
family. The manager is expected to be a father figure, mentor, and facilitator of the
processes, whereas the organizational strategic goals are human resources development
achieving high degree of attachment and labour moral. The orientation in the adhocracy
type of culture is towards external environment and the strategic goals and values
comprise dynamism, growth, innovations and creativity. The successful management
requires the managers to be innovators and entrepreneurs, and to be ready to take risks.
The hierarchy type of culture stands on the processes within the organization and the
stability, order, clear rules and procedures have priority. The managers' role is to
coordinate and organize the implementation of the work and the interaction between the
employees. The market type of organizational culture supposes searching for competitive
advantages and, in the case of administration, recognizing the external environment and
the requirements of the citizens. Motivation for achievement and determination are the
preconditions for effective leader's style in market organizational culture (Cameron,
Quinn, 1999). Organizational culture contains characteristics of every type of culture, but
the dominance of one particular orientation defines its specifics and differentiates it from
the rest organizations (Meschi, Roger, 1994).
Organizational diagnosis incorporates the assessment of the current level of
functioning in order to plan an appropriate future intervention and change.
Organizational diagnosis process requires collecting information about the
problems and their origin and the existing organizational difficulties, exploring the
possible solutions and ways of organizational improvement and choosing the
appropriate organizational interventions.
Organizational diagnosis could be viewed as a comparison between the current
and desired organizational state (Beckhard, Harris, 1987), as a process of data
collection for discrepancy between the ideal and current behaviour manner (Blake,
Mouton, 1989) or as a means for outlining the differences between the
organizational situation now and the situation that ought to be (Weisbord, 1985).
Main goal in the organizational process analysis is to disclose the forces and causes
Faculty of Business Economics and Entrepreneurship 341
led to the current situation in the organization, and to define ways and tendencies
toward achieving a new desired organizational state. Organizational diagnosis's
main purpose is data collection about the current "picture" of the organization,
which would serve as a basis for short-term and long-term changes and
improvements in its functioning (Ilieva, 2006 a).
The goal of this survey is to measure and to establish the recent organizational
culture and the desired future culture in the chosen, representative for the sector
bank, by defining the dominant type of organizational culture and, on this basis, to
diagnose the spheres where future optimization and organizational change should
be made. Congruence is expected to exist between the perceived and the desired
future organizational culture (stability), as well as to be observed clearly dominant
type of organizational culture, focused on market success.
RESEARCH METHOD AND SAMPLE
To measure the recent organizational culture and the desired future one, K.
Cameron and S. Freeman’s model of competitive values is applied which gives an
opportunity to define well each type of organizational cultures (Meschi, Roger,
1994). The questionnaire is based on the theory of competitive values and it shows
appropriate psychometric qualities (Cronbach's alpha, ? = 0, 731, current state;
Cronbach's alpha, ? = 0, 813, future desired state) (Ilieva, 2006 b). It contains 16
questions which measure four types of organizational culture - clan, hierarchy,
adhocracy, and market cultures. Questions are divided equally in four scales and
are evaluated by a 5 point Likert scale.
The questionnaire was given to the respondents to fill it twice. The first evaluation
is relative to the way they perceive the recent state of the organizational culture,
whereas the second evaluation is relative to their personal perception and concept of
the desired future state of the organization. In this way, comparing the results we can
diagnose the employees’ perception of the organizational culture dimensions and its
strengths and weaknesses. Thus, spheres of discrepancy between the real and the
desired organizational culture in the Bank could show up and preconditions for future
structuring of effective plan for organizational change could be created as well as what
is necessary to maintain and to improve in organizational culture.
For conducting an organizational diagnosis we used the R. Preziosi
questionnaire, based on the six-component model of Marvin Weisbord (Weisbord,
1985; Hamid, 2011), which contains the following components: goals, structure,
relationships, rewards, support, leadership. This model is based on the systematic
approach and it is aimed to analyse the interrelationships between the particular
variables that affect the ways the organization is managed. Preziosi had added to
these spheres another one – change that measures the attitudes and resistance to
change. The questionnaire shows good psychometric properties (Cronbach's alpha,
? = 0, 926) and is composed of 35 items, divided by 5 in 7 subscales (Preziosi,
1995).
342 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
SAMPLE
The data were collected in international bank institution which has more than
17 years of history on the Bulgarian financial market. This bank has Central Office
where more than 250 employees work, and financial centres throughout Bulgaria
where the employees are approximately 400. The respondents that took part in the
survey are 70 specialists who work in functional, business and risk departments.
They were randomly chosen and 90% of them work in the Central Office. 44 of the
respondents are women which is 62, 9% of the sample and respectively 26 are men,
which is 37, 1% of all the respondents.
RESULTS AND DI SCUSSI ON
RECENT STATE OF THE ORGANI ZATI ONAL CULTURE
The expectation that one dominant type of organizational culture has been
established was justified to a certain extent, but results show that the Bank’s
organizational culture is a balanced combination of the 4 types of organizational
culture (Figure 1). The employees define the organizational culture as market-
orientated ( = 3, 88, SD = 0, 5) and that has given a reason to define the
following characteristics of the Bank organizational culture which are: orientation
towards stability and control, on one hand, and orientation towards external
environment and result achievements, on the other. The manager is perceived as
responsible to reach the organizational goals and tasks which is extremely
important for the organizational stability and success.
Figure 1: Organizational culture types
Faculty of Business Economics and Entrepreneurship 343
There is a statistical significant difference between the employees who work in the
Central Office and in the Financial Centres (? = -2,081, ? = 0,041 (p? 0, 05). Those who
work in the Bank branches/Financial Centres evaluate the organizational culture as
market orientated ( = 4, 37) much more than their colleagues from the Central Office
( = 3, 84). The difference comes from the job specifics of the employees in the
Financial Centres – every day they meet clients, work with the Bank trade products and
make direct efforts and actions toward goals achievement.
The results indicate for peculiarities of the organizational culture of the current
bank and meanwhile the culture types can be defined as typical and representative
for the whole banking sector. Being mainly market-orientated culture, it
emphasises innovation, dynamics and development (adhocracy type), notices the
requirements of the work and specific job procedures (hierarchy type) and
meanwhile appreciates the unity, loyalty, ethics, traditions and good relations. The
competitive advantage is based on stability of organization achieved by combining
the orientation towards external environment which can be seen in the higher
values of the market type of organizational culture with the orientation towards
keeping the internal rules, order and hierarchy which are typical characteristics for
the hierarchy culture. Flexibility towards external environment can be achieved
through the adhocracy type of culture which increases the innovativeness and
develop organizational ability for adaptation and maintains its competitiveness.
DESI RED FUTURE ORGANI ZATI ONAL CULTURE STATE
(COMPARATI VE ANALYSI S)
The results about future desired culture state show employees’ preferences that
the characteristics of all types of organizational culture be expressed more strongly,
except the characteristics of hierarchy type of culture which respondents would like
to decrease a little or to keep them in the recent state (Figure 2).
Figure 2: Comparison between recent and future desired state of organizational
culture types
344 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
The biggest differences are observed between the clan and the adhocracy types of
organizational culture. This result indicates that employees have preferences to
increase the flexibility and autonomy, which the organization allows them in the recent
moment and, in the same time; they have readiness for innovations (adhocracy
organizational culture). The change towards creating an organizational culture which
contains characteristics inherent for the clan type is also pronounced (recent state: =
3, 18; desired future state = 3, 90; SD= 0, 67). Employees would like to develop
further the good relations and teamwork they have with their colleagues and are ready
to commit and involve stronger in the organization activities.
Comparison of the profiles of the recent and future desired culture gives a chance
to bring out tendencies in the practices of support and improvement, which should be
taken into consideration in the future bank management actions toward leading in
changes in the strategy, structure and human resources management (Figure 3).
Figure 3: Recent and future desired organizational culture’s profiles
The tendency for agreement in sustaining the market and hierarchic types of
culture is kept, but obvious preferences for change and improvement of clan and
adhocracy types of cultures are also demonstrated. To summarize the established
differences, it could be concluded that the desired image of the future Bank’s
organizational culture is based on the already existing recent orientation towards
stability and control, but at the same time organizational culture is expected to be
much more open to and orientated towards the external environment, which will
give the employees more freedom, independence/autonomy and flexibility in the
working process and will put higher the importance of good relations and traditions
which give a sense of social and organizational support and loyalty.
Faculty of Business Economics and Entrepreneurship 345
ORGANI ZATI ONAL DI AGNOSI S
The analysis of the results of the conducted organizational diagnosis provide
comprehensive picture of the way in which the Bank operates and give additional
information about needed changes (Figure 4).
Figure 4:. Values of organizational functioning components
The surveyed employees evaluate positively the relationships they have in the
organization with their colleagues ( = 3, 84; SD = 0,55) which give them a sense
of support and security, and allow them to show good job performance. Important
components to sustain this atmosphere are the relationships with the line manager,
which are good for 87,2% of all the respondents. A confirmation for those results is
the fact that employees and their teams are supported by the line managers through
new ideas and advice, that help them in the successful performance (support
mechanisms: = 3, 63; SD = 0, 54). Overall, they have been satisfied with the
information they received about their tasks, but do not highly appreciate the
mechanisms for assuming obligations. With regard to possible future changes,
surveyed employees, albeit moderately, find out a potential in the banking
institution ( = 3, 35; SD = 0, 46). According to them, when new strategies and
implementation procedures are introduced, the organization does not have a strong
resistance, but it does not actively support the innovation. Respondents have a
positive attitude towards change, confirming the results obtained from the study of
current and future organizational culture.
With regard to the structure ( = 3, 65; SD=0, 54), according to employees,
the existing division of labour is dependent more on the achievement of the
346 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
organizational goals and is not assessed as very flexible. The top rated
organizational functioning component is leadership ( = 3, 87; SD = 0, 46). With
respect to the development and success of the bank, employees attribute great
importance to the initiated rules and the management approaches, and appreciate
the efforts of the entire leadership to achieve the goals.
Employees clearly understand the goals and priorities of the organization
(goals: = 3, 87; SD = 0, 47), they are aware of their personal goals, which
largely correspond to group goals. The lowest rated organizational component is
the rewards they receive (rewards: = 3, 12; SD = 0, 68) and they do not perceive
the options for personal and professional growth, available to them, as viable.
According to them, the proportion of the efforts they make, the job they do, and the
rewards they receive is satisfactory, but they are not quite convinced how equitable
the payment levels of all the subordinates are.
CONCLUSI ONS
The data allow establishing an organizational culture’s profile which can be
considered as representative for the banking sector. The studied organizational
culture is strongly orientated toward goals achievement and results, and toward
market stability. It is clearly structured, and focused on following, and keeping the
rules and procedures, which create stability and order inside the organization. In
this regard, good relations, friendly support, and cooperation are highly appreciated
in the organization, and the readiness and willingness for innovation and
development are revealed.
This tendency strengthens even more in the employees’ notion of the desired
future image of the organizational culture. It shows that there is congruence
between the recent organizational culture and the desired one, by demonstrating the
stability of organizational values in the future. Bank’s leading competitive
advantages expressed in stability and control, on one hand, and in achieving
results, on the other, are kept and require purposeful managerial actions of
maintenance and development. Employees would work even harder in order to
fulfil the business goals and they would not change anything in the division of
labour, subordination and management style which they highly appreciate. But
besides that, employees’ preferences about the future organizational culture’s
profile contain a desire for more flexibility and action independence which would
stimulate them to develop their initiative and innovativeness, and to identify
themselves with the organization and with the teams they work in, by developing
higher level of unity, loyalty and commitment.
A long-term organizational change planning could be built on the basis of the
survey and diagnosis, which would be focused on increasing employees’ job
satisfaction without being necessarily related to changes in the reward system. The
results from the survey on the desired future organizational culture could be
Faculty of Business Economics and Entrepreneurship 347
considered as a starting point for the areas which need intervention for fulfilment
of the desired state, and the following ways and approaches for organizational
culture improvement and change could be designed.
The implementation of more independence and flexibility for employees could
be made by applying of the following techniques of organizational change: group
decision making and team development; giving opportunities for personal planning
and organizing the delegated tasks; rotations and in-the-job trainings. Improvement
in the interrelations within the bank and creation of a higher identification, loyalty
and commitment could be developed by elaborating common projects and tasks,
which enlarge the collaboration between teams and organizational units, improve
inter-bank communication channels and help to prevent and manage conflicts.
It could be concluded that the main organizational culture’s characteristics of
the bank researched provide its competitive advantage and meanwhile reflect the
tendencies and requirements toward the organizational culture, which is inherent
for the banking sector as a whole. These tendencies are the following: balance
between the main values orientations, with focus on the external environment and a
simultaneous combination between flexibility and stability. Maintenance of the
organizational culture and its change in order to ensure wider initiative and
innovativeness, on one side, and internal integration, loyalty and commitment, on
the other, would create preconditions for more successful functioning and
development, and would help to plan and manage actions towards stabilizing its
market position and towards creating new competitive advantage.
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[12] Schein, E. H. (1992). Organizational Culture and Leadership. San Fransisco:
Jossey Bass.
[13] Weisbord, M. (1985). Organizational diagnosis: A workbook of theory and
practice. Addison-Wesley, Reading, MA
Faculty of Business Economics and Entrepreneurship 349
STAFF MANAGMENT AND EVALUATING THE STAFF
EFFICACY
Borko Somborac, MA
35
Dejan Ilic, PhD
36
ABSTRACT
Every modern corporation where people are a secondary factor carries a high
risk of unfavorable results of work, which leads to inconsistency in the
development of the productive forces. Managing modern organizations must be
based on the human resources, which allow them to their activities, awareness and
enthusiasm to develop and improve work processes and relationships. People are
leaders and economic development factors, which determine the development of
the productive forces and production relations and the fundamental creators of
expanded reproduction and its organization. Of the great importance for personal
management is the performance of staff at all levels of management and
leadership. In human resources researches there is an area that deals with
evaluating the effectiveness of staff, although the practice confirms that this field is
not yet been sufficiently examined. The aim of this paper is to establish a balance
in the flow of human resources development and material resources and the
satisfaction of the principle of “adequate human resources for the proper
technology." It’s not possibly always to measure the results of staff by using the
available instruments, but it can be set a system of evaluation of their performance.
Evaluating of staff performance represents characteristics, behaviors and analyzes
the results of their work. The value of such evaluations is reflected in the
comparative review of individual results and to provide opportunities for the most
capable to take the key places in company with an intention to achieve optimum
results based on available resources.
Key words: Management, Staff, Resources, Efficiency
J EL Classification: L21
UDK: 005.962.131
35
Borko Somborac, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
36
Dejan Ili?, Faculty for Strategic and Operational Management, Belgrade, Serbia,
[email protected]
350 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Management comprises a number of interrelated functions that are present in
all organizations and at all organizational levels. One of the major problems facing
modern management is how best to use the resources of the company in a rapidly
changing and turbulent environment. The optimal combination of available
resources and their best use is one of the most difficult problems faced by the
management at the beginning of the XXI century. In order to solve these problems
there is no single management practice, which would be universally applicable to
all kinds and types of business.
Personnel management as part of operational management lately attaches great
importance. Since man is the only living factor in the organization, there is no
universal pattern of work and dealing with people who would guarantee the success
of the company. Task functions of human resource management in the enterprise
relates to: filing and maintaining jobs in the organizational structure, education,
development and training of employees. Since people, as individuals, have to be
organized in work teams, i.e. groups, this means that the organization depends on
interaction and coordination among people to accomplish their goals (Stojanovi? et
al., 2013, p.78) Management system in a broader sense includes research human
resources, recruitment, employee development, their fees and salaries, promotion at
work, health care and life of employees, relationships with employees and unions.
Only selection can not guarantee success of that company, if it is not accompanied
by action of continuous improvement, education and training, and retention of
quality staff. At a time when the knowledge of employees to expand and multiply
at short period of time, the success and survival of any enterprise is caused by
continuous development and training of employees. Only those companies that are
able to recruit, develop, promote and retain their employees will be able to achieve
its planned objectives and survive on the market. Companies must continually
search for quality personnel, in order to achieve the planned objectives. The main
objective of human resource management in any company is to place the right
people in the right jobs. (Jovanovi? et al.,2007) The economy of the XXI century
management personnel is facing new challenges of the business environment.
Requires new ways of thinking and acting, new policies and practices, new
technology and new business needs. Today, enterprises are subject to
organizational change, change management and the role of employees. (Farkaš,
2008) Construction of management function is not complete yet and it must
necessarily be developed in accordance with enterprise development and social
relations. Otherwise, he threatens her risk of bed development and stagnation. In
connection with the development of business, it’s necessary to build a profile of
leading personnel (Stefanovi?, 1996).
Faculty of Business Economics and Entrepreneurship 351
ENTERPRI SE DEVELOPMENT AND HUMAN CAPI TAL
The organization is also the product of human intention to create 'perfect'
structure/system that would provide maximum benefits/profits/gains with
minimum costs.Support and cooperation is an important aspect of enterprise
development (Stojanovi? et al., 2013, p.76).
The properties of these enterprises are change, innovation, openness and trust.
If we look at the company, the starting point should be a system of enterprise
value, because companies that are focused on the development are based on values.
The main values that are the key element and directed the development of the
company are: quality, knowledge, skills, competencies, expertise, knowledge
sharing and innovation. Successful utilization of the expertise of employees is main
quality performance of companies, which is why personal competence plays an
important role in the value of the company. This means that the company must
nurture an appropriate long-term philosophy focused on the development. The
philosophy of the company development must have the place it deserves, and this
leads to the improvement of individual employees and at the same time
contributing to the achievement of the strategic goals of the company. Orientation
on development policy will inevitably lead to individual success of each manager.
Just based on the introduction of new techniques and the improvement of the
productive forces leads to an increase in the social productivity of labor, one of the
factors playing a society.
Development planning is a specific form of leadership and decision-making
basis, leads to the fact that the creative role of the main lever of leadership in
policy development. For this policy are crucial these moments: (Stefanovi?, 1996)
? Provide support to all staff
? The selection of objectives
? Alignment of interests
? Financing strategy and
? Constant activity in the implementation of (consistency).
In the long-term development policy must come to the fore especially
economic interests and principles. Economic interests consist in increasing profits,
achieving full employment capacity and human resources, increase labor
productivity and, in this regard, earnings, and also in economic stabilization and
job security companies. One must not forget the increase in the educational level of
staff and strengthening the position of enterprises in the market mechanism.
Economic development principles require that each plan must be realistic,
achievable and consistent.
It should be noted that the long-term development policy has a broader
meaning than it does in practice. She includes many elements of development, such
as increasing production and productivity, long-term contractual obligations,
market expansion and export, but also its contents are rationalization,
352 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
specialization, integration processes and self-organization, reconstruction,
replacement, expansion and new production. The width gives each company to
enter into the general mechanism of economic development. Optimal investment in
material and human resources make effective business results and promotion of
human work. Important role in that process are a long-term policy development
and personnel policies designed to interrelations and reconciliation. The main
driving forces of production are the staff with its knowledge and experience in the
function of carriers and employees, and the organizers and the steering wheel.
Adequate staffs with continuous systematic training are equally important as the
introduction of new technologies. Technical progress and adequate staff profiling
are two essential conditions for the development of the productive forces. Human
resources and means of production are indivisible unity in initiating economic
development. Funding alone can not achieve results without man nor can man
perform productive activities without the means to work. They are the two essential
elements and indivisible factors of production and the productive forces (Pelevi?,
2004). Human capital is the accumulation of investments in people. Education is
the most important type of human capital. Like all types of capital, education is a
waste of resources in a given period in order to increase productivity in the future.
Unlike investments in other types of capital, investment in education is related to a
particular person and it is a bond that makes the human capital. Not surprising that
workers with more human capital on average earn more than those with less human
capital. For example, people with a university degree in Europe and North America
earn almost tree times more than workers who have earned a high school
education. The big difference is even greater in less developed countries where the
supply of educated workers is limited. From the perspective of supply and demand,
it is easy to determine why education increases wages. Companies are willing to
pay more for highly educated workers because such workers have higher marginal
products. Workers are willing to bear the cost of acquiring education only if such
efforts are paying off (Mankiw, Taylor, 2000, p.58). According to the analysis of
the labor market, employers and leaders want employees to continuously
modernize and further develop their skills and to communicate effectively and
work independently. In the publication, "Why the sphere of business worry about
education?" it was concluded that the new economy require individuals who
possess a wide rang of high-level skills and competencies such as critical thinking,
problem solving, teamwork and decision making skills (Maksimovi?, 2006). The
world today is a sophisticated and multifaceted. People need to have a high level of
skills to act, respond, learn and react to various changes. The success of every
profession and every individual will largely depend on his ability to think, learn,
adapt and communicate. In these conditions, a special place for technology in the
future it will continue to be the main power in the workplace, community and
individual lives. For all individuals, especially those who belong to the sphere of
management, it is necessary to understand how to use the tools of technology
(Maksimovi?, 2006, p.37). These tools are: computers, networking, and other
technologies, audio, video and other media and multimedia tools. These tools
enable people to effectively monetize their work and daily life and to set of tasks
Faculty of Business Economics and Entrepreneurship 353
such as electronic commerce, multimedia programs, presentation, preparation and
processing of database research, networking and communication with others.
Given these estimates of analysts and theorists, the question in the academic world
is how to develop or even better refine the appropriate skills and student’s
knowledge in higher education institutions. If we talk about management studies,
business and administration (because these areas are often linked) it receives
alarming significance and requires special involvement of higher education
institutions and those who manage them or implement programs (Ostoji?,
Damnjanovi?, 2013, p.519). Consequence of the specific human capital relative to
physical is that there is a material embodiment of human capital. Therefore it can
not be possible to establish an effective lien against such capital. This makes it
difficult to finance investment in human capital, particularly education financing.
Because the capital market does not provide the socially desirable offer of debt to
finance investment in human capital. Those who invest in human capital, and
education, is not able to internalize the overall yields of these investments, so there
is a difference between private and social rates of return.
There are significant implications for the behavior of companies in terms of
capital investments of its own employees, and education of the labor force
employed in the company. The company acts so that equates the present value of
future returns engaged workforce and the present value of the cost of investment in
human capital. The greater the share of investment in the workforce, the less
fluctuation, since workers will remain in the company, seeking to appropriate the
returns as long as such investments in equity. Practice has shown that the standard
accounting categories are not reported in full production potential available to a
company. Existing accounting categories of fixed assets or equity does not include
fund of human capital that have employees in the company, thus effectively
disposes of that company (Pelevi?, 2004).
SUCCESS RATE AND APTI TUDE
The process of production and management are increasingly dependent on the
role and importance of human resources. Staff is in the process of reproduction
occurring as drivers and factors of economic development and a factor of
development of the productive forces and production relations. So far, the staff was
neglected ("minor factor"), which adversely reflect on their personality and
performance, especially in creativity. This led to a series of contradictions and
inconsistencies in the development of the productive forces, and had come to the
question of the redefinition of leadership in our conditions.
One of the basic requirements for access to assessing the success of any staff
profiles is that, to meet the main principle of the operation: "adequate staff for the
proper technology", it means every man to "own" the right place. This principle
reaches its appropriateness thereby ensuring the success of the enterprise, and
individual satisfaction. The worker can achieve optimal results only on jobs and the
354 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
next workplace where the best come to the fore of his abilities. He will be happier if
you achieve success in the workplace that suits his skills and abilities, more than
assigned to the position of the status and out of range of his abilities and not achieve
the expected results.
Our economy is measured and assessed part of the work and come up with
undesired phenomenon that staff are allocated to jobs that require higher skills than
theirs, because it brings higher status and greater profits. Accordingly, the first
phase of evaluation of personnel in all companies and institutions related to the
fact, whether they are adequately distributed in the work process. This will justify
the "cost" only if they have been systematized jobs and established measure of
success in work and the criteria for it.
The result of the work can not be measured by precision instruments, but it can
introduce a system of evaluating personnel and evaluating their effectiveness.
Performance appraisal system of staff is important from the standpoint of
optimization success. That system is very suitable for the proper progression of
staff and their change from responsible places.
Evaluating performance of staff is evaluating the properties and behavior of
staff, measurement and analysis of the results of their work. Assessment process
consists of several stages: assessment of personality, assessment activities, as well
as the analysis and evaluation of the success of an individual. Each category of
personnel requires special methods of assessment, their adaptation conditions, the
complexity of the tasks and functions and social relationships. Previous methods
have a universal character, a certain element method are subject to change, given
the nature and purpose of performance evaluation of staff (Stefanovi?, 1996).
The success of the work includes motivation, creativity, and performance
evaluation. The motivation for the work is the biggest problem in the field of
human resources management. An important reason for the purposes of designing
work motivation is the need to understand the mechanisms of behavior as a basis
for building motivation. One of the tasks of a manager becomes successful
management of human resources and building motivation. The problem of long-
term retention of high quality staff and employee motivation is a constant creative
input and includes two basic questions:
1. How to measure the performance of and contribution to the people and
2. How to reward their work?
For the first question are related to the problem of criteria and methods for
measuring and assessing the work contribution, and success in one or more
dimensions (quality, quantity, innovation, etc...), and the second question
elaboration best remuneration policy and its implementation of a range of
instruments. The company must start from the objectives to address the issue of
how to achieve these goals and to measure their performance. Managers design
tasks in jobs that are in line with organizational goals employ people with the
necessary skills, then train, motivate and reward. These are the basic aspects of
staffing that allow successful operation, and evaluation of the work is used
primarily for monitoring the implementation of the objectives to develop corporate
Faculty of Business Economics and Entrepreneurship 355
strategy. One of the most popular and most widely used control method as
successful managers and staff management by objectives. The advantage of this
method is that the managers and staff familiar with the objectives to be carried out.
Creativity that carries the individual comes to the fore in a particular climate and
enterprise value to the social environment. The task of management is to recognize
the creative individual in the company and provide the conditions in which they
will be his ability to play. The success of the work of the permanent care of the
entities and personnel management. An important role in that, have the motivation,
creativity and evaluating success (Ostojic, Damnjanovic, 2013, p.522).
THE METHODOLOGY OF EVALUATI ON OF PERSONNEL
The success of the staff, especially managers assessed in different ways and by
different methods, which are conditioned by the general terms and conditions in
society. In relation to "the object" of assessment, there are three levels of managers.
Each level requires specific methods, given the complexity of the functions,
powers and responsibilities. There are three methods of evaluation for system
performance evaluation of staff,: first, the assessment made by others managers
(board, commission, researcher on the basis of specific methods - tests, reminders,
surveys and results); Second, the assessment given by the head manager thru
methods "control shares"; Third, evaluations are conducted by team (appropriate
manager to other managers and authorities, as well as the research team) using the
"Chart of leadership." Methods for assessing the success of managers are:
(Stefanovi?, 1996)
? Method of ranking
? Scales courts method
? Free choice of method claims
? Method of forced choice statements
? Method of critical vessels
? Content analysis method biography (dynamic score last time in preparation
for a new feature),
? Method of continuous "control their own actions"
? Method "chart management"
? TAM - method (evaluation capabilities, performance and features)
The above methods are based on the familiar grounds and used objective
criteria and standards with the help of mathematical and statistical indicators,
which means that instead of bureaucratic - administrative assessment managers, it’s
used impartial assessment of the appropriate people, comparing the obtained value
with the valuation requirements of the respective functions. Correlation between
these two levels of parameters, is the condition that someone can be a candidate for
appointment or reappointment to the position from which he will manage.
356 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
There are two basic criteria for evaluating managers: relative score value and
performance evaluations, which restrict the choice of the appropriate method. The
procedure of the evaluation requires certain principles, systematic, and contains a
number of elements, such as the purpose and program evaluation; draft scheme
assessment; choice timeline evaluation; rules of evaluation and accuracy assessment.
The choice of method depends on the evaluation criteria and elements of the
assessment, but also on the specific conditions and the appropriateness of that action.
Method of ranking in the evaluation of managers consists in ranking the group of
managers to total abilities and quality from best to worst. It is suitable for the
assessment of workers and managers to lower organizational units for comparison.
Scale vessels, containing the bad side, which are reflected in the lack of precision in
grading. The method of free choice of the claims made in the selection of those
statements that best characterize a particular function, and the person who is
performing. Assess the behavior, performance, and accountability of the head, in order
to choose the positive and negative sides of the person. Claims are converted into
points on a given system, which provides numerical expressions and measurement.
Thus, the assessment can be compared with the heads of other companies. This method
is suitable for assessing the performance leading staff, particularly because of the
possibility of quantification. Methods such as mandatory choice statements and critical
cases are of more recent date. They are complex and time consuming, and did not show
confirm proper value. The first time the long-term preparation (selecting several groups
claim to good and bad), and in the second, it takes longer to wait for the critical cases
that characterize the evaluated person. Method of analyzing resumes suitable in the
appointment of managers as gaining insight into the overall operation. To do this,
collect all the data about the person, since it is necessary for the success of the sum of
all the characteristics and behavior in different situations. The most important criteria
are achieved efficient economic outcomes, and the quality and level interpersonal
relations in those business units where the specific manager acted. It’s important to see
business results and attitude towards co-workers, agencies, and organizations. Data are
obtained by objective methods, surveys and direct conversation. The method of
"control shares" is a method of self-assessment. The aim is to achieve stability, balance
and efficiency of the organization, and the adaptation of his own work. It has its own
self-assessment of creativity in setting up the organization of work in the production
and social frameworks and way that it is optimal, consistent and appropriate given
situation, in order to allow maximum efficiency of operations. This method is the self-
awareness and monitoring of the situation and the organization of work. It can serve
others (board) as the ability to control the current work. Figure leadership is the latest
method of assessing the success of managers. It covers all stages of company
development: creating the concept and construction of the organizational structure,
training executives, setting up the organization and its implementation, measuring the
efficiency and rationality of organizational change. Prior to the evaluation of the
success of the program makes enterprise development this is of particular importance,
because the assessment has a complex personality of leaders in all stages, from concept
to results. Given that specifies the powers and responsibilities through the program, and
trained personnel for the proper function of the company, it is possible to monitor the
contribution of each manager. Who it fails, or is the weakest link in the chain must be
replaced. The work is organized in teams, evaluate the team, a determined individual
Faculty of Business Economics and Entrepreneurship 357
responsibility. Phase of the program include: seminars, team building, integration of
various teams by profession and status, setting organizational goals, achievement of
goals and overcoming "resistance to change" and stabilize the organizational structure.
This method provides tangible results in business, education leaders, strengthening the
company and the opportunity for realistic performance evaluation of managers. TAM -
method is complex and multidimensional, as it allows the right image for the
promotion of staff. Managers are the "driving force", their impact and effect felt
throughout the company, not only in his country. That is why it’s important to be so
significant the role of manager evaluates by certain principles, which will allow a
delegate certain roles. This will be the most successful seen by the following principles
for evaluating managers (Stefanovi?, 1996)
? Management functions are evaluated by a separate system, because they are
fundamentally different from other functions in each company,
? It is necessary to choose the elements for assessment (knowledge, quality,
experience, competence, responsibility, influence),
? Establish measurement of functional duties and responsibilities,
? Each element to give proper meaning of the wide variety of facilities and
activities and
? Score to tie the components and the complexity of the corresponding
function, because it is the foundation of every grade behavior and
understanding tasks.
Choice of elements in evaluating is the question of principle in achieving the
purposes of evaluation. With the evaluation of results, and evaluating the subject
property managers such as properties important for successfully solving tasks, refer
to the members of the collective, general personality traits and moral properties. It
would be difficult to enumerate all unbundled properties that are related to
personality characteristics and functions, because it’s always should keep in mind
that the selection and ranking depend on the specifics of individual functions.
Generally speaking, it seems that the following features of the profile manager are
the most important: (Stefanovi?, 1996)
? Ability to apply knowledge
? Persistence for understanding and resolving complex problems
? Sense of organization
? Sense of rationalization
? Talent for coordination and cooperation
? Courage to take responsibility and
? A realistic assessment of their own capabilities.
Each selected attribute for evaluating the weighted and weighted results are
added, which allows the comparison score between the evaluated individual
people, according to the relative satisfaction requires certain functions. Evaluating
the success of managers must contain the principles of professionalism, application
method, building assessment system, impartiality, transparency of results and
achievement of program objectives rater. The procedure is performed through the
evaluation of evidence, analysis, synthesis and control.
358 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ELEMENTS FOR EVALUATI ON
The ability of managers is evaluated by how he mastered the strategy and
tactics of business policies in the market economy. In other words, how he was
able to organize the business and what results have been achieved in the company.
Assessment skills and performance of employees in a company subject to scientific
investigation. This task is the evaluation of management actions in terms of market
relations and the study of the level of control in certain collectives.
Evaluates the effectiveness of achieving the basic functions of the company by
managers with special powers and responsibilities such as planning, organizing,
delegating, coordinating and controlling. The evaluations are the result of specific
solutions that perform complex functions of any business executive in our conditions,
within a complex range of problems, since the managers management as a profession
deserves to be treated with different aspects: economic, technological, organizational -
human, psychological, sociological, legal, social, medical and even.
The function of leadership consists in balancing the available resources to achieve
the objectives, where it is necessary to coordinate the multitude of specialties. Expertise
is absolutely necessary, but more in the form of gaining knowledge for their
application, given that the manager must be able to organize, control and fit. He has his
creative imagination to have a vision of a new mechanism for the creation and
implementation of new business policies. A man can be trained for that through the
teaching or educate at schools for managers. Achieve such a manager profile, with
some personal predispositions, can and must be achieved through learning.
Training and education for managerial function must be understood as an
ongoing process, since many of the functions have a dynamic character, and that in
the conditions of market economy must not stagnate. The function of the
management body should be creative, and less operational. It is intended for the
role of policy and organization, and operational tasks necessary to delegate to its
assistants. Business executive coordinator who by delegating, directing and
controlling realize the responsibility that can not be fully delegated. This role
manager can be achieved by mastering and applying the three essential functions of
the company: long-term policy development, personnel policies and deliberate
scientific organization of labor. It necessary to set up the thesis that concentration
on these three basic functions leads to the development and optimization of
interpersonal relations.
It’s not about the managerial staff with only these three functions, that is, they
only keep to themselves, but to the predominant activity in this regard focus to
these essential functions for the success of the business. Actually manager delegate
functions to the appropriate partners and service to professional elaborate ideas and
concepts. Delegate tasks to the experts, which means to execute them cheaper,
more professional, faster and more efficiently. Today managerial personnel asked
not to be "scrapbook", but experts - the organizers.
Faculty of Business Economics and Entrepreneurship 359
GRADI NG SYSTEM STAFF
The study of human nature occupied the experts in different times and spaces.
When the pre 2.5 millennia asked Confucius what is wisdom, he said that wisdom
is "knowledge of mankind." With the help of scientific knowledge, now can be
assessing and evaluating personnel to predict the level of achievement in the career
of the individual and the degree of its success at work.
An evaluation of actor in work processes is an expert job, but it also means the
democratization of interactions between staff of different structure and position.
The purpose of the evaluation, the possibility of the most able to take key positions
in the system of promotion, in order to achieve optimum results from available
resources. Rating capabilities and performance of staff enables the promotion of
staff in relation to the vertical, horizontal, diagonal and spatial mobility.
In parallel with the needs arise resistance evaluation for various reasons, such
as: the inertia of the organization which makes a change, "freeze" status positions,
the vested interests of certain power, neglect of public work, promotion without
criteria. The transition of an economy dominated by innovation at all stages, and in
the personnel policy. Forms of cooperation in work processes as an important
factor in efficiency means joint effort of skilled individuals in an effort to achieve
collective goals. This principle demands and evaluating capacity and performance
of personnel, especially management.
The practice is said to be appointed by the head manager by ability. And when
it comes to optimal staffing solutions, the ability to be increased through education
for the position of leadership. Successful cooperation in the work is role and tasks
of managers, embodied in their actions and behavior, of which the most
characteristic as follows (Stefanovi?, 1996):
? treat the workers as individuals
? learn workers' about their rights, duties, and obligations
? give appropriate recognition to employees
? Promptly inform workers about the events and the set changes
? Optimal use the ability of workers
? Motivate employees to work and education and stimulate results
? A balance of common interest
? Provide a creative atmosphere and mutual trust
Good management is achieves that gives the best possible results with the
corresponding structure of workers. Given that the results obtained by all the staff,
they are the core responsibilities of managers for the success of the business which
makes homogeneous power to companies. Any demands from the outside can not
successfully change the lack within the company, but it can own forces. The
grading system of staff displays the following elements of staff character:
? Type of ability (primary mental abilities and organizational skills)
? Character traits (primary traits of temperament and primary traits)
? The ethical virtues of personality (ethical principles and moral habits of
behavior interpersonal relations).
360 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 1: Contained method of feedback
Figure 2: The basic elements of staff development
Motivation
Feedback
Evaluation
Education
Staff
Evaluation
Development
Staff
Faculty of Business Economics and Entrepreneurship 361
THE I MPACT OF QUALI TY MANAGEMENT I N THE
EVALUATI ON OF STAFF
To order to evaluation of each worker could have its full effect, as one of the main
mechanisms to comprehensive results lies in the quality training and multi-system
management. To make managers aware of how and what parameters should be
evaluated primarily employees is essential to the training of the managers at the highest
level possible, which will include all modern trends in business. The knowledgeable
staff is a blend of theory and practice, the best and the real, the possible and necessary.
One of the part of this paper shows how managers should be trained to had from
employees the highest degree of respect, credibility, loyalty and motivation, but also
themselves to have sufficient knowledge to evaluate the other. In the early stages of the
emergence of corporate society, it was thought that the manager should be an 'iron fist'
of the companies, where there can be no compromise and deviation from the standards
and quality that are set before them, and that one mistake can lead to loss of job. An
important part of the appraisal process involves recording incidents and behaviors that
is out of the ordinary. These are referred to as ''critical incidents'' and ''significant
behaviors''(Max, Bacal, 2011). However, at the present time, these phenomena must
be eradicated, because companies need to recognize the dearth of quality manpower
which is on the market, a particular need to focus on staff who are in their own ranks
and recognizing them as future potencial managers or persons whose knowledge and
dedication can help increase company profits.
At the present time, when the recession practically 'destroys' human resources
managers within the company played a major role in the recognition of the problem
and the need to find a way to highlight the personnel policy as a capital for quality
business, but also with the continuous control and evaluation to reach a clear
success indicators or potential downtime.
Modern managers are all aware of the importance of skills working with
people and is of crucial importance since their following capabilities:
? to select, train and empower employees,
? to shape and lead group meetings of all kinds,
? to manage all sorts of conflicts between powerful individuals and groups,
? to influence and negotiate on an equal basis
? to integrate the efforts of people of different professional specialties.
? to implement best options to evaluate the work of employees and then send a
clear feedback
So the managers can assess the work of their employees, it is crucial their level
of knowledge, in which leading next abilites:
? Humane
? Technical and
? Conceptual,
because their unification, the manager becomes highly competent person who can
evaluate in a full form perform of existing staff.
362 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
KEY PARAMETERS OF EVALUATI ON
Assessment of job performance is a process that measures the contribution of
employees in achieving the goals at a time. If such an assessment is not done
properly can damage relationships, in contrast, accurate assessment can encourage
employees to better realization of the goals and set tasks in front of them. Today, in
addition to higher-level managers and associates and colleagues all over the
process of assessing performance, and includes self-assessment, which should
contribute to a single dose of reality with the employee (McCourt,2003).
Control should not defend anyone. On the contrary, everyone should be
content, for it provides better results. Also responsible leaders should not omit the
control for the alleged trust they have in their co-workers, and thus to make a big
mistake.
The trust should not become a naivety or even abuse, but there needs to be
both, and the control should not be exaggerated, as there would be no resistance to
the employees.
Excessive control may cause adverse effects. (McCourt,2003) For a good and
successful control required many assumptions and the best control system will fail
if not set good plans, norms and organizations to function.
Regular employee evaluation helps remind workers what is expected of them
in the workplace, and provides employers with information to use when
making employment decisions, such as promotions, pay raises, and layoffs. In a
traditional employee evaluation, the manager or supervisor writes and presents the
employee's contributions and shortcomings to the employee. The manager and
employee then discuss improvements. Some organizations ask the employee to
write self-evaluation before the meeting. The performance evaluation process in
organizations is ongoing - every day - as the manager or supervisor observes and
coaches each employee's performance. In many organizations with a formal
employee evaluation process, employees are ranked and rated in comparison to
other employees. Depending on the employer's practices employee evaluation can
frustrate and demoralize employees. All previous mentioned elements of evaluation
alone can not provide a complete picture of the performance of employees.
Combining all the available parameters can contribute to a clearer and
comprehensive picture, as an individual as well as all sectors of the company. Key
synergies in the evaluation of employees, as well as improving individual and
group performance are:
? Improving the training and education of employees
? Improved work plan
? direct conversation
? Clear and unambiguous way that assesses the performance of work
? Establishing feedback
Faculty of Business Economics and Entrepreneurship 363
Without quality training and development of workers, managers will not be able to
ask for high grades of employees, because they will have sufficient knowledge to
perform a given operation, which will in most cases lead to negative results in the
performance evaluation. Therefore it can be concluded that neither the planned work
process will not be correlated with expected if employees do not have a sufficient level
of competency, so that is one of the key elements in corporate success today, the fact
that the adopted plans must constantly revise and harmonize with the current market
needs in order to achieve long-term competitiveness. Every action must have a
reaction, which is the directing relationship between the manager - employee, because
through communication can greatly enhance the effect of a real transfer of information
to the employee. Through directing conversation, should be transferred expectations,
deadlines and parameters of success that will continue to measure through a clearly
defined form of evaluation. As the final phase of this part should be presented feedback
to all employees’ on the current state of work, level of success, segments where there is
a deadlock and how they expect it to be resolved in the future. The joint action of these
items leads to the best possible results in the understanding of the tasks and removes
errors.
METHODS TO I MPROVE THE PERFORMANCE OF STAFF
Whether it is about the results of the performance of employees, the question
of wages or of implementation of the new evaluation plan employees, there are
several elements that have been identified as essential in improving the above
mentioned elements of functioning and decision-making. Through this approach to
employees, managers, unless they come to clear results of performance evaluation,
they also improve their ability to interact with employees. Control of results relates
to the quality, quantity and value of output of certain processes of the organization
(products, services and decisions) (Petkovi?, ?oki?, 2012),
In the case of today's modern corporate world, the following approaches
should be taken into account as a key to developing perception among workers
about the importance of evaluation as a process of improving the performance, not
as a repressive methods which included a penalty for errors. That is why the
interaction is very important for the improvement of the performance of each
individual. Primarily be addressed to the following parameters:
? The employee should never hear about positive performance or performance
in need of improvement for the first time at formal performance discussion
meeting, unless it is new information or insight. Effective managers discuss
both positive performance and areas for improvement regularly, even daily
or weekly. Aim to make the contents of the performance review discussion a
re-emphasis of critical points.
? No matter what are the components of performance review process, the first
step is goal setting. It is imperative that the employee knows exactly what is
expected of his or her performance. Managers periodic discussions about
364 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
performance need to focus on these significant portions of the employee’s
job. Manager need to document this job plan: goals and expectations in a job
plan or job expectations format, or in employer's format. Without a written
agreement and a shared picture of the employee’s goals, success for the
employee is unlikely.
? During preparation and goal setting, manager needs to make how he will
evaluate the employee’s performance clear. It’s important to describe exactly
what he is looking for from the employee and exactly how will evaluate the
performance. Manager need to discuss with the employee its role in the
evaluation process. The employee needs to understand that if he does what is
expected, he will be considered a performing employee.
? If managers company uses a form that manager fill out in advance of the
meeting, it’s good to give the performance review to the employee in
advance of the meeting. This allows the employee to digest the contents
prior to her discussion of the details with manager. This simple gesture can
remove a lot of the emotion and drama from the performance review
meeting.
? Preparation is an important part for the discussion with the employee. It’s
not good to go into a performance review without preparation, because in
opposite performance reviews might fail. It can be missed key opportunities
for feedback and improvement and the employee will not feel encouraged
about his successes.
? When manager meet with the employee, it’s important to spend time on the
positive aspects of his or her performance. In most cases, the discussion of
the positive components of the employee’s performance should take up more
time than that of the negative components. The employee will find this
rewarding and motivating. But, is necessary to mention the areas that need
improvement either. Especially for an underperforming employee, manager
needs to speak directly and not to mince words. If he is not direct, the
employee will not understand the seriousness of the performance situation.
? The spirit in which manager approach conversation will make a difference in
whether it is effective. If manager’s intention is genuinely to help the
employee improve, and he have a positive relationship with the employee,
the conversation is easier and more effective. The employee has to trust that
he want to help him improve his performance. He needs to hear him say that
he have confidence in his ability to improve. This helps him believe that he
has the ability and the support necessary to improve.
? Conversation is the key word that should define a performance review
meeting. If manager doing all of the talking or the meeting becomes a
lecture, the performance review is less effective. The employee will feel as if
he was yelled at and treated unjustly. This is not the way how manager wants
employees feeling as they leave their performance review. Manager want an
employee who is motivated and excited about his ability to continue to grow,
develop, and contribute. Aim for performance review meetings in which the
employee talks more than half of the time.
Faculty of Business Economics and Entrepreneurship 365
This kind of approach is very complex and requires a lot of effort by
managers, as well as some time as he could in the right way to master these
methods. Such an approach to the evaluation of performance improves relations of
the manager and employees, improving work within the organization, raises
communications manager-employee at a higher level, which will have a positive
effect on customers, as well as relations within the working community.
LI NKI NG EMPLOYEE PERFORMANCE TO RESULTS
If an organization wants to improve the performance of its employees, it must
think in terms of everyday communication with employees. To talk about the new
tasks, plans, terms, ideas, purpose. This segment of corporate cultures is important
because in this way remind employees that are stored in a serious system which
largely depends on the quality of their work. Why is it important? Because in this
way the effect of employees associated with the resulting company.
It is important to emphasize the employees that when they give their reports on
time and express their views on improving the business, it immediately gives a
time limit within which the management will have to respond. It reduce time for
the adoption of certain plans. Another thing that should be encouraged among
employees is to attend meetings where they will be senior managers and will then
have the opportunity to interact express their particular opinions and ideas. Also,
by participating in some project employees will have the opportunity to become
familiar with the company's strategy.
The main reason this results-based approach works is because manager is able
to explain the value of positive performance from different perspectives. Manager
can talk about results that are important to employees and results that are important
to the organization. Manager is also able to use multiple reasons to explain why
something is important or why something is not important. So if employees react
negatively to one result (ie impact another employee), manager can use a different
result (ie impact customer service) to illustrate his performance conversation. That
means manager do not have to say, "Do it because it's your job."
Correlation between quality of work of staff with company success is one of
the most important design feature to the evaluation of the performance of the
individual. At the individual level, you can link employee performance to desirable
outcomes such as greater autonomy, less stress, reduced workloads, or increased
visibility. On a broader level, employee performance can be linked to organization
mission, goals office, customer service, or team performance. These require
employees to look at the larger impact of their performance results. Connection
between the employee's work is in many aspects relates to a given overall
evaluation. If an employee manage to link at all levels that are listed in the table,
then we can talk about the greatest possible work performance of the individual
with the group (company).
366 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 3: Primary tasks linked to employee success
Evaluation and assessment of performance of the individual or sector brings
with it a number of methods and approaches. Access to link employees and the
performance of enterprises, primarily given the importance of each individual to be
in an organized system of work, his contribution to evaluate, assess, and always
improving. Consequently gets a sense of belonging to an employee and his desire
to continue to provide its full contribution to the companies development and
market competitiveness. Direct access to the employees, who are not only applies
to the written word, or by filling out the form of reports, but direct interpersonal
communication, employees are given the opportunity to be a listener and proposer
and critic. That's why the conclusion should be that it is best to evaluate
performance of the individual comes through quality training and development,
direct contact and linking or creating an unambiguous sense of belonging to the
company.
CONCLUSI ON
The new role of managers is to improve the process of developing enterprise
flowed better. Modern division of labor shows a shift from the classical model of
employment in enterprises. Companies can analyze their field activities and expand
to new business and so open up the need for new skills. Techniques for assessing
the competence and efficiency of the staff have a clear advantage when it comes to
decisions in employment and to obtain staff with the highest qualifications that
should be introduced into the business, and also play an important role in the
selection of programs for training and development. Accurate assessment of
expertise has proven to be a very useful tool in the formulation of plans for
business development and management careers.
The new employment processes used various tests and assessments. Potential
staff must be able to create good working relationships with clients and colleagues,
and exhibit a high level of motivation and ambition in their work. Staff require a
high level of knowledge in its profession and the excellent skills of communication
and cooperation.
Employee
Performance
Job Enrichment Learning
And
Development
Career
Andvancement
Other Employees’
Performance
Money
And
Rewards
Organization
Success
And
Result
Faculty of Business Economics and Entrepreneurship 367
Without quality staff and business can not be well done. The main question in
this equation is the improvement of techniques and skills that lead to increased
ratings and long-term competitiveness of the company. System of training and
education, evaluation, flexibility in policy decisions and implementation of modern
business trends lead to the highest possible results.
The aim of this study was to demonstrate the importance of education at all
levels in the company, the importance of planning management, the establishment
of methods of evaluation of performance, his individual and collective approach
and the methods by which the employee is the best way tie for the success of the
company and thereby increase their level of motivation and commitment, all with
the aim of providing quality services that are in accordance with the wishes and
needs of consumers and market.
REFERENCES
[1] Bohlander, W. G., Snell, S., (2010), Managing Human Resources, Cengage
Learning
[2] Farkas, F. (2008), Strateški menadžment ljudskih resursa u organizacijama
usmerenim na znanje, Razvojne strategije preduze?a i privrede, Beograd:
Univerzitet Megatrend, pp. 13-22.
[3] Ivancevich, J., (2006), Human Resource Managment, McGraw-Hill Irwin
[4] Jovanovi?, M., Živkovi?, M., Cvetkovski, T. (2007), Organizaciono ponašanje,
Beograd: Univerzitet Megatrend.
[5] Max, D., Bacal R., (2011), Perfect Phrases for Performance Reviews 2/E,
McGraw-Hill
[6] Maksimovi?, I. (2006), Obrazovanje menadžera za 21 vek, Beograd:
Univerzitet Singidunum.
[7] Mankiw, G., Taylor, M. (2000), Ekonomija, Beograd: Redaktor izdanja na
srpskom jeziku Hani?, H.
[8] McCourt, W., (2003), Global Human Resource Management: Managing People
in Developing and Transitional Countries, USA, Edward Elgar Publishing
[9] Ostojic, S., Damnjanovic, N. (2013), Permanentna edukacija menadžera,
Nacionalna konferencija sa me?unarodnim u?eš?em, „Reinženjering poslovnih
procesa u obrazovanju RPP013“, ?a?ak: Fakultet tehni?kih nauka, p. 517-524.
[10] Pelevi?, B. (2004), Ekonomisti nobelovci, Beograd: Ekonomski fakultet.
[11] Petkovi?, V., ?oki?, A., (2012), Menadžment ljudskih resursa, Beograd,
VSPEP
[12] Rudman, R., (2004) Performance Planning & Review: Making Employee
Appraisals Work, The Australian Copyright
[13] Stefanovi?, V. (1996), Menadžment kadrova, Niš, Europrojekt.
[14] Stojanovi?, T., Djoki? A., Djoki? S. (2013), Organizational Behavior-Creative
Tool for Creating Value, International Review, Faculty of Business Economics
and Entrepreneurship, p. 76-84
368 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
EMPLOYEE PERFORMANCE AND DEVELOPMENT:
ALCOHOL AND ITS EFFECT ON ORGANISATIONAL
PERFORMANCE
Samuel Osei-Nimo, PhD
37
Imani Silver Kyaruzi, PhD
38
I NTRODUCTI ON
It has indeed been recognised at least since the 1940s that alcohol is a
‘problem’ in the workplace although it may seem surprising that serious efforts to
cope with the ‘problem’ were initiated as recently as the late 1980s (Pratt,Tucker,
1989). Pratt and Tucker add that, as was with the case of alcohol as problem on
the roads, it took about a half a century from the first official recognition of the
problem until the Criminal Justice Act of 1925 when prevention became
reasonably effective. However, the case of alcohol use or misuse in the workplace
is not a straightforward issue, as this paper will identify. In the case of the
workplace, the main problem areas that are seen to be of concern as a result of
alcohol use or misuse are identified as alcohol-related accidents, reduced work
performance and loss of working time.
The need to focus the study of this paper on the workplace is based on an
understanding that work, and for that matter the workplace, offers a setting and an
opportunity where one might conveniently scrutinize some of the most important
factors shaping the lives of individuals. Therefore, based on the aims of this paper,
emphasis will be particularly placed on multinational companies (MNC)
(Interviews for this study were carried out with individuals from MNCs based in
the East Midlands, United Kingdom) to address the overall aims of this study.
Key words: Employee, Work, Organizational Performance, Alcoholism
J EL Classification: I12, J24
UDK: 005.958:613.81
37
Samuel Osei-Nimo, QA Business School – University of Ulster, United Kingdom, samuel.osei-
[email protected]
38
Imani Silver Kyaruzi, QA Business School – University of Ulster, United Kingdom,
[email protected]
Faculty of Business Economics and Entrepreneurship 369
I NTRODUCTI ON
ALCOHOL AND EMPLOYMENT
Alcohol misuse in the workplace has long been perceived as being associated with
accidents, inefficiency and absenteeism (Gill, 1994). In response to these claims, a
considerable amount of literature has been produced and these relate to drinking habits
and alcohol-related problems amongst workers in different settings and to initiatives
designed to curb, prevent or respond to alcohol misuse in employment. According to
Newman and Sell (1992), the initial problem related to alcohol misuse in the workplace
is finding a realistic definition for the term ‘misuse’. Even the widely accepted medical
definition which characterises it as a long-term disease creates much controversy. It is
added that the conflict over the diverse views on the definition of alcohol misuse or
abuse will not be resolved soon. Banta, Tennant (1989) made two observations on the
issue. Firstly, while there is a debate over whether alcoholism is an illness and what
causes it, most definitions agree that it is a condition of dependency on alcohol.
Secondly, alcohol is, of course, a drug and suggestions have been made that efforts
employed in addressing alcohol misuse in the workplace should be similar to that of
drug misuse.
Newman, Sell (1992) add that the causes of alcohol misuse, especially in
employment, are as elusive as a true definition. Steele (1988) suggests that
potential causes range from social influences to organisational pressures and Ames
(1987) argues that the workplace can strongly promote alcohol misuse if the
employees feel alienated and if manager adopt a permissive and ambiguous attitude
toward alcohol. It is clear that most studies relating to alcohol use and the
workplace have intended to prove alcohol’s detrimental influence on the workplace
and has thus ‘criminalised’ the act of consuming alcohol in any form or amount.
Further emphasis on the susceptibility of the workplace to alcohol misuse among
employees is drawn by Newman, Sells (1992) who refer to the notion that drinking on
the job usually evokes some form of major sanctions. It is further stressed that many
companies are hesitant to specify policies beyond on-site consumption or condition on
arrival at work. Most organisations (including some stakeholders) view policies or
positions taken on situations beyond work as invasion of privacy.
Roman, Trice (1972) claim that factors within an organisation that may be
potential causes of alcohol misuse include low structural visibility, occupational
obsolescence, absence of social controls (such as required on-the-job drinking),
severe role stress and competitive pressure. Campbell and Graham (1988)
contribute to this by stating that a lack of personal achievement and recognition
and unchallenging work may also contribute to job-specific causes of alcohol
misuse. To add to this debate Holland (2005) adds that the nature of work has an
association with a culture of use and misuse of alcohol and illicit drugs. It is
reiterated that workplaces with high stress factors, job insecurity and isolation or
combinations of these factors are seen as catalysts for such cultures.
370 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Typically, discussions about alcohol misuse have been centred on blue-collar
industries such as mining, building and transport. However, the fundamental change in
the nature of work across society and the volatility of the global economic environment
(Holland, 2005), which the United Kingdom is a part of has seen professional and white-
collar workplaces also mirror many of the traits linked with the misuse of alcohol and
illicit drugs. Therefore with both white-and blue-collar jobs now exhibiting similar
patterns in terms of increased stress, job insecurity and more longer and intensive work
duration, most workplaces have become a fertile ground for the development of an
alcohol culture. However, the IIDTW (2004) argued that there is no established link
between the nature and/or working conditions of a workplace and the presence of a
drinking culture. According to Lucas (2005), it is very important for employers
especially, to focus and examine the type of workplace that they have created or shaped
when the issue of alcohol misuse in the workplace is under discussion. Holland (2005)
therefore suggests that the culture and expectation that management set is a central issue
in any discussion regarding alcohol and other drugs misuse.
THE WORKI NG ENVI RONMENT AND ALCOHOL USE
Most organisations, and employers for that matter, often see the development of
substance misuse policies and measures as a proactive and responsible stance, without
an understanding of the reason for the problems. However this critically misses the
vital issue of workplace culture. Henderson et al., (1996) dwell on the need to identify
the relationship between general levels of drinking and particular working
environments and how consumption may relate to the type of work conducted and the
role played by ‘normal and accepted’ working practices in enabling and maintaining
drinking in the workplace. According to Allsop, Pidd (2001), workplace culture is of
central importance in framing workplace expectations and social environment and the
use of legal drugs such as alcohol and tobacco and illicit drugs. For example:
“In a variety of cultures, formal and informal pressures encourage weekly after
work team building and relaxation based on alcohol consumption. Sanctioned
drugs such as caffeine and tobacco have been embraced in ritualised breaks in
worktime” (Allsop, Pidd, 2001, pp.5).
Along with a study of workforce alcohol consumption by Midford (2001), it
was identified that alcohol consumption level among both white- and blue- collar
jobs was on par. In addition, Rigby (2005) notes that, in relation to the white-collar
environment, drug and alcohol addiction in the financial services and the pressures
that lead to addiction have been a celebrated part of popular culture since the coke
snorting, heavy-drinking yuppie made his debut in the 1980s. Callus and Lansbury
(2002) suggest that the changes in the nature of work over the past couple of
decades have seen increased pressures of work intensification and job insecurity
permeate all types and levels of work. Ames, Grube (1999) also add that issues
such as lack of control, alienation and stress linked with the individual’s
Faculty of Business Economics and Entrepreneurship 371
perceptions of powerlessness are important factors in substance misuse in all kinds
of workplaces.
On the other hand, Holland (2005) emphasises the need to assess cultural
issues, in any study relating to substance misuse, by especially dealing with the
taboo nature of alcohol misuse in the workplace particularly from the employers
viewpoint. For example:
“In the City, on Wall Street and in similar environments the world over,
there’s no doubt that alcohol and drug use and misuse are widespread and even
talked about – but almost always in the third person. And if individuals are cagey,
the banks and brokerage houses are reticent still. The attitude is very much don’t
ask, don’t tell…” (Rigby, 2005, p. 30).
Subsequent to this is the externalising of the issue of workplace alcohol misuse by
employers, which as noted by Midford (2001), in order to gain an understanding of
workplace substance misuse issues, one must look at the wide-range of factors that
influence (pressures/powers) patterns of substance misuse. It is added that, “in the
workplace, holding the view that drug use is a problem for the individual worker is
functional from the point of view of the employers, because it avoids any exploration
of how the workplace may contribute to the problem” (Midford 2001, p. 46).
The findings for the IIDTW (2005) study support this stance with regards to
the issue of alcohol and drug misuse in the workplace. For example, the IIDTW
argue that the introduction of testing and/or sanctions should not be viewed as a
quick fix solution and may be inappropriate in certain circumstances. This position
is supported by the Australian Council of Trade Unions (ACTU 1991) who state
that in any consideration of alcohol and illicit drug misuse in the workplace, broad
and diverse consideration should be paid to environmental factors that may form a
catalyst and be affected by the issue. The level of drinking in a particular
workplace may partly depend on the type of working environment that is present
within the company (Henderson et al., 1996). This environment may exert a strong
influence on the formation and continuance of drinking cultures through factors
like the accessibility to alcohol and the ease with which it may be consumed on
company premises, even during working hours. Cooper and Sadri (1991) cite the
significance of the working environment and further argue that a working
environment symbolised by overall excessive alcohol consumption is more of a
condemnation of the working conditions themselves than a reflection on the people
who consume the alcohol. The authors add that, for instance, a management may
reinforce a drinking culture if there is alcohol present in board rooms and private
bars in offices, as well as alcohol consumption within any context related to
company work.
Henderson et al (1996) are of the view that, in addition to the working
environment and job type, the attitudes of employees to drinking and the ‘normal’
working practices that exist also exert a powerful influence on workplace employee
behaviour. That is, in certain situations, such behaviour may be more influential
than the organisation’s rules about alcohol consumption. For instance:
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“…there may be a formal policy about drinking mandated by upper
management that is all but ignored by the majority of the employees, who are
responding to less socially distant behavioural expectations that make alcohol use
appropriate-even desirable-under certain circumstances… For example, while
drinking on the job in a construction company may be against company policy, it
may be understood by a group of bricklayers, painters, or carpenters that Friday
afternoons are a time for ‘taking it easy’ and ‘having a few beers’. Similar drinking
behaviour in another occupational group, computer programmers for example, may
result in disciplinary action or dismissal” (Ames, Janes, 1992 cited in Henderson et
al., 1996, pp. 31)
The above example therefore indicates that company policy on alcohol
consumption may sometimes be disregarded by some employees who are
responding to the more ‘immediate and powerful understanding’ that, in the case of
the construction workers, drinking on a Friday afternoon occurs and is acceptable.
Davies (1979) notes that not all drinking ‘norms’ should be viewed in a negative
light as some of these norms have come about because they serve the immediate
needs of the employee and the organisation in general. For instance, drinking
norms may carry symbolic or actual functions significant for meeting organisation
goals, in that it may encourage social team-building and sooth the burden of long
shift-work routines.
Although there have been numerous studies (Hagen et al., 1992; Roman et al.,
2000; Phillips, 2001) aimed at linking increased alcohol consumption, job
insecurity and stress, and other harmful occupational attributes, Lucas (2005)
points out that it is not always negative factors driving alcohol consumption. That
is, the culture and structure of an organisation, and the society in general, may
permit employees to indulge in lunchtime or after-hours drinking to boost
networking opportunities.
ALCOHOL CONSUMPTI ON AND I TS EFFECT ON
ORGANI SATI ONAL PERFORMANCE
Alcohol use at work has often been considered in terms of productivity,
absenteeism, accident rates and the turnover rates of employees. The effects in the
workplace have usually been linked to alcohol use in leisure time, at the workplace
itself and in the ‘grey’ area between work and leisure such as after-work activities,
office parties or other work-related occasions. The aim of this section therefore is
to set out what is known and unknown about the alcohol use and its possible effect
on the overall functioning of an organisation. Previous research have aimed to
quantify the supposed effects, from an employer’s perspective, (Observer,
Maxwell, 1959; Godfrey, Parrott, 2005; CIPD Surveys; IAS Factsheets) of alcohol
on employees’ performance, however Register and Williams (1992) argue that
there have been no significant relationships identified between effects of substance
misuse and productivity.
Faculty of Business Economics and Entrepreneurship 373
ABSENTEEI SM
It is clear that absenteeism may incur a number of costs to organisations,
mostly as a result of decreased output due to days individuals are not available,
tardiness, early leaving and unscheduled and frequent breaks. Godfrey and Parrott
(2005) argue that although chronic use of alcohol may be associated with longer-
term absences from work, the United Kingdom in this respect usually have shorter-
term absenteeism cases reported in their particular workplaces. It is added that the
relationship between recreational, acute or binge episodes and chronic use of
alcohol or illicit drugs to shorter workplace absences in the United Kingdom is
under- researched. It is therefore difficult to create a link between alcohol use and
absenteeism because employees are unlikely to admit absences are related to
alcohol-use behaviour. Godfrey, Parrott (2005) therefore admit that the extent of
the effect of alcohol use on absenteeism among the United Kingdom workforce is
problematic to assess, hence researchers have often had to resort to estimations as
well as assumptions to support their claim.
Previous researchers who have aimed to quantify alcohol-induced absenteeism
(McDonnell, Maynard, 1985; Godfrey, Hardman, 1990) have been challenged by
Joeman (1992), who on the basis of data obtained from a General Household
Survey, concluded that there were no direct and reliable differences in rates of
absences between light, moderate and heavy drinkers. It was identified that a
relationship between alcohol intake and absence became apparent only when
general health and smoking were taken into consideration. The role of alcohol
consumption in establishing rates of absence is very vague and the number of
absences that can be linked to alcohol is uncertain (Henderson et al., 1996). This
indicates the difficulty in determining the costs associated with alcohol-related
absences, although calculations have been adopted on the basis of employees’
gross earnings and other employers’ costs to arrive at figures. Henderson et al
(1996) argue that the accuracy of such figures and the true cost to the organisation
cannot be justified. It is further stressed that in present working environments,
absenteeism should not be included as a cost in the same manner as accidents and
job performance losses can be. Besides, Martin et al. (1994) are of the view that:
“…substance abusers’ absenteeism reflected efforts protect themselves from
harm that might occur if they tried to work; obviously this protection can extend to
co-workers and to the workplace itself. While seeming absurd, the suggestion that
absenteeism can serve positive functions stands in the face of very imperfect
systems of detection of employed substance abusers or implementing effective
means for their behavioural change” (Martin et al., 1994 cited in Henderson et al.,
1996).
This point of view thus exposes a positive side to absences from work that
may be due to alcohol. For instance, in a workforce that has a developed drinking
culture absenteeism could be viewed as beneficial since it would prevent accidents
and poor performance that may result from intoxication. Hence, the cost from
absenteeism which is regarded as a major cost in most organisations as a
374 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
consequence of alcohol use is usually estimated on the amount of time lost and the
value of the lost production. However, it is clear that such calculations are open to
dispute and therefore more accurate information on the nature and causes of
absences and employee-employer agreement when assessing such costs would best
clarify the association.
ACCI DENTS
The presence of alcohol use in the workplace has been characterised and
highly publicised by its relationship with accidents. Alcohol consumption has been
implicated in many high profile cases, particularly involving transportation and
although it has not always been possible that alcohol has been the cause of most of
these accidents (Henderson et al., 1996), it has always been cited as a possible
factor. Findings from a number of studies (Health and Safety Executive, 1993;
Davies, Teasdale, 1994) imply that alcohol consumption is likely to be related to
accidents both within and outside the workplace. However, the precise relationship
is poorly understood and precludes any accurate assessment of the exact part
played by alcohol consumption (Henderson et al., 1996).
J OB PERFORMANCE AND WORKI NG RELATI ONS
Alcohol consumption may affect human performance in a number of ways
including gross motor coordination, reaction times and attention (Peterson, 1990;
Collin, 1980; Critchlow, 1983). Thus it has been concluded in most studies that
working under the influence of alcohol may affect efficiency and accurate at work.
However, Henderson et al. (1996) argue that as it is difficult to calculate the overall
effect that alcohol consumption has on performance, the decrease in productivity
due to alcohol consumption, can only be guessed. Most of the effects that the
consumption of alcohol has on behaviour and emotions are well documented
(Critchlow, 1983), most especially its effect of lowering a drinker’s inhibitions.
Thus lowered inhibitions and the perceived benefits that this provides are totally
opposite to the general view and often stated unwanted side-effects of alcohol
consumption in the workplace. While such effects may be acceptable within a
social setting, especially the United Kingdom, they have a particular relevance to
the working environment.
Numerous studies have highlighted the positive and negative consequences of
alcohol use within the workplace and some have attributed thefts, aggression, lost
promotion and encouraging informal groups (Gustafson, 1983; Pernanen, 1991). In
contrast, Davies (1981) notes that alcohol use may sustain informal groups,
improve relationships between management and employees, and also help with
team-building and work as a reinforcer to a certain extent. Example is given of how
Faculty of Business Economics and Entrepreneurship 375
alcohol plays an important role of reinforcement, at company gatherings, for
reaching production targets or reaching particular organisational goals.
Henderson et al (1996) stresses the point that it is very difficult to quantify the
costs, as done in numerous studies, be it positive or negative of alcohol
consumption has on job performance or working relations. This is because such
beneficial effects are rarely taken into account when cost of alcohol consumption is
being calculated while consumption of alcohol in small quantities may not
highlight many of the negative impediments cited in several studies.
FI ELDWORK RESPONSES - ALCOHOL AND PRODUCTI VI TY
The following section discusses a number of interviews held with different
actors and ‘experts’ about their views on alcohol in the workplace and highlights
the actual practices related to the use of alcohol in the workplace. In designing this
qualitative research, the researchers were concerned with the data to be collected
and the role of the participants in the research process. The use of qualitative
research in this study ensured that issues of validity were effectively addressed in
terms of how the data collection and analysis really addressed the aims of the
paper. Validity may be defined as the extent to which our research explains or
describes what it plans to explain or describe (Willig, 2008) and therefore its
flexibility and open-endedness allows this kind of issue to be dealt with.
In using a semi-structured interview approach to undertake a research that
involves any organisation particularly knowledge-intensive ones, it is essential to
still strategically select your sample organisation and a sample of employees and
managers to interview. For this research, three business organisations which have
office-based work environments were selected for both the fieldwork study.
Although these organisations, all located in the East Midlands, are parts of Multi-
national Corporations, they still share common characteristics of the British
workplace in terms of range of current work and employment
practices, and work-
force characteristics. These organisations are Knowledge Intensive Firms and this
industry represents a major growth area in the Midlands, and the United Kingdom
in general, and therefore relevant to consider when addressing any issues
concerning the contemporary British workplace.
The question of organisational efficiency and employee performance was
presented to the interviewees to identify whether they believe that the use of
alcohol in the workplace can be a cause of low productivity, absenteeism and high
staff turnover. Thus the interviewees were asked to share their perceptions on how
much they felt alcohol use did or could impede the levels of productivity in their
particular workplaces. Although most of them stated that they felt drinking could
affect productivity in any workplace, majority stated that this would be the case in
more blue-collared jobs that the white-collared ones that they worked in:
376 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
“I think that people in British society drink a lot, they are drinking people, and
they are drinking than most nationalities because they drink everyday. I personally
don’t drink because it is not in my personal nature. But I think typical British
factory workers do drink and it causes lots of trouble”
One interviewee in a senior role stated that in terms of absenteeism and
general performance, alcohol was highly related to productivity. The interviewee
explained that in the monthly performance appraisals that were conducted in their
workplace, it was evident that absenteeism and poor work performance often
occurred on weekends or at the start of the working week. In the interviewee’s
opinion, even though there was not much evidence to attribute this trend to alcohol,
it was important to acknowledge that it could be partly due to it as some employees
had admitted to calling in sick due to alcohol use the night before:
“But could you prove that those were related to alcohol? Not really, but pretty
much yes. I mean it was no definite proof like they came in with bottles or came in
drunk but to consistently be sick this time of the month and especially these days
you could tell. And also people would say they saw them out in clubs the night
before and they don’t come into work the next day, you don’t have to be a
detective to figure out what the problem is”
On the issues of the British society’s attitude to alcohol and whether
interviewees felt that alcohol was a problem in the British workplace, all of them
answered in the affirmative. Some said that because alcohol forms part of British
culture in general, it was not regarded as much of a problem in the workplace.
Particularly in the case of an office-based working environment, most interviewees
felt alcohol use was not as much of a problem as it would be in other industries like
the manufacturing or entertainment sectors. Moreover some interviewees stated
that if alcohol was consumed in moderation, its effects on the workplace would not
be as bad or detrimental to productivity as it currently portrayed in the media. As a
matter of fact, most of the interviewees mentioned the possible benefits alcohol
could have on the individuals in the workplace in terms of team-bonding and
socialising, although all of them stated clearly such effects were only possible in
out-of-office work functions:
“Sometimes alcohol does make people loosen up and act friendlier and so at
the party after work then it would help bonding and employees can work closer”
Such points raised by the interviewees prompted the need to acknowledge the
diverse views that arise when the topic of organisational performance and its
relationship with alcohol use or its misuse is being considered.
Faculty of Business Economics and Entrepreneurship 377
CONCLUSI ON
The many opinions about alcohol which are expressed through the interviews,
statements from the managerial and official sources like the Charter Institute of
Personnel and Development (CIPD), and the government statements are infused
with particular appreciations of and world-views on the topic when makes it a very
controversial topic. However what brings the issue of alcohol to the forefront in
most discussions regarding the workplace is the association that has been made by
the above stakeholders among others regarding alcohol and its role in workplace
accidents, reduced work performance and loss of working time. Consequently these
have been translated to economic and social costs, by numerous studies mentioned
in the research, to both the employer and employee and the wider society. Aside
these issues mentioned about alcohol and the workplace is also the notion of work
which in recent years has been increasingly separated from ‘leisure’. Thus the
‘need’ for the employer or management to ensure that there is a healthy and
productive workforce during the working day and on the other hand a similar need
on the part of the employee to feel that they are entitled to act as they please, with
regards to alcohol consumption, so long as they are ‘doing their job’ has further
strengthened the need to review and examine the issues of alcohol in the
workplace.
In the case of this research, the need to address the effect of alcohol use or its
misuse on organisational performance seems to be relevant because aside from the
above mentioned discourses being present in these workplaces, at least with the
ones studied for this research, there is also an ever increasing role of the employer
or management in the discussion. That is, there has been a recent influx of
discourses regarding employee health and safety as well as their wellbeing in the
country and subsequently this has led to many organisations introducing
restrictions and regulations regarding alcohol consumption under the guise of
protecting the ‘drinking employee’ and his or her workgroup.
However, other contrasting views have expressed concern about the
employer’s role in this situation and cited these measures are all a ploy to regulate
the individual’s actions in the workplace and mould him or her into the ‘ideal
worker’ and that alcohol just seems to be one of the media to achieve this.
Nonetheless, aside these debates, there also lie the concerns of the United Kingdom
government whom through numerous legislations and rulings have also tasked the
employer or organisations with the duty of tackling substance misuse in the
workplace. However, with alcohol being a legal and not illicit substance, it has
been as much a difficult substance to address, and for that matter study, using the
same conditions required to do so for other substances like cannabis and cocaine.
Thus the organisation’s role in this issue could, on the other hand, be viewed as
having being thrust upon them by law and therefore their actions and views
regarding alcohol consumption in the workplace, regardless of how harsh or lenient
they may appear, are justified by the fear of the repercussions of flouting these
laws.
378 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Allsop, S.,Pidd, K. (2001). The nature of drug related harm in the workplace In
Allsop, S, Phillips, M & Calogera, C eds Drugs and Work: Responding to
alcohol and other drug problems in Australian workplaces, IP Communications,
Melbourne, pp 5?20
[2] Campbell, D.,Graham, M. (1988). Drugs and alcohol in the workplace: A guide
for managers. New York: Facts on File Publications
[3] Henderson, M., Hutcheson, G.,Davies, J. (1996). Alcohol and the
workplace. WHO Reg Publ Eur Ser, 67, 1-100.
[4] Pratt, A.E. ,Tucker, M.M. (1989) Approaches to the alcohol problem in the
workplace. Alcohol Alcohol. 1989; 24: 453–463, PubMed
Faculty of Business Economics and Entrepreneurship 379
REFORM OF THE HUMAN RESOURCES
MANAGEMENT FUNCTION IN THE MINISTRY OF
INTERIOR OF THE REPUBLIC OF SERBIA - THE
STRATEGIC BASIS, KEY ACTIVITIES AND
CHALLENGES
Milan Klisaric, PhD
39
Sinisa Dostic, PhD
40
ABSTRACT
The subject of this research is the reform of the functions of human resources
management in the Ministry of Interior of Serbia. The aim of the research is that, in the
context of complex transitional changes in Serbian community, to identify, describe
and explain the strategic basis, key activities (sub-functions), and the challenges of
reforming the functions of human resources management in the MoI. For identifying
the current situation of human resources management in the police of the Republic of
Serbia, and the predictions of the future state of affairs in this area, among other
methods - the methods of content analysis, secondary analysis and examinations
(surveys) have been used. Among the strategic bases for reforming the functions of
human resources management, the following have been particularly described and
explained: the need for de-politicizing and professionalization of human resources
management function, the need for improving performance in carrying out police
duties, the need for quality personnel, etc. This research briefly describes the key
activities (sub-functions) of the human resources management function, such as
strategy and human resources management policy, analysis and work design, human
resources planning, recruitment and selection, employee training, and development of
employees and the organization. Among the challenges in reforming the human
resources management function, a special focus has been devoted to the design of the
introduction of the prestigious human resources management standard, worldwide
known as” Investors In People – IIP”. For designing of the future model of human
resources management in the Serbian police, foreign experiences and solutions of
human resources management in the police and the public sector, especially in the
Great Britain, have been used.
Key words: Reform, Human Resources Management Function, Strategic
Bases, Key Activities, Challenges.
J EL Classification: M12
UDK: 005.96:351.74
39
Milan Klisaric, Ministry of Interior, Belgrade, Serbia, [email protected]
40
Sinisa Dostic, Ministry of Interior, Belgrade, Serbia, [email protected]
380 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
Human Resources Management (hereinafter referred to as HRM) can be
viewed as a scientific discipline and as a management function in the organization.
As part of the science on organization, it deals with the study of all aspects of
employment in an organization, and as a management function it is within the
competence of the human resources sector and all levels of management in the
organization. The purpose of HRM is to create and maintain the required quality of
employees, and the achievement of strategic business objectives of the organization
- the effectiveness, efficiency and economy. All managers, starting from the very
top, must act as leaders in the field of quality, because it is their task to establish a
quality system and to incorporate it into the structure of the organization (Filipovic
et al. 2009, p. 382). Human Resources (hereinafter the HR) are the most important
resources in any organization. HR quality directly affects the quality of business
processes and their products (decrease of crime rate, increase of efficiency of
solving crimes, crime prevention, improvement of confidence in the police and the
level of satisfaction with their work, etc.).
Ministry of Interior of the Republic of Serbia has been in the process of
reforming its core functions for the last decade; one of which, in the opinion of
many experts and police employees, the reform of the HRM functions is the most
important but also the most complex. The aim of this process is that the police,
from the perspective of the international community, should become a reliable
partner and the support of European integrations; and from the perspective of
citizens - a public service to which citizens can turn to for help and protection. In
order to achieve this goal, the Ministry has to raise its capacity and reputation that
enjoys as an institution, which must include the internal reorganization so as to
create a more efficient police service, which costs less to the citizens of Serbia
(statement by the former Minister of Interior of Serbia, Ivica Dacic, in his opening
address in the Development Strategy of the Ministry of the Interior 2011-2016).
The modern requirement of both the public sector and the general public that
the police should be more effective in their work and at the same time cost less,
represents a basic quality requirement that cannot be achieved without good HR
and HRM quality. Such requirement opposes to many factors of traditional police
organization and its environment, such as: system inertia, opposition of personal
interests to the organizational and general social interests, lack of awareness about
the essence and importance of the changes, political interests and the influence that
changes should not be not implemented, poor coordination and communication in
organization, excessive paperwork and outdated work technology, underdeveloped
leadership and management, human resources surplus, etc. In addition, the
tendency of politicians towards achieving a better quality of the police, is usually
associated with a conceptual misunderstanding of quality, hypocritical statements
and inconsistencies. Even though many politicians like to pay lip service to quality,
other issues, such as tax levels, are important to them. (Bovaird et al., 2009, p.
166).
Faculty of Business Economics and Entrepreneurship 381
The contemporary HRM in police organizations in the developed EU countries
is based on the developed activities, such as HRM strategies and policies, job
analysis and design, HR planning, recruitment and selection, staff training,
performance management, and other. Special contribution to the improvement of
the HRM function in organizations has enabled the creation of standards known as
“Investors In People – IIP”, a prestigious quality management model in the field of
HR. MoI of the Republic of Serbia during the past two years has adopted a number
of projects relating to the reform of the HRM function, within which the
introduction of the IIP standard has been envisaged. In addition to the many
challenges in reforming the human resources management functions, the
introduction of IIP standards will be the most demanding enterprise and the biggest
challenge of this reform.
STRATEGI C BASI S FOR THE REFORM OF THE HRM
FUNCTI ONS
Strategic bases for the reform of HRM functions make part of strategic
documents of MoI, the official reports of government bodies, the findings of the
scientific research and other relevant documents. In the Development Strategy of
the Ministry of Interior 2011 - 2016, the section relating to organization and
management, emphasizes the need that HRM be reformed from the personnel
department of the old type to a modern service that will be able to meet the
challenges of the 21st century. In order to achieve this, it is necessary to establish a
HRM system based on contemporary standards, criteria and principles of hiring,
selection, training and promotion in professional career. Such developed system
would allow competition among law enforcement personnel based on competence
and results, resulting in high level of professionalism, job satisfaction and legal
safety of employees. Moreover, the Strategy states that promotion should be based
on transparent procedures, with the use of internal open competitions as rules when
it comes to filling middle and senior level managers vacancies in the police, based
on the results of the work and advanced training, with a standard test of knowledge
and abilities.
The demographic changes in the Republic of Serbia also represent the
important strategic basis. According to the data given by the Statistical Office of
the Republic of Serbia in the publication "Population, age and gender - census
2011", Serbia has 7,186,862 inhabitants (without AP Kosovo). Compared to the
1991 census (7,822,795), and 2002 (7,498,001), a significant decrease in the
population is evident - for 20 years by more than 600,000 residents. Contrary to the
significant decrease of the number of inhabitants, in the above-mentioned period
there was a significant increase in the number of employees in the Ministry of
Interior. For example, in 2002 at the seat of the Ministry there were 7,728
employees, and at the end of 2012 approximately 18,000 (OSCE Mission 2004,
pp.95). This has caused increased financial investment in the police, mostly for
382 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
staff salaries. MoI of the Republic of Serbia is the largest employer in the state
administration, with over 46,000 employees, which is, when compared to some
other countries with similar population, incomparably much more (e.g. Kingdom of
Sweden has around 9.5 million inhabitants, and only about 28,500 police
personnel). The large increase in the number of employees in the Ministry of
Interior of the Republic of Serbia in the abovementioned period did not lead to any
significant decrease of crime. According to the data of the Statistical Office of the
Republic of Serbia, the total criminality of adult offenders in the abovementioned
period was reduced only by around 10% (Table 1). However, within this slight
reduction, there is a trend of significant growth in crimes of violence and drugs,
which indicates a reduced efficiency of the police, the judiciary and the entire
community.
Table 1: The general trend of reported adults for the period 2002-2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
104061 95733 88453 100536 105701 98702 101723 100026 74279 88207 92879
Source: Bulletin of the Statistical Office of the Republic of Serbia No 558 "Adult
offenders in the Republic of Serbia 2011 - Registration, prosecutions and
convictions" and announcement No 12 "Adult offenders in the Republic of Serbia
2012"
Juvenile delinquency in the mentioned period increased by as much as 20%
(Table 2).
Table 2: Reported minors in 2002 – 2012
Republic of Serbia
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
3,251 2,415 3,120 2,945 3,041 3,434 4,085 3,497 3,747 4,323 3,913
Source: Bulletin of the Institute of Statistics of the Republic of Serbia No 559
"Juvenile offenders in the Republic of Serbia 2011 - Registration, prosecutions and
convictions" and announcement No 11 "Juvenile offenders in the Republic of
Serbia 2012"
The above statistics indicate that a large increase in the number of employees
in the Ministry of Interior does not necessarily lead to a significant reduction in
crime rates, nor does it lead to a reduction in crime rates in certain groups of
offenses. Therefore, only the quantitative increase in human resources is not
enough to improve the quality of work in the most important areas of policing - the
prevention and repression of crime. It can be assumed that in the mentioned period
the qualitative attributes of HR and management of these resources were not at the
required level.
Faculty of Business Economics and Entrepreneurship 383
The following statistics from the Ministry of Interior - Directorate for
Analytics, shown in Table 3, indicate that there are serious problems in the quality
of staff in the Ministry of Interior. The data relate to criminal offenses committed
by police officers of the Republic of Serbia for the period 2002 - 2012.
Table 3: criminal offenses committed by police officers in the period 2002 - 2012,
in total and by categories of employees: uniformed, authorized police officers, and
other
MoI Year Employees
Total Uniformed Authori-
zed
police
officers
Other
2002 263 194 31 25
2003 346 273 44 23
2004 280 222 32 19
2005 334 289 22 27
2006 290 239 22 13
2007 385 267 76 24
2008 251 190 31 20
2009 312 226 23 18
2010 254 117 22 10
2011 537 373 67 97
2012 529 386 72 71
Total 3,781 2,776 420 347
Source: Statistics from the Ministry of Interior of the Republic of Serbia -
Directorate for Analytics
The average number of crimes, according to MoI statistics, the police officers
perpetrated during the observed period of 11 years is 343, but there is a growing
trend. Most crimes are perpetrated by uniformed police officers who are directly
responsible for the safety of citizens. Participation of uniformed police in 2012 in
criminal offenses was 72.96%, while for the remaining authorized police officers it
was 13.61%. Statistics of a large number of criminal offenses included in the above
tables indicate the major problems in the quality of police officers, especially in the
ethical dimension, as well as in the function of HRM. Of particular concern in
relation to criminal offenses committed by police officers is the lack of systematic
analysis of these crimes, drawing relevant conclusions and recommendations,
asking questions about management responsibilities, and taking preventive and
corrective measures.
If we take into account the statistics of the presented criminal offenses, the
criminal affairs of the senior police officials and managers, the existence of hidden
figures of crimes perpetrated by police officers, particularly in the area of crime,
corruption, as well as a growing trend of all these, one can say that the state of HR
384 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
and HRM is disheartening both for the police and for the society in general.
Perpetrating offenses by those who are authorized by the community, equipped and
paid to protect against crime; and coupling of some leading men of the police with
the greatest criminals of organized and drug crime in the country, which is a topic
often used in the media, are the most serious forms of tarnishing the reputation of
the police profession.
The important strategic basis for reforming the HRM function is in the attitude
of the citizens towards the police. Significant sources of public opinions about the
police are found in the public opinion research agencies: Strategic Marketing (2008
- 2010), CESID (2011 - 2012) and the Office of the OSCE - Mission to Serbia on
the attitudes of citizens of Serbia on policing, conducted in the period from 2008 to
2012. The above mentioned research show that the greatest number of citizens
demand that the quality of the police employees should be improved. 90% of the
respondents believe that the appointment to senior positions in the police is
conducted on the basis of political and other non-professional connections and
influences. In this regard, 30% of respondents demand to de-politicize the police
and to improve the education and training of the police (33% in 2008, 68% in
2012). In addition, on average, about one half of respondents require the reduction
or elimination of corruption in the police force. A particularly important
requirement of citizens is related to the role of the police in the community. On
average, around one-third of the respondents believe that the police is a service of
the citizens, and the majority believes that it currently has the role predominantly
oriented towards the Government of Serbia and the political parties.
In the recently conducted empirical research of opinions of heads of Criminal
Police in the Republic of Serbia on the quality of HR and HRM function, the
results also point to significant problems in this area. The results are shown in
Tables 4 and 5.
Question: "How do you assess the competence of crime police officers?"
Table 4: Assessment of competence of crime police officers
Quality level in %
Quality dimension
excellent good poor
Expertise 15.5 64.3 20.2
Ethics 17.9 70.2 11.9
Motivation 7.1 65.5 27.4
Experience 12 67.5 20.5
Average value 13.12% 66.87% 20%
Source: Klisaric, 2014, pp 451
Faculty of Business Economics and Entrepreneurship 385
The distribution of the responses on the quality of competence of crime police
officers is mainly at the good quality level, the average value of 66.87%, followed
by the poor level, the average value of 20%, and lastly at excellent average value of
13.12%. The highest value was recorded for the dimension of ethics (17.9: 70.2:
11.9) and the lowest value for the dimension: Motivation (7.1: 65.5: 27.4).
The lack of motivation as the biggest problem in HR, seen from the
perspective of the heads of Criminal Police, is the consequence of the poor quality
of HRM, which was analyzed in the following question:
Question: "How do you assess the quality of human resource management?"
Table 5: Evaluation of the quality of human resource management
Quality level in %
Quality dimension excellent good poor
HR planning 5 57.5 37.5
HR recruitment 3.7 52.4 43.9
HR development 6.1 57.3 36.6
Career advancement 4.9 61 34.1
Average value 4.92% 57% 38%
Source: Klisaric, 2014, pp 452
The distribution of the responses on the quality of HRM is mostly at the good
quality level, the average value of 57%, then at the poor level, the average value of
38%, and lastly at excellent average value of 4.92%. HR recruitment in the
criminal police was rated the lowest (3.7: 52.4: 43.9). Compared to the quality
assessment of crime police officers competence, HR quality management in the
criminal division was rated significantly worse.
The above research shows that the biggest problems of the human resources of
the Serbian police is the lack of systematic, strategic and modern HRM, as well as
the existence of a strong political influence on all of the key activities of HRM
functions. This has produced a disproportionate increase in staff at the Ministry of
Interior, the increased costs of the state budget and increase of the number of
criminal offenses committed by police officers. State of crime has not improved
either statistically or in the eyes of the public, and citizens believe that the police of
the Republic of Serbia is still the dominant instrument of the Government and the
political parties, and not a public service. All of the abovementioned should be
sufficient reasons, and strategic basis for the reform of the HRM function in the
Ministry of Interior.
386 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
FUNCTI ONS AND KEY ACTI VI TI ES OF HRM
THE CURRENT STATE OF AFFAI RS AT THE MI NI STRY OF
I NTERI OR OF REPUBLI C OF SERBI A
The HRM function is made up of a range of activities, policies, practices and
systems that influence the behavior, attitudes and performance of employees in the
organization (Bogicevic-Milekic, 2011, pp.5). A developed model of HRM
includes a variety of programs, such as quality management, team building
programs, measurement and management of organizational climate and culture,
organizational performance management, etc. The current state of HRM in the
Ministry of Interior of Republic of Serbia is characterized by numerous and various
deficiencies and significant deviations from the modern standard or best practice
HRM (Cezemier et al., 2012, pp.3-20). Firstly, HRM is much more bureaucratic
administering to the employees than it has been a developed strategic managerial
function. Management for HR, as the holder of the HRM function, does not possess
the necessary authority for bringing decisions in the field of HRM. Recruitment is
carried out without open competition and is strictly centralized, the deployment and
promotion to managerial and other positions is done without transparent criteria
and procedures. HR is not recognized as the potential of the organization which can
provide a significant contribution to the way in which the Ministry is being
managed in terms of labor costs and effective working practices. The key HR
activities are generally either not executed at all, or not executed properly - there is
no evidence that the best practices of HR support the MoI and its departments in
achieving goals. Duties and tasks are delegated through a number of organizational
units of the MoI, which leads to the unnecessary duplication and separation, where
problems with coordination and information arise and lead to unnecessarily high
number of employees, and similar.
The disunity of HRM affairs prevents a unique and systematic approach to
people management at the level of the Ministry of Interior. Operating procedures in
the field of HRM are not formalized and transparent. Many important tasks are not
performed: HR planning, analysis and design of work, career management,
performance management, etc. The lack of harmonization of regulations and
inconsistent treatment result in a large number of lawsuits for violating the rights of
employees. HRM processes in the MoI are slow, inconsistent and expensive. The
management system is centralized, which in practice translates into an enormous
written and verbal daily correspondence. There is the largest number of written acts
on the assignment, transfer and promotion - which all must be signed by the
Minister, but before that there are a lot of other parties that must give their consent,
which significantly slows down the procedure. Employees are largely uninformed
about HRM (surveys conducted in May 2013 by the Ministry of Interior and DCAF
on a sample of 2,400 employees), which indicates that the system is not
transparent. There is no a united approach to HRM in the MoI, ie. the HRM
Faculty of Business Economics and Entrepreneurship 387
function is disunited: Directorate for HRM collaborates with 27 police departments
(PDs), which deal with similar tasks in the local police stations. Also, the
management of HR in the MoI does not provide the necessary technical support to
the direct managers.
THE PROJ ECTI ON OF A MODERN SYSTEM OF HRM I N THE
MOI OF THE REPUBLI C OF SERBI A
A modern HRM system would primarily require a new unit for HR, which
would be positioned at the strategic level. Also, a modern HRM system would
consist of key activities as shown in figure 1.
Figure 1: Projection of the key activities of the HRM function in the Ministry of
Interior of Republic of Serbia
Source: promotional material of the DCAF project "The introduction of modern
concept of HRM in the MoI", under the title: "Reforms"
A more comprehensive scheme of the HR management function, so-called
integrated HRM system, provided by Dr Gert Ahrer is shown in figure 2.
Evaluation
Education
Staff
Employee
Performanc
e
Job
Enrichment
Learning
And
Development
Working
relations
Health and
Safety protection
of employees
HRM
Strategy and
Policies
Training of
employees
Recruitment
And Selection
388 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 2: The integrated human resources management system
Source: Ahrer, G., pp.16
For achieving the broadly set activities of the integrated HRM as shown in
picture 2, it is necessary to precisely define the key (sub) function units for HRM
within the police organization, such as (Swanson, et al., 2008, p. 387-388):
1.Preparation of political statements, including the suggestions of HR
strategies; also the standards of operational work relating to all areas of HRM, as
well as issues for decision making by the executive managers of the police
organization.
2. Maintenance of performance evaluation system (performance at work, the
characteristics of the employees and the organization).
3. Creating an integrated information management system that includes all the
necessary information about the employees.
4. Maintenance of program effectiveness for the purpose of recruitment of
qualified candidates.
5. Management of carefully thought-out selection process.
6. Establishing and maintenance of criteria for the promotion of employees at
various levels of the organization, together with a method for determining the
necessary qualifications of employees visible for each position.
Business Plan for HR
Internal Communications
Control of HR, Risk
analysis, HR systems and
audit, Quality control
quality Control
Corporate Strategy
HR strategy
Vision, mission, values
Brand, sustainability
Health, Welfare,
Safety, ecology
Healthcare
Working conditions
Office management
IT
Administration
Salaries, pensions
Employee relations
Law on Employment
Operational process
BPR (re-engineering) of the
operational process
Organizational Structure
Description of results
Job Description
Workforce Planning
Career Advancement
Recruitment
Substitute planning
Relocation
Work evaluation
Compensation
Organizational and personal development
Knowledge Management
Organizational Transformation
and Change
Management
Performance Management
Guidelines for employees
and management
Faculty of Business Economics and Entrepreneurship 389
7. The implementation of the program for the development of employees, from
entry into service to the highest positions in the police organization.
8. Developing and managing classification positions in the police
organization.
9. Developing a plan of appropriate compensations, taking into account the
different levels of complexity and responsibility for assigned tasks.
10. Presenting the police organization during negotiations with groups which
seek employment in the police, and in other meetings related to HRM issues.
11. Conducting the exit interviews with police officers who leave the service,
in order to identify and adequately correct the unsatisfactory conditions.
12. Providing advice to managers at all levels related to the problem of HR,
paying particular attention to management and issues about the disciplinary
procedure.
13. Implementation of the HR issues research program.
14. Presenting the police HRM unit to the Service of Human Resource
Management in the Government of the Republic of Serbia, trade unions and other
agencies and bodies dealing with HR issues.
For the purposes of this paper, we will include the first six activities of HRM
functions shown in picture 1 – from the HRM strategies and policies to the
development of employees and the organization.
STRATEGI ES AND POLI CI ES OF HRM
HRM strategy is an action plan that includes both: the means and objectives.
The objectives of HR may, for example, include the quality of performance,
quantity of employees and an estimated cost of those goals. On the other hand, the
means may include, for example, HR practices and HR policies (Brewster,
according to Porter, et al. 2006, p. 382). HR management strategy should be well
planned and implementable use of human resources in order to meet the objectives
of the Ministry of Interior at all organizational levels. As a functional strategy, it
should be an integral part of the development strategy of the Ministry. This means
that HRM strategy must be focused on the key dimensions of employee quality,
such as competence, ethics, character, behavior and enthusiasm. The strategic focus
must be on the role of the police to the community, on the right of employees to
fair competition in the professional development and advancement to senior
positions, employee satisfaction with the various aspects of their work, and the fact
that the quality of employees significantly affects the quality of organizational
processes and their products, and particularly the effectiveness, efficiency and
economy of operations. HRM strategy and policies provide the framework for all
HRM functions and give them the desired development direction.
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ANALYSI S AND J OB DESI GN
Job analysis is the process of collecting and evaluating relevant information
related to the job: the content and nature of work, the required knowledge, abilities,
skills and other requirements for the job (Schuler to Bogi?evi? Mileki?., 2011 pp
35). The analysis is focused on two groups of data. The first relates to the contents,
characteristics and performance of a particular job, and the other to the required
employee competencies at specific work position for the successful performance of
the job. Under competence we mean the knowledge, skills and behavior, and often
certain work experience is required as well. The result of the job analysis is the job
description. Job description is a document that contains the purpose of the job, job
tasks, duties and responsibilities, performance targets and reporting
responsibilities. It contains details on the conditions, compensation and working
hours. It represents the basis for the preparation of qualifications of candidates.
The conditions for a quality job analysis of each position separately in the
organization, are process and functional analysis of the scope and jurisdiction of
organization. The process and functional analysis are the framework for the
description and design of each position. There are no records that at the Ministry of
Interior of Republic of Serbia any process analysis has been conducted up to date,
therefore this organization was able to irrationally and enormously increase the
number of positions and employees in the last 20 years. What contributed to this
state was the insufficient use of information technology and software (integrated
database of human resources, training, crime, etc.), which allows the rationalization
of employment, improvement of HR management, increase of the effectiveness,
efficiency and economy of operations, etc.
The results of job analysis serve as a basis for other HRM activities:
recruitment and selection, training, evaluating and rewarding employees,
performance management. The qualitative analysis of work requires a special
methodological approach, methods and tools for collecting, processing and
interpretation of data (interviews, observations, questionnaires, content analysis,
etc.). This means that people who are engaged to carry out the job analysis should
have the necessary methodological skills. The best solution for quality analysis and
job description is to engage an external expert who will work together with
managers and executors at the specific workplace, and conduct this analysis at all
levels of the police organization. Another solution is to train the managers for that
job and for conducting job analysis following the clear, consistent, and complete
instructions.
Faculty of Business Economics and Entrepreneurship 391
HR PLANNI NG
HR planning is the process where HR needs are predicted based on the
anticipated changes in the internal and external environment. More specifically,
work staff planning is making plans to fill the future vacancies in the organization,
which is based on the prediction of vacancies and deciding whether those jobs will
be filled by candidates who are already working in the organization or candidates
outside the organization (Dessler, 2007, pp. 71). HR planning in the police of the
Republic of Serbia, which would be based on predicting the need for staff, offering
both internal and external candidates, has not been performed for the last 20 years.
There is no annual plan for HR based on needs analysis. The reasons for this can be
found in the impact of politics on employment and career system in the Ministry of
Interior, the high centralization of decision-making on the recruitment and
deployment of candidates, the absence of the list of qualifications of employees
and others. It could be said that the only exception to this is the admission of
candidates to the basic police training, which is defined by the Law on Police and
the defined standards, criteria and procedures for the admission of candidates. One
of the problems in HR planning is the outdated Act on working positions
systematization in the police. Namely, the number of police officers, envisaged by
the Act on systematization at the local level (police stations) has not significantly
changed for the last twenty years, however the changing determinants on the basis
of which this number is determined have changed, such as the number of
inhabitants and the security issues (type and frequency of security problems,
criminal acts primarily). Ministry of Interior, as all large organizations, should have
a HR plan, especially for achieving the following objectives:
? Attracting and retaining the required number of quality staff (Vuji?, 1008, p.
126). Namely, Ministry of Interior provides opportunities for high
specialization of a part of its staff in different areas (forensics, information
technology, cybercrime, analytics, etc.); however, there are no defined
instruments how to keep the staff, in which they invested significant funds,
in the situations when other agencies offer a much higher salary.
? Solving problems of staff surpluses or shortages. Rationalization of staff
number is not possible without a clear and consistent methodological staff
plan.
? Maximum utilization of employees’ potentials, including the retired police
officers, in a variety of necessary activities, etc.
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RECRUI TMENT AND SELECTI ON OF CANDI DATES
Recruitment of candidates is the process of attracting qualified candidates in
such numbers that the organization will be able to choose the best for filling
vacancies. Selection of candidates is the process of selecting among the applicants
for the job and making the decision on hiring.
Organization may seek candidates internally, among the employees who desire
promotion or transfer; or externally, at the labor market. Most organizations use a
combination of internal and external candidates - promotion within the organization if
there are qualified employees, and external recruitment when they are in need of new
skills. Internal recruitment is particularly important in order to develop careers within
the organization. In this way, organizations can retain valuable and effective employees
by providing them with the opportunity of career advancement.
A number of selection techniques can be used, and they should be chosen
depending on the vacancy to be filled. The techniques are designed to reveal the
characteristics, skills and qualities of an individual for a specific job. The use of
reliable and proven techniques will help lead to the correct decision and the
appointment of a suitable candidate. Selection techniques include biographical
information, interviews, psychometric test, assessment centers, checking
references, test tasks, etc. (DCAF, 2014, pp.6).
Biographical information is information that can be objectively categorized, such
as, for example, qualifications, years of relevant experience, positions of responsibility.
Each category has its specific weight for the final score, so that each candidate gets a
certain number of points based on biographical data. Interviews are conducted at
various stages of employee’s career, and represent a useful method for obtaining
information and getting to know the person. The interview should ensure fairness and
consistency, should be planned in advance, be well structured, and conducted by
persons trained for that. The information obtained during the interview should be
considered along with other sources of information so as to obtain a more complete
picture of the respondents. There are different types of interviews, such as: the face-to-
face interview, panel interview, structured interview, interview about expertise,
focused interview, interview about behavior in a given situation, situation interview,
and so on. The discussion should be conducted by people specially prepared and
trained to avoid bad evaluation of candidates based on faulty perceptions, prejudice and
other negative effects that may occur during the interviewing. Psychological test
represents a wide range of tests that assess mental ability, behavioral preferences and
attitudes/values. The tests are result-oriented, they include points that can be used to
compare candidates one to another, or to a certain standard. It is necessary that they are
conducted and interpreted by a psychologist. They can be divided into two types: (1)
cognitive test / which measures the mental abilities of the person, such as IQ, spatial
resourcefulness; awareness, reasoning, logic, arithmetic; (2) personality test / which
evaluates the attitudes, values and beliefs. The collected responses constitute the
candidate profile which could be compared with the profile that is considered
appropriate for the job.
Faculty of Business Economics and Entrepreneurship 393
In addition to the developed selection for basic police training, there is a
selection of candidates who are already employed to work in specialized units such
as the Special Antiterrorist Unit (SAU) and the Gendarmerie (certain types of
selection training). For deployment at the managerial functions there is no
systematic selection. The promotion of police officers to police managers in the
Ministry of Interior of Republic of Serbia, unfortunately, is not conducted on the
basis of testing, i.e. verification of capabilities and aptitude for leadership and
management. The biggest problem in the selection of candidates for police work is
that there is no such test that will have all the necessary filters based on which the
latent problems in the ethical dimension of the personality would be identified.
In modern time, for the purposes of selection of candidates/applicants, the so-
called in-basket method is used: it is a candidate selection technique where the
problems and/or challenges that await them at work are presented, and includes
discussion groups without a leader. In-basket method is a test used by companies
and governments in the recruitment and promotion of employees. In this test,
applicants receive a variety of messages, phone calls, documents and notes. They
have limited time to set priorities and to properly organize and respond to messages
and phone calls. After the test, or exercise, applicants can justify their decisions
during an interview with the assessors. In the discussion group without a leader
applicants meet as a group to discuss a business problem within a given deadline.
During the meeting, the behavior of the candidates, their mode of interaction, and
the leadership and communication skills they exhibit are observed. The leader of
the group usually stands out during a discussion. From the patrol officers in the
21st century it is required that, in addition to their usual duties to submit reports,
they should also be managers who solve problems (Leonard, et al 1974, p. 522).
The quality recruitment and selection process is very expensive for the police
organization. However, as it provides the highest quality professionals for the
future, who create real value for the organization, it is also a cost-effective process
in the long-term. Only the quality employees in the police can create a positive
image of themselves in the public and the world, and provide the values of the
organization.
TRAI NI NG OF EMPLOYEES
Training is a process through which employees systematically acquire and
improve the skills and abilities that are needed in order to achieve better work
performance (Greenberg et al. 1998, p. 64). Training at any level represents a new
skill and also socializes employees into their new work roles (Thibault, et al., 2007,
p. 362). Unlike education, which is aimed at wider cognitive concepts, the training
is focused on the job description of the specific position, the competencies that are
required for successful job performance from that description, as well as solving
specific work problems and achieving the desired effect. Today's experts
increasingly use the phrase "learning and work performance" instead of the term
394 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
‘training’, to highlight the two main objectives of training – employees’ teaching
and organizational performance (Dessler, 2007, p. 152). If the recruitment and
selection are focused on filling vacancies with candidates with the best
predispositions for work in the police, then the training is focused on the creation
of quality employees. If candidates are not carefully selected with the
corresponding potential for the performance of their job duties, then the proper
training and proper management is a very expensive solution to the problem
(Iannone, 2001, p. 62). The effective operational police force depends on the area
of the qualifications of each police officer. The conscientious police managers
know that the quality of police services is not solely in the function of numbers.
Modern HR management is focused on intelligence, ability and skills that are at
disposal to the organization in terms of its operations and the realization of plans
(Leonard et al., 1974, p. 520).
The current management training process in the Ministry of Interior in
Republic of Serbia is characterized by a disconnection with the HR management
function. Specifically, the completed trainings of police officers in most cases have
no significance for the development of their careers. Directorate for Police
Education, Training, Professional Development and Science (hereinafter: the
Directorate for Education) is in the hierarchy of the Ministry of Interior positioned
quite low - it belongs to the Sector of Finance, HR and joint affairs, so it does not
have sufficient authority to coordinate, control and promote the comprehensive
training system in the MoI. Therefore, managing the training process is not
functionally or organizationally set to be part of an overall strategy for HRM.
Within the ongoing twinning project, as one of its key results the binding of
Directorate for Human Resources and the Directorate for Education in an
organizational unit – Sector for Human Resources, which will have significantly
higher organizational position (next to the minister) and sufficient authority for the
exercise of its jurisdiction.
ORGANI ZATI ONAL AND PERSONAL DEVELOPMENT
Employee development should be an ongoing process of acquiring and
developing formal and non-formal education (courses, seminars, etc.), work
experience and interpersonal relationships. It also includes an assessment of
personality, skills and work performance. The basic objective of development is to
enable the employee to acquire specific skills which are required for high-quality
performance in the near future, whether it is horizontal or vertical career
advancement. The development within the Ministry of Interior of Republic of
Serbia is not based on a systematic approach. In fact, there is no planning for the
development of employees as individuals. Moreover, some police executives are
reluctant to further develop employees because they fear this way they will become
competent (Iannone, 2001, p. 25).
Faculty of Business Economics and Entrepreneurship 395
Employee development system includes the career system. Career is a set of
positions that an individual holds during work in a particular profession, from the
date of his employment until retirement. A new employee of the MoI today has no
clear picture of the possibilities of his/her career development, with no one to
inform and guide him/her. The career system is not transparent, it is politicized,
and many managers are not allowed to get the best candidates, because in fact there
are no candidates. Usually there is only "one candidate".
Law on Police defines a dual career system for employees in the Ministry of
Interior - for police officers with the status of authorized police officials to firefighters
and other employees. Law on Police should define a career system for police officers
only. Other employees should be included in the system of promotion of civil servants
in the Republic of Serbia. Career advancement of police officers is solely based on the
acquired level of formal education and years of service. The system of career
advancement of police officers should, in addition to the above, also include the
necessary training and development programs for the acquisition of higher-level ranks,
as well as annual performance assessment. By implementing internal open
competitions for advancement to higher ranks, competition would be introduced and
the quality of candidates who advance to higher positions would be improved.
THE CHALLENGES OF THE REFORM OF HRM FUNCTI ON I N
THE SERBI AN POLI CE
The strategic challenges of HRM in Serbian police are the result of many piled
problems in this function, and the need for the establishment of a modern HRM
model in the economic, political, technological and legal context of the national
and international level. The basic characteristics of Serbian society are:
underdeveloped economy, high unemployment rate, large brain drain of the young
and talented people, underdeveloped private sector, too large and bureaucratic and
politicized public sector, etc. The request of the public sector is to modernize of the
public sector in Serbia, within which a very important place has the modernization
of the HRM function. Reducing employees’ costs and improvement of
performance (Dessler, 2007, p. 8) will be one of the most important and difficult
challenges of reform of the HRM function in the police of Republic of Serbia. The
strategic management of MoI of Serbia has decided that within the reform of the
HRM function, the process of introducing Investors in People (IIP) standards
should be started, which once is established, will solve numerous challenges and
problems in this function.
Investors In People - the international standard, originally from the UK, is the
first and the only framework for business improvement that focuses on people. IIP
standard can be further defined as a quality system for HR development that shows
commitment to excellence through employees; a tool that connects the goals and
aspirations of the organization for individual performance and development;
framework for the change management, defining the role of HR management,
396 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
performance improvement and organizational development; the international
symbol of quality in the development of human resources, etc. (Oakley, H 2012, pp
presentation). No other quality framework (Six Sigma, ISO 9001: 2000, EFQM,
Kaizen Blitz, etc.) has such a long tradition (21 years), the trust gained worldwide,
and the effect achieved (it is used in over 20,000 organizations in the GB). In
addition to Great Britain, with a license, IIP standard has been applied in 10 other
countries of the European Union (The Netherlands, Sweden, Austria, Belgium,
Bulgaria, Cyprus, Finland, Greece, Hungary and Romania), and in twenty countries
in Europe, Africa, Asia and America. Some recent research (CBI survey of
education and training, 2008, Cranfield School of Management, 2010) show that
IIP standard improves managerial skills - knowledge, experience and skills;
supports the development of organizational learning culture, improves the
effectiveness of management development, encouraging the creation of high-
performance environment and increases manager performance. Also, research
shows that the IIP standard is particularly useful framework for business
environments facing with significant or rapid changes.
The basic idea of the IIP standard is to improve work performance by inciting
all employees, which are characterized by effort without direction, to work together
to achieve better results faster. IIP standard is based on three basic principles
(analogous to the Deming cycle): planning, which includes the development of
strategies to improve the organization's performance; application, which involves
taking actions aimed at improving the organization's performance, and auditing,
which involves the evaluation of the impact of the organization's performance. IIP
standard has ten thematic sections or criteria (indicators) of the HRM quality and
performance, based on the IIP standard and 39 evidentiary requirements. The
criteria are: business strategy, learning and development strategy, people
management strategy, leadership and management strategy, management
effectiveness, recognition and rewards, involvement and empowerment, learning
and development, performance measurement and continuous improvement. IIP
standard criteria have been defined on the basis of best practice of the most
effective companies and government bodies in Europe.
Some studies that have investigated the relationship between work
performance, on the one hand, and the policies and HR practices on the other hand,
show that certain policies and HR practices can have a positive impact on business
performance (Management Journal, June 1995, str.635-672 according to Coulter,
2010, p. 179). The introduction of IIP standard in the HRM practice in the Serbian
police will bring many benefits, especially showing the quality management
system and public system to taxpayers and beneficiaries, as well as to the
Government, donors and partners. The principal risks of introducing IIP standard in
the Serbian police will be the opposing of the underdeveloped HRM systems,
performance and processes accentuated by political influence, and organizational
culture characterized by the lack of readiness for large and serious developmental
changes. Therefore, it can be expected that the introduction of the IIP standard in
police of the Republic of Serbia will be a very long and functionally non-linear
process.
Faculty of Business Economics and Entrepreneurship 397
CONCLUSI ON
The initiated reform of HRM function in the Ministry of Interior of the
Republic of Serbia is linked to a number of factors that influence its success. The
most influential among them is the political factor, i.e. the will of the Government
of Serbia and the key people in the MoI, who are now taking the test of democratic
maturity. It is clear that without their support the real reform is not possible. Also, a
very influential factor is the management of the Ministry of Interior of all levels,
that are responsible to transfer the strategic vision of the development of the HRM
function throughout the organization. A very important factor for the reform is the
organizational culture, i.e. the awareness and attitudes of all employees of the
necessity of development changes in the field of human resources. It is quite
certain that a number of employees does not agree to the changes and seek to retain
the existing system that promotes political suitability and other non-professional
connections when it comes to employment and career advancement in the police.
In the process of the reform of the HR management in the police of the
Republic of Serbia, it is necessary to use the positive experiences and models of
HRM in developed countries of the European Union. In this regard, the reform
projects in HR that are supported by the European Commission, financially and
professionally, should assist the HRM function in the Ministry of Interior of
Republic of Serbia to develop implementing the activities which now do not exist
at all or are poorly developed. It is realistic to expect that the establishment of all
HRM activities will contribute to achieving the key objectives of the reform of
public administration in the Ministry of Internal Affairs, as follows:
professionalization, decriminalization, depoliticizing, decentralization and
rationalization, which are the key dimensions of contemporary public sector
organization and the quality of its management.
To reform the functions of HRM as planned and with the anticipated activities
and results, the Ministry of Interior of Republic of Serbia must seriously and
systemically approach to change management, using the ‘step by step’ principle, or
‘the switch’ principle in situations where it is necessary.
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REFERENCES
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Faculty of Business Economics and Entrepreneurship 399
[18]Promotional material of the DCAF project "The introduction of modern HR
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[29]http://en.wikipedia.org/wiki/Swedish_Police_Service.
[30]http://en.wikipedia.org/wiki/In-basket_test.
Faculty of Business Economics and Entrepreneurship 401
III PART.
CASE STUDIES
Faculty of Business Economics and Entrepreneurship 403
INNOVATIVE GLOBAL COMPANIES – SOME CASE
STUDIES
Mirjana Radovic Markovic, PhD
41
Sladjana Vujicic, MA
42
ABSTRACT
The world economy is becoming increasingly global and the magnitude of the
globalization trend is so large that it is creating complexities for the managers and
leaders of the organizations. Globalization brings both benefits and challenges for
the organizations and striking a right balance between the two is critical for the
organizations to succeed in the global marketplace. This paper aims to study and
discuss the significance of globalization for organizations. The study is aimed at
the complexities of the global environment and the competitiveness of the
organizations. The paper elaborates the types of global organizations, followed by
the role of managers and leaders in managing global organizations. The study also
includes the role of the international business environment in the context of the
global strategy of companies. Finally, an attempt has been made to study the
importance of managing a culturally diverse workforce in a global organization.
The method of study is primarily a literature survey and the websites of some of the
organizations. The study proves the point that globalization is inevitable in the
present economic scenario. Hence, companies that can adapt faster to this trend of
globalization by adopting suitable management techniques will have a competitive
advantage. The organizations need to strike a right balance between the challenges
and the benefits of globalization and the four basic areas for striking the right
balance are cost, strategy, people and risk.
Key words: Globalization, Global Strategy, Cultural Diversity, International
Business Environment.
J EL Classification: F60, F23
UDK: 005.44 334.726
41
Mirjana Radovic Markovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
42
Sladjana Vujicic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia,
[email protected]
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I NTRODUCTI ON
The globalization process involves the establishing of social, technological and
political links among countries all over the world (E-commerce corporate infrastructure
program, 2002). As a result of the integration of international economies, the last two
decades have seen an unprecedented surge in globalization trends across industries and
nations. And along with globalization, come significant opportunities and threats in the
external environment to which the organizations have to respond. Globalization can be
understood as a process which removes physical, political, economic and cultural
barriers between different regions in the world, thus encouraging an exchange of
goods, services, money and professionals between nations. As these exchanges grow,
businesses become more and more integrated and interdependent (E-commerce
corporate infrastructure program, 2002). Global companies can be defined as those that
have a significant proportion of their sales, assets or employees outside their home
markets although they are definitely not homogeneous. Globalization offers both
benefits and challenges for the organizations (The Yearbook of International
Organizations, (1978). Advancements in communications, technology and
transportation have truly made the world a unified global field and have contributed
significantly to the globalization process. The product development life cycles are
growing shorter and communications are becoming instantaneous and thus, products
can be manufactured and sold anywhere in the world (Fenton, Pettigrew, 2000). The
employees within the organizations can be from anywhere in the world, since global
organizations have offices in different locations and regions. Managing global
companies poses many opportunities and challenges for the managers and the
leadership of the company. For example, at the macro level, it could be property
ownership arrangements, availability of resources and components, the role of
government in business, as well as behavioral and cultural differences among nations
and differences within the nations. Values, symbols, beliefs, and work cultures vary
sharply between countries (Robbins, Coulter, 2012).
Managing these global organizations requires a fine balance of costs, strategy,
people and risks. Globalization has become such an important factor in the survival
and competitiveness of the organizations that those who do not think globally could
get left behind.
TYPES OF GLOBAL ORGANI ZATI ONS
Companies conducting their business at international locations have been there for
a while. For example, DuPont conducted business in China as far back as 1863 and the
Ford Motor Company established its first overseas sales office in France in 1908.
However, the concept and popularity of multinational corporations grew only after the
mid-1960s (Griffin, Moorhead, 2011). Global organizations are conventionally
Faculty of Business Economics and Entrepreneurship 405
classified into three broad categories: inter-governmental organizations, international
non-governmental organizations and multinational organizations.
1. The Inter-Governmental Organizations (IGOs) are based on formal
agreements between the governments of nation states and consist of a permanent
secretariat to perform their tasks (the Yearbook of International Organizations (1978)).
2. An International Non-Governmental Organization (INGO) is any
international organization which is not established by inter-governmental
agreement. These organizations may accept members designated by government
authorities, provided that their membership does not interfere with the free
expression of views of the organization (the Yearbook of International
Organizations (1978)).
3. A Multi National Corporation (MNC) is a broad term used to identify any
international company which has operations in multiple countries. Multinational
companies have extensive experience in a number of international markets and
have established marketing, manufacturing, and research and development
facilities in many countries. A substantial portion of their revenues come from
sales outside their home country.
4. Global Companies such as Royal Dutch/Shell, Unilever, Proctor and
Gamble and Philips operate in a truly global manner and the entire world is their
marketplace. These are also called Transnational Corporations and they maintain
operations in several countries, while their management is decentralized into local
countries. The management of such companies is based on interdependence rather
than either full divisional independence or total dependence of their units in several
countries on headquarters for decision-making and control.
5. Borderless Organizations are firms that have eliminated structural divisions
that impose artificial geographic barriers and are organized along business lines
(Robbins, Coulter, 2012).
I NNOVATI VE STRATEGY OF GLOBAL FI RMS BASED ON
PROJ ECT MANAGEMENT
“Changes in today’s business environment have been caused by globalization,
increasingly stricter demands of the end buyers, tendencies towards reducing the
shelf life of a product, the dependence of a company on business partners, as well
as the focus of companies on key components” (Jovanovi?, Vasiljevi?, 2008).
Small and medium sized companies in the USA and Europe have spread their
global holdings and restructured themselves in the aim of increasing their
competitiveness on global markets. The globalization of the world market, rapid
technological progress and the application of developed technology have led to the
fact that many companies understood that the conditions for surviving on the
market are contained within the ability of a quick adapting to variable conditions in
the environment. Competitive advantage is the aim of every company and the
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majority of them have become aware of the fact that today the mere satisfying of
buyers’ needs is not enough to be competitive, but rather along with this they have
to exceed the expectations of the buyers, as this is the only way to persuade the
buyers that the company is the best of all (Vuji?i?, Vukadinovi?, 2011). The
majority of companies mostly use the innovative project management strategy,
which via efficient planning and coordination can help a firm use its resources and
the available time in a much more productive way.
Namely, in today’s highly competitive environment, project management is
used with all types of professional service organizations. Namely, a sure way to
achieve success, whether this involves legal and lawyer services, consulting,
accounting services, civil or other services, is to think and act outside the
traditional framework. This implies using new knowledge in the application of the
best practical experience, as well as the experience of other organizations which
are involved with the same or similar services. The development of contemporary
technologies, especially the Internet on one side, and changes in management
practice, communication and the organization of work in companies on the other
side, have led in the last years to changes in regards to knowledge type and
acquiring method (Radovic et al., 2012). The new way of acquiring knowledge
combines formal and informal learning with practical experience. Raising
awareness, training and qualifying employees is a key factor in market
competitiveness (Radovic et al., 2012).
In this way, managers can more efficiently manage projects, respond more
quickly to the pressure of clients to implement new technologies, etc. The ability to
learn more quickly than the competition can be the only sustainable competitive
advantage in today’s business environment. Individuals must constantly improve
their knowledge and build themselves up as individuals who are bearers of the
organization’s abilities – after all, a successful organization is a group of successful
individuals (Stanisavljev et al., 2011).
Except for this, there have been several suggestions to engage project
managers on the side, that is, from other firms which are involved with other
activities. In other words, it is considered that someone working in an accounting
firm can better view the work in a lawyer’s office, and launch the necessary
innovations in its work. Also, it is recommended that firms overcome and gradually
leave the traditional organizational methodology. Many firms have thus turned to
project management and have realized admirable results. It should be stressed that
project management is not only used in service activities, but also in many
industries.
One of the managers of the famous consulting firm Bearing Point considers
that he has found the formula of success of project management. It is made up of
the following:
? An adequate business strategy
? Coordination between resources, teams, activities and stages
? Good communication between team members, as well as the consumers
? Careful planning and control via detailed planning
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? A set structure for each project, including the description of their
management and decision-making method
? A constant educating of project team members
? Ensuring that all team members understand the project aims, their tasks and
way of realization.
Along with the mentioned conditions which are to be met by the project
founded firm in order for it to succeed, it should be stressed that there is a degree of
risk of possible failure. Primarily, considering the fact that project organized firms
function in very uncertain environments, they need to be constantly formed, with
the teams changing as well as the members working on the project.
Most of these project teams work virtually, considering they are not in the same
place nor do they meet at the same time in order to deliver the project, but they work
constantly networked and linked with different types of IT (Radovic Markovic, 2007a).
In order for the virtual organization to succeed, it must meet conditions such as high
technology, mutual trust, an endeavor to satisfy the buyers as much as possible as well
as a striving for excellence. The most important feature of a virtual organization is its
interdependence by certain members (persons or organizations) from the network,
although they mostly cooperate between themselves.
The links between individuals in national firms are very close but they are also
linked with international global services. In their research for innovation projects,
Filippov and Mooi (2010) stress the significance of exploring the relations between
innovativeness and project management. In that sense, very often an innovation
project is equated with the development of a new product.
GLOBALI ZATI ON AND ORGANI ZATI ONAL CULTURE
DI VERSI TY
Globalization has transformed organizations, societies, economics and politics
all over the world. For global organizations, the definition of global diversity has
become broader. Global diversity must encompass not only an understanding of the
differences between different countries, but also the internal diversity of each
country. The scope of diversity has become truly global and knowledge about each
country’s customers, employees and suppliers has become essential. Thus, global
organizations need to move quickly towards the better management of a culturally
diverse workforce. This movement towards better management has to be adopted
by organizations due to three main reasons, as illustrated with some real examples.
Some companies like Xerox were obliged to develop better management of a work
force made more diverse by affirmative action. Other companies like Hewlett-
Packard grew very rapidly and then they realized that they had to work with
multicultural constituencies. A third type of company like Avon Products needed to
have a diverse workforce in order to match the diversity in the marketplace
(Robbins, Coulter, 2012).
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All these three kinds of companies had to work towards managing their
diverse multicultural workforce better in order to gain a competitive advantage in
the six dimensions of cost, resource acquisition, creativity, marketing and problem
solving and system flexibility (Griffin, Moorhead, 2011). Thus, a culturally diverse
workforce must be valued and managed well by all organizations in order to
remain competitive in the present global scenario.
The workforce is becoming more diverse; hence, the companies that value and
integrate diversity among employees will reap the benefits of globalization. Lower
personnel costs and improved quality of the workforce are two obvious benefits for
these organizations. In addition, a diverse workforce leads to diverse perspectives
in problem solving, decision making, creativity, product development and
marketing activities which are essential for creating a competitive advantage in an
increasingly global marketplace.
Globalization has led to a growth of multicultural organizations which are
characterized by six features, namely, pluralism, full structured integration,
integration of informal networks, absence of prejudice, equal identification with
goals and minimal intergroup conflict (Griffin, Moorhead, 2011).The table below
depicts the characteristics and tools for creating a multicultural organization:
Table 1: Creating a Culturally Diverse Organization
Characteristics Tools
Pluralism Training and orientation programs
Full Structural Integration Education, training, affirmative action,
performance appraisal and rewards systems,
benefits, work schedules
Integration of Informal Networks Mentoring, social events, support groups
Absence of Prejudice Bias-reduction training, focus, task forces
Equal Identification with Goals Encourage participation of all employees from
the diverse workforce in formulating goals,
strategies and mission
Minimal Intergroup Conflict Conflict reduction training, survey feedback
Source: Adapted from Taylor H. Cox Jr. “The Multicultural Organization”,
Academy of Management Executive, August 1991.
Global organizations are essentially multicultural organizations in which
employees from different backgrounds, ethnicities, experiences and cultures can
contribute and achieve their fullest potential, benefitting themselves as well as the
organization. Developing a multicultural organization is a very important step in
managing a diverse workforce in a global organization, and it is crucial for
sustaining a competitive advantage in the global marketplace.
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EXAMPLES OF GOOD PRACTI CES
NORTEL NETWORKS
Nortel Networks is a global firm founded as far back as 1973, and today it is one
of the largest world telecommunication providers, employing nine hundred people, 200
of which are engineers (E-commerce corporate infrastructure program, 2002).
When Nortel Networks started its work, the CEO came to the idea of introducing
new standards into the company, managing projects which are orientated towards
consumers. Considering this firm has a wide range of products, each project is
independent and relates to a special product which is offered to the market. However,
with time, consumers started to take an interest not only in certain products, but in the
complete production range offered by the firm. In such circumstances, the general
manager made the decision to establish consistent standards of project management for
the organization. Thus, project management included all processes-deliveries, product
installment, product testing, consumer training, etc. From 1999, this firm also started to
carry out restructuring, that is, from an organization which is based on products it grew
into an organization geographically based in six regions - America, Canada, Latin
America, Brazil, Asia-Pacific and EMEA (Europe, the Middle East and Africa). In
each region, the firm founded its representing offices and appointed directors, defining
their responsibility for project management marketing. In fact, management teams
worked with regional representatives according to standard management projects from
all over the world. Regional managers formed the managing body, which voted on
bringing all standard decisions. In the majority of cases, voting was carried out in
secrecy and it was anonymous. Thereby, the managing body was the key for the firm to
become a global company.
Figure 1: Nortel Adaptive All Optical Intelligent Network
Source:http://www.networkworld.com/community/node/44588
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With global logistics, Nortel Networks has installed standardized automatic
project management tools, integrated with Oracle database. Along with securing
the standard tools, the global team also standardizes practice, combining it with the
best regional experiences. The website of the firm lists the best experiences,
divided into two categories:
1. A list with the tested experiences of the firm
2. A list with suggestions made by employees and associates
Considering that the list with suggestions is made public, the members of the
management body vote for proposals. The best proposals are on the first list, while
the others are erased or eliminated. In this way, the best ideas and experiences are
stimulated, and individuals working on their own are not encouraged. Namely, only
those ideas and practices which have the support of the majority are accepted.
Twice a year, the firm presents awards, one for progress in implementing the
global process, and the other for the best results in practice.
The firm also carries out training of project managers all over the world, while
Nortel Networks organizes three types of training (Radovic Markovic, 2007):
? First the managing body members visit the region and carry out training,
organizing most often Walk-the-Wall classes. They create a network diagram or
Gantt chart and set it up on the wall, in order to show to all those present the
differences between planned and current processes, and then they determine what
should be done to eliminate the differences (Radovic Markovic, 2007a).
? Second, the firm makes contracts with external associates for securing
training and a large number of classes, which offers them enough knowledge
about project management.
? The managing body provides the CDs which contain information which
pertain to the new process, procedures, and tools.
This is just one aspect of the global dimension of project management from the
organizational perspective. The experiences of Nortel Networks can serve as a
guide on how to carry out successful implementing of global project management.
COOPERS & LYBRAND
Along with the mentioned example, we will also use research by Fenton and
Pettigrew (2000), which tested the work of Coopers & Lybrand Consulting, which
renders services from pharmaceutics on a global level. At the time when this research
was conducted, Coopers & Lybrand employed 70,000 people from all over the world
(30,000 from Europe) in more than 140 countries (Radovic Markovic, 2007a).
At the beginning of 1989, this firm integrated with partner firms and this is
how Cooper & Lybrand Europe came about, joined by AbacusConsulting in 1992.
From its founding, this consulting firm increased the number of employees from 4
in 1987 to more than 2,000 in 2013 (Figure 2).
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Figure 2: Development consulting firm - AbacusConsulting, 1987-2013.
Source:http://www.abacus-global.com/?q=about/abacusconsulting
The merging of these two consulting firms was carried out primarily in the
purpose of rendering consulting services in Pakistan.
Along with merging and linking with AbacusConsulting, Coopers & Lybrand
integrated the network of partner firms in 16 European countries. In this way, it
created a virtual company without a center which would exert control, with two
representing offices in London and Brussels. Also, some 74,000 people provide
consulting services in 142 countries all over the world (PR Newswire, 1997).
Strategic decisions are brought globally, and it is significant to say that each
network member can from time to time be included in one or more project teams.
Thus, Richmond Groups is a perfect example of cooperation with individuals,
whose expert services are used by this company. This cooperation is carried out on
a global level through a great degree of integration of all the associates, during
which they do not lose their independence and identity. This firm, with its
cooperation with individuals and small firms endeavors to support and upgrade the
interests of all the team members and function according to the principle of linking
all the members regardless of their activity.
However, there is another side of the story, when individuals join the
multinational project team and leave the country in order to manage the project in
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another part of the world. On that occasion, they face certain difficulties,
considering that it is not easy to build up relations, understand others and be
understood by others properly in an unknown culture and environment. It is equally
difficult when project team members speak different languages, when there are
ethnic, national and regional differences.
BENETTON
The case of Benetton is a good example of the application of an innovative
strategy and an innovative global company in the traditional sector.
Benetton was founded in 1965 in Ponzano, Italy, as a small company with 60
employees. Five years after its founding, intense development and the expansion of
the firm started. In 1970 the firm employed 912 employees, and in 1985 some
1,446 employees. From 1970, Benetton was orientated towards exporting, a
company which in the 1970-1985 period increased its placement on foreign
markets from 5.3% in 1970 to 59.9% in 1985.
Today, Benetton products can be found in 124 countries and in around 6,300
stores all over the world, of which 95% are franchises.
The beginning of the rise of Benetton is linked with a specific franchising
system which this firm applies in the textile industry. Through franchising
Benetton imposed solid conditions of control, as salesmen of Benetton products
cannot sell any products but those of Benetton in the stores. In this way, along with
its products, Benetton has also exported its organization and marketing strategy.
The access to foreign markets and an export orientation put this firm in the
situation to compete with other global competitors such as Gap and Zara for
survival and further development.
The success of Benetton was enabled by numerous innovations which were
realized in the following areas: products, processes and organization. In the 70s,
Benetton based its competitive advantage on using light colors and conforming to
the taste of young people. Furthermore, Benetton’s strategy is global and famous
all over the world for its brands:
1. United Colors of Benetton - UCB is the brand name which Benetton used at
its beginning.
2. Sisley – this company participates in the total Benetton sale with 19%.
Sisley is promoted as a high quality, high-priced product.
3. Playlife – Playlife was created to produce sportswear for the age group 20 to
40 years of age.
4. Killer Loop – a brand aimed at young buyers aged 14 to 27 and consists of
urban clothing and sportswear.
In 1964, Benetton, in order to satisfy the taste of buyers, transferred from
traditional to new processes, so instead of producing clothes in colors it started to
Faculty of Business Economics and Entrepreneurship 413
make clothes in natural fabrics and then, based on market information, marketed
the trend. This was contrary to traditional production but this is how Benetton used
the Just in Time (hereinafter: JIT) production strategy and in this way reduced the
production time, increased efficiency and led to technological improvement. The
most important innovations in the clothing industry relate to production flexibility,
an accelerated goods turnover and the invested capital. A direct link from
Benetton’s headquarters in northern Italy with other Benetton branches all over the
world was enabled by computer. The EPOS system (the electronic point-of-sale
system) helped follow the trends of demand and realize the supply according to the
JIT system. The profit was thus quite large and represented a unique marker of
process management in the conditions of the globalization and internationalization
of business.
Figure 3: Postponement application in Benetton
Source: Yang, Burns, 2003
It can be said for Benetton that it grew through strategies of vertical and
horizontal integration. At the end of the 70s, Benetton’s organization could be
defined as “quasi-vertical integration” (Blois 1972) as the company controlled the
entire value chain, even if various activities were not organized through an
exclusive hierarchical control. The main advantages of a vertical integration from
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the aspect of the company are mostly better control and an optimizing of
operational costs. If the company wishes to stay in step with the times, it must
continuously invest into new technologies and system development. A common
feature of all fashion companies is their vertical integration. They differ according
to degree and integration direction (Figure 4).
Figure 4:A presentation of different degrees of the vertical integration of fashion
companies
Source: F. Caro, The Fast-Fashion Business Model, 2008.
Benetton also established a process of horizontal integration. The strategy of
the total look was completed with the introduction of products such as shoes,
spectacles, perfumes, watches and, most recently, jewelry. The Benetton strategy is
global and communication and advertising are a significant area for innovations in
the Benetton system. In its advertising strategy in the aim of stimulating consumers
to think they will be happy by buying company products, Benetton managed to
attract the attention of the public and single itself out among the other fashion
companies. In 2012, with the UNHATE campaign, Benetton invited the
unemployed aged from 18 to 30 to send their projects and participate in the
innovations competition. The best 100 projects were awarded with 5,000 Euros
which shows the interest of this company for innovativeness and creativity.
It can be said for Benetton that it is one of the most successful companies in
the world, to a large extent thanks to a sophisticated IT system which it innovates
every 10 years.
ZARA
Zara is the leading store chain in Inditex, owned by Spaniard Amancio Ortega.
The first Zara shop was opened in 1975 so that today Inditex is one of the fastest
growing retail world companies. This company with the Zara brand has managed
to enter the market with quality brands and very reasonable prices.
Faculty of Business Economics and Entrepreneurship 415
The strategy applied by Zara on the international market is a combination
between a generic strategy of cost leadership and a strategy of differentiation. From
the very beginning, Zara has invested in opening new stores all over the world, and
Zara’s business model has the features of vertical integration which is very high in
comparison with the models developed by other international companies. Zara’s
business model enables the satisfying of the needs of the buyers as the key of this
model is in adapting to the wishes of the buyers in as short a time as possible.
Vertical integration enables shortening processing time and achieving high
flexibility, reducing supplies to a minimum and reducing risks.
The figure shows Zara’s business model which it uses to adapt to changes
which occur during the season, reacting to them by sending the products to the
stores as quickly as possible and in this way managing to retain its position on the
market.
Figure 5: Zara’s business model
Source:http://cmuscm.blogspot.com/2013/02/design-and-forecasting-case-of-
zara.html
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CONCLUSI ON
The concept of global organization is definitely not new; it has a long history
dating back to the 10
th
century Venetian trading empire. But in recent years, the
importance of being global has increased tremendously. It is largely driven by the
emerging markets and facilitated by the advancements in communication
technology.
The increasing trend of globalization is evident by the fact that companies are
becoming global earlier in their lifecycles. In line with this, while organizations
like Sony and Honda took more than 15 years to become global organizations,
AbacusConsulting became a global company in only 5 years. The global
companies are no way homogeneous; rather they belong to one of the five
archetypes, namely, resource seekers like the mining and oil & gas companies,
researchers like pharmaceuticals or some high tech companies, the global offers
like the luxury goods manufacturers that offer the same product worldwide, the
customizers that make customized products for the local markets and the
networkers such as airlines or logistics companies. Essentially, the true value of
being global lies in the fact that global organizations are able to strike the right
balance between the challenges and the benefits of globalization and the four basic
areas for striking the right balance are cost, strategy, people and risk. Striking the
right balance can be difficult, but there lies the importance of management and the
role of managers and leaders in the organization.
Benetton and Zara are the best examples of global firms which have in an
efficient and effective way combined a production and commercial strategy with
technological innovations. Such an approach has enabled them a high
competitiveness and a strong position on the global market.
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[16]Vuji?i?, S., Vukadinovi?, S. (2011), Kvalitet kao faktor konkurentske prednosti
(Quality as a factor of competitive advantage), Me?unarodna
konferencija,,Konkurentnost u funkciji održivog razvoja,, NUBL, Banja Luka
[17]http://www.abacus-global.com/?q=about/abacusconsulting
[18]http://www.networkworld.com/community/node/44588
418 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
PROFESSIONAL EDUCATION AND YOUTH
EMPOWERMENT THROUGH ENTREPRENEURSHIP
FOR SOCIO-ECONOMIC DEVELOPMENT IN NIGERIA
Isaac Elijah Esema, PhD
43
Sasa Stefanovic
44
ABSTRACT
Nigeria as a nation is a potentially great economy, which has always lingered on
the fringes of economic prosperity. However, swift steps need to be taken to save the
ship of state from hitting the rocks due to widespread corruption, insincere leadership
and an industrious people disillusioned by abject poverty; occasioned by clueless
managers of the polity and the economy. Something positive needs to happen to
alleviate the worrisome trend of economic depression pervading the land and
retarding the well-being and progress of the people - or the gaseous atmosphere of
unease, which is a direct consequence of the people’s economic hardship explodes into
a conflagration worse than the inferno of terror and crime plaguing many parts of the
country today! Without doubt, it is the obligation of any responsible and responsive
government to devise practicable ways of providing the basic infrastructures necessary
to ease the suffering of its much beleaguered people; especially uninterrupted power
supply, potable water, motor able roads, a seamless telecommunications service, etc.
Governments at all levels must dynamically and sincerely formulate policies which
would engender economic development amongst grassroots people. This paper
discusses the urgent need to empower the de facto leaders and futures of Nigeria - the
youths – to become seasoned entrepreneurs, who would then develop Nigeria’s socio-
economic terrain. Entrepreneurship is a crucial force necessary for socio-economic
growth in a developing country like Nigeria, which urgently needs to live up to her
positive reputation as the Giant of Africa. Nigeria is unarguably the largest economy
on the African continent as well as the most populous black nation in the world. The
education of the nation’s youths has to be purposely tailored towards professionalism
in entrepreneurship in order to stimulate the social development process, and to ensure
that Nigeria takes her rightful place in the comity of developed nations.
Key words: Entrepreneurship, Entrepreneur, Professional, Education, SME,
Innovation, Socio-economic, Economy, Development, Youth, Empowerment, TVET
J EL Classification: I25, L26, O10
UDK: 005.961:005.914.3-053.81(669) 374.3(669)
43
Isaac Elijah Esema, Prentice Nigeria Ltd, Lagos, Nigeria, [email protected]
44
Sasa Stefanovic, GMS International,Belgrade, Serbia
Faculty of Business Economics and Entrepreneurship 419
I NTRODUCTI ON
Entrepreneurship is the lifeblood of any nation’s economy – whether
developed or developing. This statement could be taken literally, as the people of
any nation must be fecund in profitable enterprise in order to overcome the demons
called deprivation, desperation and despair. Desperation and despair often given
rise to social malaise such as armed robbery, hooliganism, cult-related activities,
terror acts, kidnapping, ritual murder, arson, drug abuse, insanity, homicide,
suicide, etc. Entrepreneurship starts with innovation – the birthing of new ideas
which could result in the manufacturing of products or provision of services to
meet existing market demands. When the social milieu is conducive, ordinary
private citizens would be inspired to set up enterprises which would meet certain
societal needs, while simultaneously putting money in their pockets. In this
process, more job opportunities, dependable income and enduring wealth are
generated. Consequently, unemployment and its resultant evil effects are
significantly reduced.
Without entrepreneurship, economic growth and social development would be
seriously retarded. Human capital is of utmost relevance in the production process
in entrepreneurship. Nigeria is rich in human resources, who can be trained in areas
pertaining to entrepreneurship and science/technology to wholly imbibe the
entrepreneurial spirit.
Nigeria's educational system should be redesigned and reprogrammed to
produce generations of young entrepreneurs who can positively change the
economic landscape of Nigeria. Today, the world makes reference, with awe, to the
Asian Tigers. Such nations like Malaysia, South Korea, Singapore, Hong Kong and
other such swiftly developing nations in Asia have determinedly invested in their
human capital over the decades. They have consistently and determinedly
empowered their people, especially their youths through structured technical,
vocational and entrepreneurial training for the sustainable development of their
Fatherlands. Their level of development today is an incontrovertible proof that their
investment in human capital is a right and commendable one. It is highly
recommended that Nigeria should implement favourable policies, build
infrastructures and encourage her people to acquire relevant entrepreneurial skills
in order to achieve socio-economic development geared towards improving the
people’s standard of living.
420 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DEFI NI TI ON OF TERMS
1. Professional Education: According to Wikipedia, in workplaces,
Professional Development or education refers to the acquisition of skills and
knowledge both for personal development and for career advancement. It is the
knowledge that one needs to get ahead in one’s career or business, improve one’s
management skills or simply pursue learning for its own sake.
2.Youth Empowerment: Wikipedia further defines Youth Empowerment as an
attitudinal, structural, and cultural process whereby young people gain the ability,
authority, and agency to make decisions and implement change in their own lives
and the lives of other people, including youths and adults. The United Nations
identifies youths as individuals between the ages of 15 and 24, while the Federal
Government of Nigeria defines them as all young persons of the ages 18-35 years.
By this definition, the youths constitute some two-thirds of the country’s
population; making them the critical mass of the instruments of national
development. As at 2011, the average youth unemployment rate was an appalling
46.5%. (Tunde Lemo, This Day Live, 2013).
3.Entrepreneurship: Whenever the concept of the “Entrepreneur” is mentioned,
some clear images immediately come to mind: “someone with the Midas touch”,
“business czar”, “business tycoon”, “business mogul”, “captain of industry”, etc.
Hence, some of the keywords that readily pertain to entrepreneurship are:
Innovation, Creativity, New Ideas, Risk-taker, Enterprise, Doggedness,
Disciplined, Inventor, Leader, Pioneer, Shrewd, Product, Service, Hands-on,
Feasible, Calculated Risk, Can-do Attitude, Wealth Creation, etc. An entrepreneur
is therefore a person who organizes and manages a business undertaking, assuming
the risk for the sake of profit. An entrepreneur: Sees an opportunity. Makes a plan.
Starts the business. Manages the business. Receives the profits. (U.S. Small
Business Administration)
4. Small Scale Business: This is a business enterprise that requires relatively
little capital investment, producing in small quantities and consequently controlling
a small segment of the market share, employing not more than fifty workers – with
management, marketing and other entrepreneurship functions vested in the
proprietor.
Although in Nigeria, there is no clear cut definition of who an SME is, but
according to the CBN, a Small and Medium Scale Enterprise is an enterprise that
has an asset base (excluding land) of between N5 million –N500 million and labour
force of between 11 and 300.
Another broader definition that can be found in the archives of the CBN
(2005) defines industry in the following way:
? Micro/Cottage Industry
An industry with a labour size of not more than 10 workers, or total cost of
not more than N1.50 million, including working capital but excluding cost of
land.
Faculty of Business Economics and Entrepreneurship 421
? Small-Scale Industry
An industry with a labour size of 11-100 workers or a total cost of not more
thanN50 million, including working capital but excluding cost of land.
? Medium Scale Industry:
An industry with a labour size of between 101-300 workers or a total cost of
over N50 million but not more than N200 million, including working capital
but excluding cost of land.
? Large Scale
An industry with a labour size of over 300 workers or a total cost of over
N200 million, including working capital but excluding cost of land.
5. Socio-economic Development: Wikipedia defines Socio-economic
development as the process of social and economic development in a society. It
further explains that socio-economic development can be measured with indicators,
such as Gross Domestic Product (GDP), life expectancy, literacy and levels of
employment. Changes in less-tangible factors are also considered, such as personal
dignity, freedom of association, personal safety and freedom from fear of physical
harm, and the extent of participation in civil society. Causes of socio-economic
impacts are, for example, new technologies, changes in laws, changes in the
physical environment and ecological changes.
LI TERATURE REVI EW
According to Peter Drucker (1984), a world-renowned management expert, as
cited by Alawiye, (2004), the entrepreneur is the innovator who searches for
change, responds to it and exploits it as an opportunity. It means creating
something new, doing something different, rather than doing better what is already
being done. An entrepreneur shifts resources from areas of low productivity and
yield to areas of higher productivity and yield by creating a new
market and a new
customer.
Tijani-Alawiye, (2004) cited by P.U Akanwa et al defines entrepreneurship as
the process of increasing the supply of entrepreneurs or adding to the stock of
existing small, medium and big enterprises available to a country by creating and
promoting many capable entrepreneurs who can successfully run innovative
enterprises, nurture them to grow and sustain them, with a view to achieving broad
socio-economic development goals. Binks and Vale, (1990) also cited by P.U.
Akanwa et al, defines entrepreneurship as an unrehearsed combination of economic
resources instigated by the uncertain prospect of temporary monopoly profit.
Entrepreneur is also defined as the instigator of entrepreneurial events for so long
as they occur.
Pinchot, a university based in Seattle explains in its website
(http://pinchot.edu/what-is-entrepreneurship), that entrepreneurship is the
willingness to take risks and develop, organize and manage a business venture in a
422 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
competitive global marketplace that is constantly evolving. Entrepreneurs are
pioneers, innovators, leaders and inventors. They are at the forefront of
technological and social movements – in their fields, in their forward thinking, in
their desire to push the envelope. They are dreamers and most importantly – doers.
Furthermore, the Microsoft Encarta defines an entrepreneur as one who
assumes the responsibility and the risk for a business operation with the
expectation of making a profit. The entrepreneur generally decides on the product,
acquires the facilities, and brings together the labour force, capital, and production
materials. If the business succeeds, the entrepreneur reaps the reward of profits; if
it fails, he or she takes the loss.
Again, www.quickMBA.com posits that the concept of entrepreneurship has a
wide range of meanings. On the one extreme, an entrepreneur is a person of very
high aptitude who pioneers change, possessing characteristics found in only a very
small fraction of the population. On the other extreme of definitions, anyone who
wants to work for him self or herself is considered to be an entrepreneur.
Therefore, one could safely put it across that entrepreneurship is a person’s
readiness to take calculated risks which propels him or her to develop, organise and
manage and improve on a business enterprise within a competitive marketplace
that is constantly evolving.
THE I MPORTANCE OF ENTREPRENEURI ALLY-I NCLI NED
YOUTHS IN NIGERIA’S SOCI O-ECONOMI C DEVELOPMENT
Entrepreneurship is the bedrock of economic growth. No economy can truly
grow and impact the people’s lives without the input of the myriads of Small and
Medium-scale Enterprises necessary to drive a healthy economy. Entrepreneurship
does not only bring about economic growth, it also brings about social changes in
the environment which make life better for the citizens. It is necessary for
entrepreneurs to be focused, disciplined and highly professional in their activities
in order to generate wealth and build sustainable organisations, thereby increasing
the size and the reach of the market.
To be a professional entrepreneur means to be highly-skilled and disciplined in
all the day-to-day activities which one does in driving one’s enterprise towards
profitability and continuous sustainable growth. It entails proficiency, efficiency
and effectiveness; purposely geared towards the production of quality goods and
delivery of impeccable services, while one continues to seek better ways of
improving on whatever one does. Professionalism, like excellence is not a
destination, but a journey.
Holcombe (1998) cites Kirzner (1973) who describes entrepreneurship as the
process of acting upon a previously unnoticed profit opportunity. The connection
between entrepreneurship and economic growth is that these previously unnoticed
profit opportunities must come from somewhere, and the most common source of
Faculty of Business Economics and Entrepreneurship 423
profit opportunities is the insights of other entrepreneurs. Entrepreneurial ideas
arise when an entrepreneur sees that the ideas developed by earlier entrepreneurs
can be combined to produce a new process or output (Holcombe, 1998).
Apart from stimulating economic growth, entrepreneurship also initiates social
changes in the society which make life and living more conducive for citizens.
Getting involved in entrepreneurial exploits helps in wealth creation. It increases
the size and the reach of the market. It also allows for specialization as
entrepreneurs see and create niches through innovation. The increased
entrepreneurship also creates jobs, infrastructures necessary for business
development such as roads, transport, communication, power supply, education,
health services and supply of various goods demanded in the market. All these
enhance social development.
Tunde Lemo, the former Deputy Governor (Operations) of the Central Bank of
Nigeria in his article titled Policy & Execution published in This Day Live online
column, Development and the Entrepreneurial Challenge on January 11, 2013
argues that development has many dimensions. He posits that on balance, it is
connected to improvements in human capacity, living standards and overall
societal well-being. For a nation to attain development, its social, economic &
political institutions must be in tandem with the Millennium Development Goals
(MDGs). Within this framework, Nigeria is rated one of the developing countries
with slow progress in education, gender equality, income equality, employment
generation, wealth creation and poverty.
He further explains that the economic benefits of youth participation in
development process are varied. Youth empowerment has multiplier effects on the
national economy, including boosting productivity, wealth creation, consumption
and tax revenue. The rate of development of a country depends largely on how
productive and creative the youths are. Since youths constitute about 70% of
Nigeria’s population, the nation cannot achieve development when they are mostly
idle and unproductive. This is the basis for their productive engagement in
entrepreneurship.
PROBLEMS OF YOUTH ENTREPRENEURSHI P I N NI GERI A
As it is with most developing nations of the world, Nigeria is faced with so
many challenges, capable of retarding the economic growth and prosperity of her
people. Chief amongst these are: Poverty, Unemployment, Corruption, Visionless
Leadership, Conflicts and Diseases.
The falling standard of education and persistent illiteracy is another problem
limiting youth entrepreneurship. In Western Nigeria, about 90 percent of rural
small-scale entrepreneurs had less than Primary VI education and 44 percent were
virtually illiterate (Aluko, 1973 cited in Chuta 2012). Increasing the number of
literate small entrepreneurs could facilitate the upgrading of their managerial
424 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
processes in general and could obviously facilitate improved record keeping
(Chuta, 2012). Decision-making, sound management and accounting practices are
very low among Nigerian SMEs operators (Aremu, Adeyemi, 2011).
Moreover, Okello-Obura and Matovu (2011) argue that the growth of an
enterprise may depend - among other things - on the entrepreneurial spirit and
qualifications of its owner and on the quality of Business Development Services
(BDSs) it can access within the designed system. The term, Business Development
Services (BDSs) refers to the provision of information, knowledge and skills - as
well as advice on the various aspects of a business (Finnegan, 2000 cited in Okello-
Obura, Matovu, 2011).
It is obvious from the foregoing that with the proper professional education,
Nigerian potential and existing entrepreneurs would imbibe the right attitude and
entrepreneurial spirit necessary to drive their business idea towards the creation of
lasting wealth made possible by well-grounded business enterprises.
El Brown, an online blogger also gave further insight into some of the
constraints of Entrepreneurship Education in Nigeria:
1. Poor knowledge-based economy and low spirit of competition;
2. Poor enterprising culture;
3. Lack of entrepreneurship teachers, materials and equipment;
4. Unavailability of funds;
5. Non-inclusion of entrepreneurship programme in the school curricula;
6. Poor societal attitude to Technical and Vocational Education development;
7. Inadequate facilities and equipment for teaching and learning;
8. Insensitivity of government to enterprise creation and expansion strategy;
9. Poor plan and execution of processes of action.
One major flaw of the Nigerian educational system, with special emphasis on
university education, is that it is too theoretically-inclined. Nigerian universities
produce people who are only suited for white-collar jobs and have little or no basic
skills of any other vocational relevance. This has led to high rise in unemployment
especially among university graduates (Ejere, Tende, 2012).
The BUSINESS DAY (Monday, 3 September, 2012) editorial column
corroborates this by stating that:
The manufacturing sector is increasingly technology dependent, especially the
multinationals. Unfortunately our training institutions have not revised their
curricula to meet the rising demand for highly-skilled technical manpower to
install, operate and maintain these new machines. There is a dearth of talent in the
sector. This lack of technical talent mars Nigeria's economic growth story.
Faculty of Business Economics and Entrepreneurship 425
HOW ENTREPRENEURSHI P CAN BE PROMOTED AMONG
NI GERI AN YOUTHS
The Organisation for Economic Cooperation & Development (OECD), cited
by Tunde Lemo (2013) characterizes entrepreneurship as a motivating force for
initiating business ideas, mobilising human, financial and physical resources for
establishing and expanding enterprises and creating jobs. The organisation argues
that given the Nigerian youth unemployment situation, entrepreneurship remains
the viable option to create jobs and reduce poverty. Entrepreneurship empowers
them to develop their businesses, pursue their dreams and contribute to overall
productive capacity and national development.
Highlighted below are some of the ways in which entrepreneurship can be
promoted amongst Nigerian youths:
1.Ensure that schools deliberately provide sector specific skills needed for the
development of human capital, use professional and entrepreneurs as instructors
and mentors.
2.Operation Catch Them Young. That is, the government should make it
mandatory for schools to teach entrepreneurship and creativity at an early age.
3.Organize for curricular integration of education, entrepreneurship and
community development.
4. Plan practical programmes to reorient and transform Nigerians.
Nigerian youths need to be transformed from laid-back, employment seeking
graduates into confident, positively-aggressive, innovative, dogged and purposeful
individuals. The ideal profile for emerging professionals (products of our ivory
towers) with respect to entrepreneurial education, this would include a strong
scientific, technical and factual base with good background information and
research skills.
EFFORTS BY GOVERNMENTS AND NGOS TO PROMOTE
ECONOMI C GROWTH THROUGH ENTREPRENEURSHI P
DEVELOPMENT
Over the years, governments at every level in Nigeria and some local and
international non- governmental organisations have made efforts to initiate
programmes which would empower the people for entrepreneurial success, at the
same time reducing the alarming increase in unemployment rate in the nation.
Unfortunately, in Nigeria, such Government policies are often seen as being
insincere in many instances or self-centred by the masses due to past experience
with visionless leadership and pervasive corruption.
426 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE NI GERI A VI SI ON 20:2020 POLI CY
The Nigeria Vision 20:2020 policy was a goal set by the Nigerian Government
during the Olusegun Obasanjo Administration (1999 – 2007) to place the country
among the top 20 most developed economies in the world by the year 2020.
While the goal is commendable, the fact remains that basic infrastructure
necessary for development must be put in place. Paramount amongst these are
uninterrupted power supply, motorable roads, potable water, an efficient
telecommunications network and a dependable security system to protect the lives,
properties and investments of the people. Historically, Nigeria used to be a
predominantly agrarian economy during the postcolonial times. However, she is
now heavily dependent on the oil and gas industry as the mainstay of her economy.
Efforts are now being made to diversify the economy by investing, for example, in
agriculture and also creating a conducive environment for the manufacturing sector
to thrive. The Government and people of Nigeria are gradually becoming aware
that proceeds from the export of agricultural products could help increase the
country’s revenue.
However, in making these efforts, development strategies which are
entrepreneurship-focused should be emphasised as these have proven successful in
several developing countries. South Korea, Malaysia, Singapore, Hong Kong,
Taiwan, China and India have taken entrepreneurship related strategies (SMEs) to
fast-track their economic growth. Entrepreneurship is being seen as the key driver
of not just economic development but also social advancement. Small and
Medium-scale Enterprises (SMEs) in developed countries - especially USA,
Canada and Europe are still being used successfully for economic growth.
SMEDAN
The Small and Medium Enterprises Development Agency of Nigeria
(SMEDAN) was established by the SMEDAN Act of 2003 to promote the
development of micro, small and medium enterprises [MSME] sector of the
Nigeria Economy. The Agency positions itself as a One-Stop Shop for MSME
Development. Micro Enterprises are included in the clientele of the Agency since
they form the bedrock for SME's.
Faculty of Business Economics and Entrepreneurship 427
THE I LO-SI YB PROGRAMME
About 24 years ago, an International Labour Organisation technical
cooperation project in Fiji embarked on the development of a specially-designed
and packaged programme for the training of potential and existing entrepreneurs
(TOPEE) which is called the Start and Improve Your Business Programme (SIYB).
This programme has three modules: Generate Your Business Idea (GYBI), Start
Your Business (SYB) and Improve Your Business (IYB). Today, the SIYB
Programme is recognized in more than 100 countries in Africa, Asia, Europe and
South America as a successful ILO trademark. Many young potential and existing
entrepreneurs who have participated in the programme have commended it for the
simplicity of its language and the practicality of the programme, as evidenced by
the entrepreneurial success recorded by participants in the training programme.
According to the International Labour Organisation website,http://ilo.org/empent/areas/start-and-improve-your-business/, the Start & Improve
Your Business (SIYB) programme is a management-training programme with a
focus on starting and improving small businesses as a strategy for creating more
and better employment in developing economies and economies in transition.
With an estimated outreach of 4.5 million trainees, continuously growing
network of more than 17000 trainers and 200 Master Trainers in 2500 partner
institutions SIYB is one of the biggest global management training systems used
for the support of micro and small enterprises (MSEs) currently on the
market. Initially developed in the 1980s, it has now been translated into more than
40 languages and introduced in more than 100 countries.
With a consolidated step by step approach, the organisation’s immediate
objectives are:
? To enable local Business Development Service (BDS) providers to
effectively and independently implement business start up and improvement
training and related activities
? To enable potential and existing small entrepreneurs, both women and men,
through these BDS organizations to start viable businesses, to increase the
viability of existing enterprises, and to create quality employment for others
in the process.
Potential and existing entrepreneurs who participate in such hands-on trainings
provided for entrepreneurial development such as the ILO-SIYB Programme, Fate
Foundation, etc can be certain of picking up practical skills needed to succeed in
their business enterprise.
428 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON AND RECOMMENDATI ONS
As a nation, Nigeria is blessed with abundance of both natural and human
resources. Nigeria has the potential to be great and indeed attain the Vision
20:2020. This would be possible if steps are taken to put the basic infrastructure
necessary for economic development and social advancement to take place. As
SMEs and entrepreneurship are seen to be the driving force behind growth and
transformation, these should be encouraged through favourable investment
environment and supportive government policies. Nigeria should also take
deliberate steps to invest heavily in development of her human capital by
increasing funding for education, Technical Vocational Education and Training
(TVET) programmes, entrepreneurial training, and development in technological
knowledge and skills in order for human capital to become an advantage for
development as it has turned out to be for China and India.
In Nigeria, TVET should be encouraged and given due recognition because it
is crucial to technological and sustainable development. It is an avenue to equip the
youth with knowledge and skills for employability and productivity. TVET
graduates should not be looked down upon. They should be remunerated
appropriately.
There is need also to upgrade the programme to use modern equipment and
ICT to meet the global modern practices in industry. Nigeria needs to take a cue
from the Asian Tigers countries which invested heavily in TVET for human capital
development between 1960 and 1990s. Taiwan built 80 vocational schools in 2
years and set a ratio of 1:1 vocational enrolment with secondary school enrolment.
This ratio was later increased to 7:3 in favour of the vocational enrolment. In China
where skilled labourers represent the backbone of her economic expansion, one
third of all secondary students are enrolled in vocational schools (Adenipekun,
2007, Diallo, 2005 cited in Erwat, 2010). The Asian Tigers countries are also
committed to fund and pay important attention to basic education. The school
enrolment in 2007 in these countries was 86% and above while that of Nigeria was
63.4%; their gender parity index was 1.0 for all the countries while that of Nigeria
was 0.82 (World Development Indicators, 2007, cited in Erwat, Fabunmi and Isah,
2009). The benefits of these investments in their human capital are now being seen
in the rapid socio-economic development experienced in these countries.
Furthermore, to equip Nigerian youths, entrepreneurship courses should be
included in the curricula of secondary schools, colleges of education, polytechnics
and universities, not theoretical, but in a more practical way incorporating issues
young entrepreneurs would encounter in business. Study modules could cover
various aspects of business from opportunity identification, idea/plan development;
fund sourcing, start-up and running/managing a business, record keeping, customer
relations, marketing and so forth. For example, the Indian state of Gujarat
established a Centre for Entrepreneurship Development (CED) 1979 and the
programme consists of the following components: motivation development, project
counselling and management orientation, project planning and confidence
Faculty of Business Economics and Entrepreneurship 429
development. In over 14 years of existence, the Gujarat CED has created over
8,000 new entrepreneurs (El-Namaki et al, 1987 cited in Ejere and Tende, 2012).
Tertiary institutions as well as secondary schools should teach entrepreneurship
skills as well as encourage entrepreneurship spirit among the students. Nigeria
should harness her large population to human capital advantage for development
just as Singapore, India and China have done.
Entrepreneurship development and encouragement of SMEs would see the
country enjoy many benefits such as job creation, self-employment, skills and
talents development, innovation, wealth creation, economic growth, economic
stability and social advancement.
430 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
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[23]http://en.wikipedia.org/wiki/Youth_empowerment
Faculty of Business Economics and Entrepreneurship 431
FEMALE ENTREPRENEURSHIP AND THE WOMEN
CHAMBER OF COMMERCE AND INDUSTRY:
ECONOMIC EMANCIPATION AND CLOUT FOR
PAKISTANI WOMEN
Iqbal Khan
45
ABSTRACT
Socio-economics, culture, religious entrepreneurism and taboos have massive
impact on societies in South Asia. Pakistan is a Muslim society that has lived aside
other cultures also driven by religion. Muslim characteristic is an identity and
practical way of life. In defining the entrepreneurial portrait of Muslim female
entrepreneur in Pakistan, it has to be borne in mind that culture plays the dominant
role. There is so much of complexity in the culture of South Asia that Amartiya Sen
raises the question “How much of this can a foreigner with no more them a cursory
knowledge of the factors involved – feel and respond to”? And furthermore Roomi
(2005) contends women face deep rooted discriminating cultural and social factors
that hamper their growth. Yet the empowerment of women entrepreneurs in Pakistan
has come about following the example of Prophet Muhammad’s (SAW) wife Khadija
(RA). This contradiction in terms and this evolution among Muslim women is a subject
of interest to researcher, such as what inhibits the growth of female entrepreneurs in a
Muslim society like Pakistan?
There is constraint owing to limited literature on Muslim female entrepreneurs
of South Asia. Qualitative methodology, in-depth interviews and case studies were
adopted. The findings indicate that under the garb of religion, false philosophy is
practiced. Women have discovered clout comes from having platform and hence
the long down struggle to setup the Women Chamber of Commerce & Industry;
this is the contribution of the paper.
Key words: South Asia Culture, Clout for Women, Women Chamber of Commerce
& Industry, Cultural Influence on Muslim Female Entrepreneurs, Women Leadership
Styles and Practices, Psychological Advocacy, Forum for Women
J EL Classification: L26, J15, J16
UDK: 005.961:005.914.3-055.2(549.1)
45
Iqbal Khan, Lahore School of Economics, Pakistan, [email protected]
432 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
The research paper aims to explore what environment prevails to prevent or
foster female entrepreneurship in Pakistan. It explores the role played by some
prominent female entrepreneurs that resulted in creation of a forum in the
economic environment of Pakistan. The selected entrepreneurs all belong to a
similar status except their leaders. It discusses some entrepreneurial leadership
characteristics of the Pakistani female entrepreneurs. This paper attempts to
analyze women’s emancipation and ‘economic emancipation’ of women. The
question arises how can you define the characteristic of a female entrepreneur and
leadership characteristics without understanding the culture and the impact of
culture on a society. In South Asia, culture is all pervasive. Therefore does this
aspect of culture, impacts entrepreneurial characteristics and entrepreneurial
leadership aspects.
Culture is the most dominant influence in this region. So strong is the impact
of culture that any minor deviation from the set pattern of life can spell disaster. A
lot of culture revolves around women in South Asia. The culture in this region may
be said to be female driven. Cultural practices lay barriers on a woman's marriage,
her inheritance, her education, her independence, her emancipation, and her
entrepreneurial inclinations. The classical ‘caste system’ practiced by the Hindus of
South Asia is an extended form of culture. In the wake of the dominance of culture
and ‘caste system’, among the Hindus we have seen ‘sati’ An Indian woman who
burned herself on her husband’s pyre: the custom of so doing is SATI Chamber’s
Twenty Century Dictionary, 1968, W & R Chambers Ltd. Edinburgh, we have seen
women married to the Holy Book among the Muslim a practice whereby Muslim
women are made to swear by the Holy Book that they forsake marriage. In this way
men are able to hold their sisters, women’s share of inheritance. This is a custom
among some societies not to share inheritance of their sisters with anyone and
keeping it within in the hold of men, circumventing their religious requirement and
we have seen ‘Karo Kari’ (honor killing) prevailing in all the societies of this
region. All these cultural practices show a complete hold on women by men,
restricting their mobility inheritance, marriage and contact with males outside the
families. These are customs that have come down for ages. Breaking these shackles
would mean a heavy price to pay. Hence the paper lays the case of culture which is
a barrier for the Muslims or other societies or the religions existing in the South
Asian region. It has to be seen if some women have penetrated the culture barrier,
if yes, then they are the proverbial ‘Trojan Horse’. It should be understood that a
significant influence of Hindu culture exists on the Muslims of this region and
these practices hence are motivated culturally rather than religiously.
Cultural divide between the East and West is not easily understood. In this
region under the garb of religion ill-fated customs are practiced and sometimes it
becomes difficult to separate religious from cultural practices. Hence this paper has
Faculty of Business Economics and Entrepreneurship 433
presented the events in a cultural format showing where these are different from
religious facts. Therefore the paper begins with the assumption that not enough
research exist on the cultural and religious dimensions of female entrepreneurship
among Muslim countries. It is planned to review literature pertaining to female
entrepreneurs of South Asia. Their activities as entrepreneur are bound by cultural
factors and the struggle is being analyzed, to see what they may have achieved.
The cultural status of women in Pakistan has been summed up by Roomi thus:
“The status of women in Pakistan is not homogenous because of the
interconnection of gender with other forms of exclusion in the society. There is
considerable diversity in the status of women across classes (the socio-economic
status of a woman’s family), geographical regions, ethnic origin and the rural/urban
divide due to uneven socioeconomic development and the impact of tribal, feudal,
and capitalist social formations on women’s lives….”
This observation touches almost all those multifarious aspect that have stood
as barriers and shackles for women in this region. A close examination of the
culture of this region gives the realization that the entire culture revolves around
the women of this region and these are almost 1.5 billion people. And among them
Muslim community is bigger than the entire population of USA. The size alone
commands the need for research of the women’s claim to entrepreneurship.
RESEARCH QUESTI ONS AND PROBLEM STATEMENT:
The objective of this paper is to bring out the nature of the environment and
the impact of customs, tradition, culture and religious entrepreneurship on the
female entrepreneurs in Pakistan. And the study is driven by the research question.
? Given the cultural overcast, what entrepreneurial traits or characteristics or
competencies can be indentified among the Pakistani female entrepreneurs,
causes for gaining recognition and clout?
? Especially what entrepreneurial leadership characteristics are depicted
through the case studies?
? What brought about the Women Chamber of Commerce and Industry in
Pakistan, and did it create a platform and forum for the women?
Hence we will be looking into the cultural context, the religious context, the
characteristics of the female entrepreneurs in Pakistan and through in-depth
interviews and case studies of the main players building momentum through their
leadership of the women in Pakistan.
434 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
LI TERATURE REVI EW
For the purpose of this paper we will study literature that have bearing upon
the objectives to look at culture, religion, female entrepreneurs and clout for
women. Culture and environment, massively influence entrepreneurship
phenomenon, though there are many dimensions of influences on women
entrepreneurs. As reported by Global Entrepreneurship Monitor (GEM 2007) that
even the most enabling environment for entrepreneurship, USA, indicates that the
male entrepreneurial activities surpasses female entrepreneurial activity almost two
to one. Kauffman Centre for Entrepreneurial Leadership compiled a report on
obstacles facing women entrepreneurs and identified human, social and financial
capital as major constraints (Guerrero, 2008). The Diana Project was and is the
major push for research on female entrepreneurship. It brings in the Western
societies female entrepreneurship out of the domain, of minority or marginalized
society’s entrepreneurship. It is considered an extra ordinary and high impact
research. Prior to this female entrepreneurship was an under-researched field
(Holmquist & Carter 2008). However irrespective of culture & environment,
women are found to be less active as entrepreneurs then men (Minitti 2005)
Female Entrepreneurship Development Theories have therefore emerged
primarily from research carried out in developed countries with specific social
norms and values regarding women’s participation in economic activities. The
initiative to setup the Diana Project itself is an example of the way women in the
West think and act to create an enabling environment for themselves. There is a
dearth of studies conducted in different social contexts especially in Islamic
societies. But what compound the issue is the cultural aspects of some societies.
Women have not been seen to-gather together a rally for a cause as has been done
in the West. It is unheard of as no literature exists.
Female entrepreneurship research domain grew in phases though a pioneering
study as early as 1976. Schwartz notes that women were motivated by need to
achieve or having economic necessity and desire to be independent. These
motivating factors have prevailed in the West. But it was in the real sense in 1990s
that female entrepreneurship became well established. The development in this
domain is literature driven and a constant search for novel topics. But all of this does
not apply to the South Asian women development (Holmquist & Carter 2008). These
researchers have also stated that women generally are found to run smaller business
compared to men as entrepreneurs. This disparity and imbalance is generally an
accepted norm. Contemporary existing disparities that are universal on a global
perspective are that a typical female entrepreneur is more educated than her male
counterpart, but her professional experience often falls short and is usually outside
the traditional business sector (Gurrero, 2008). It was also found that they seldom
founded their business in sectors that had to do with their educational qualifications
and it was observed that they had high need for achievement, were highly educated,
had someone in the family as entrepreneur, have a strong support system from her
spouse or family but having limited network of resources (Brush, Greene et al, 2001)
Faculty of Business Economics and Entrepreneurship 435
showing distinctive behavioral differences from male. “Glass ceiling” was one factor
that drove most women to entrepreneurship. They are known to be steadfast to their
business and customer satisfaction as compared to their male counterpart and these
are the general characteristics of female entrepreneurs universally. This paradox is
universal across all societies.
Iiris Aaltio, Paula Kyro, and Elisabeth Sundin (2009) make this observation
quoting Mills “The feminist researcher may be better served avoiding a search for
cues that support a notion of progress over a period of three years progress, instead
examining events to see what they tell us …” Thus change is more important than
progress. I concur with this observation because the experience of researching the
women entrepreneurs in Pakistan, this researcher, also faced similar experience.
Hence the evidence gathered was empirical and through in-depth interviews by
repeated visits. The examination of events over a sufficient length of time (5 years)
revealed the change in status rather than the progress overtime. The events
typically went back and forth but the ultimate development was the establishment
of a platform (PWCCI) Punjab Women Chamber of Commerce & Industry for the
women entrepreneurs. As to the progressivity of the women entrepreneur it was
minimal. Dr. Shehla the popularly chosen leader of these women entrepreneurs felt
that there was still very low involvement of the members and a general apathy. The
author of the paper suggests that Women Entrepreneurship be studied from
multiple angles and especially one of them could be Self-Efficacy and Leadership.
Information on the struggle for Women Chamber of Commerce & Industry is
available on www.reformsnetwork.org/women
THE FEMALE ENTREPRENEURSHI P LANDSCAPE ACROSS
SOUTH ASI A
Beginning from the perspective across the border in the neighborhood of
Pakistan in India and Bangladesh the cultural tradition and situation has a number
of similarities though there is a significant difference at the level of culture
tradition and development. In “A reflection of the Indian Women in
Entrepreneurial World” Kollen & Parikh (2005) trace the history of economic
emancipation of the Indian female entrepreneurs from the era of the fifties to the
21st century. The women of the fifties would give up their education to support
their families at the expense of their aspirations if there was no income generating
males. There were also those who were landed with the family business in their lap
in the event of loss of the male family member. The paper calls them ‘extremely
courageous women’. In the sixties the educated females had started taking small
steps to start their small enterprises. Whereas the women of the seventies were new
radical women. They were those who had completed their education and were in
the field to take professional assignments. They opened the new frontiers for
women entrepreneurs. But they showed clear cut evidence of wanting homes,
marriage and children as well as occupation, who accepted the restrictions of their
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parents and grandparents but expected their husbands to give them understanding
for their choice of occupation. By the eighties the women entrepreneurs of India
were educated in highly sophisticated technologies and professional education. So
many preferred degrees in engineering, medical field and bioengineering. But the
choices of business were typically clinics, nursing, boutiques, garments, beauty
parlors, schools and the like. Yet the society was hostile and environment was male
dominant. The Nineties was a qualitative different era for women. They had two
decades of role models and hence these become more assertive entrepreneurs. They
had now acquired economic independence, high self esteem and could deal with
situations single handedly. Whereas the 21st century’s first decade is an era of
telecom, IT and financial institutions. Many pioneered in these new ventures and
the opportunities were alike for men and women and a melting pot for
professionally trained and enterprising women.
The real change visible in the 21st century was somewhat different as the
focus shifted to the elite class of women. Women have become aware of their
existence, their rights and their work situation. However, women of the middle
class are not too eager to alter role in fear of social backlash and this was reflected
in other part of the region such as Pakistan. The progress is more visible among
upper class families in urban India. “Society designs and defines roles for women”,
where as each country has its cultural, social, religions and political back ground, it
in turn develops for the society its economic thrust trough industrialization
resulting in new occupational roles for women. A parallel change in Pakistan is
also visible as we see the emergence of the Women Chamber of Commerce lead by
a couple of elite women in the Pakistan society. One can draw a parallel with the
status of the women and in particular the female entrepreneurs in Pakistan though
at a lower degree. The authors go on to say that despite the dilemma of being an
entrepreneur the women maneuvered into this position out of a desire to be
independent and do something meaningful and to have their own identity instead of
remaining “closeted behind their husband’s name plate”. They also found that they
were less concerned with making money and often choose entrepreneurship as
result of career dissatisfaction. Indian female entrepreneurs were either house
wives or fresh graduates with no experience. Generally ran traditional business
like garments, beauty care and fashion designing which grow usually from hobby
to serious business. The famous Indian examples of a successful female’s
entrepreneur are of Herbal Queen Lady Shehnaz Hussain who began from her
kitchen and ended with an herbal empire and a chain of beauty parlors. And
Sarabai, Mrinalimi set up dancing schools and later Malika expanded the ‘Darpana
Institute’ as a household name in dancing (Kollen & Parikh 2005).
Sujal Kumar Maiti (2008) has given a profile of Bengali urban educated
women entrepreneurs in Kolkata India. The paper focused on the women who were
engaged in home delivery catering services in Salt Lake area Kolkata, West Bengal
India. The paper has concluded that educated Bengali women are not shy to engage
in the business ventures. They are ready to take risk for their economic freedom.
They are quick to adopt to this business as a source of income and source of
pleasure to utilize their leisure after having given adequate time for bringing up
Faculty of Business Economics and Entrepreneurship 437
their children and taking care of their families. The average age of these women
was above 40 years. All 40 surveyed happen to be married and were above
graduation qualification, and rarely did they have more than five years of
professional experiences. But their education and independence to pursue a
business gives them a status of being elite. This again explains the similarity of
women entrepreneurs across the border in Pakistan. Afreen Haq and Abdul
Moyeen (2008) have also drawn similar conclusion about Bangladesh women
entrepreneurs. Bangladesh has witnessed a growing group of well educated urban
based women who have shown potential for starting their own business as an
economic option. This growing phenomenon has not been noticed much in
developing countries but developed countries have witnessed a surge of literature
and research on this subject of urban educated elite business women. This
phenomenon has been referred to as “the quietest revolution of our times” by
Afreen Haq and Abdul Moyeen (2009) with respect to Bangladesh. Such women
have demonstrated that the key elementary factors that have brought about this
phenomena are good formal education, work experience, socio economic status,
networking, and type of business. In the past the main focus on research on women
entrepreneurship has been on rural poor or urban poor. However it was observed
that women have smaller network restricting their access to business support
services. They are also handicapped by being unable to access business
associations and government agencies. (Haq, Moyeen, 2008). This creates an
awareness of the need and significant importance of women chamber of commerce.
FEMALE ENTREPRENEURSHI P ENVI RONMENT I N
PAKI STAN:
To understand the Pakistani environment and to study the women
entrepreneurs and their efforts, the findings of USAID survey gives a fairly good
idea. Nabeel Goheer and Susan Penksa (2007), have made some observation about
women in the Pakistan economic context? We quote the relevant text as the
USAID report also signifies the socio-cultural context for studying female:
“It is imperative to understand the unique socio-cultural context of Pakistan
before planning to “engender” economic growth. A characteristic feature of
Pakistani society is its family orientation and an inside/outside (private/public)
dichotomy of gender relations.
As can be observed almost all research touched and felt the sensitivity of the
family orientation in the environment and the mobility aspect of the women.
Roomi (2009) has also described this phenomenon.
Even while considering ‘engendered’ economic growth report recommends to
understand socio-cultural context of Pakistan. Which varies from place to place
even within a Provence based on variation in language and ethnicity of the society?
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“The intensity of this social feature may vary from urban to rural areas and
from one province to the other but its flavor can be seen almost everywhere in
Pakistani society”.
Roomi observe: -
The male members of the family are supposed to take care of the productive or
more precisely, the remunerative aspect of public life while women work in
private, “inside” their homes. They bear and rear children, maintain social
relationships with the extended family and friends perform household work. The
gendered division of work effectively prohibits women from participating
productively (and remuneratively) in the economic growth of Pakistan”. (Roomi
2009)
The report goes on to emphasize the gendered division that prohibits women
from economic activity outside the home. The concern ranges from security to
reputation.
“Another important feature of Pakistani society is a cultural restriction on the
mobility of women. This restriction is due to concerns for the safety and security of
women who venture outside the home and fear that the family will lose
“reputation” or “honor” due to illicit relationships in which females might become
involved (either through consent or by force). Secondly, and related to the former
problem, is the social stigma attached to women working outside the home”.
(Roomi 2009)
Cultural restriction on mobility has safety, security, honor and stigma concerns
but there are indication of change.
“A number of factors are altering these social norms but the pace of change
still is incremental. Two potent forces of change are the spread of secular education
for women and men and increasing economic pressures. Pakistani women -
especially those from the middle class - are now emerging and participating in the
productive sphere of life both as employees and as entrepreneurs but their ratio of
participation, as compared to men, are still very small”. (Roomi 2009)
An incremental change is visible in the social norms but huge majority still
labors under these cultural norms. Breaking away from these traditions are
considered radical and courageous.
Another survey has brought out some converging observation examining
recent development of women entrepreneurship in Asian developing countries.
Tulus Tambunan (2008) has taken account of the entrepreneurship enabling
environment among women entrepreneurs in South Asia. Some studies have shown
that successful women entrepreneurs generally belong to rather well to-do families
and live in nuclear family rather than extended families as it gives them freedom
from social & cultural restrictions. As a part of the profile it was observed that
female entrepreneurs are generally found in sole proprietorship, they also have a
higher closure rate. But the motivation behind female entrepreneurship comes from
the desire for economic emancipation because entrepreneurship ‘implies being in
control of one’s life and activities’. The factors identified in this paper that hinder
Faculty of Business Economics and Entrepreneurship 439
& growth are psychological, social, cultural, religious, economic and educational
factors depicting lower status of women in Pakistani society. The under estimation
of women’s economic contribution is confounded by factors that emerge from
factors such as tribal, feudal culture and cultural practices in the name of religion;
inadequate public transport and the notion of ‘Pardah’ & ‘Izzat’ as also pointed out
by Roomi (2008).
CULTURE: AN ALL PERVASI VE I MPACT ON FEMALE
ENTREPRENEURS: EXPLAI NI NG THE I MPACT OF CULTURE
Generally there are two meanings of culture; in the narrow sense civilization
(Art Science and Education). In the broad anthropological sense “A collective
programming of the human mind”. The Western society lives in the individualism
mode but the Eastern society of South Asia lives the collectivism mode. People
belong to in-group are supposed to be looked after by in-group. It is dangerous to
be kicked out of your in-group. Loss of face has to be avoided. Face saving is
important.
For the purpose of this paper and its objective a deeper look at the
environment and culture of the region needs to be taken. This region has been the
cradle of a typical culture for all the nations residing herein. Opinions are pre-
determined by groups. Everyone has to fulfill obligation to and society and in-
group. Otherwise face shame and penalties are sever.
Amartya Sen (2005) explains through the works of Satyajit Ray that the
environment consists of indigenous ‘factors such as habits of speech and behavior,
deep seated social practices past traditions, present influences and “so on”. He asks
“How much of this can a foreigner with no more than a cursory knowledge of the
factors involved – feel and respond to?” and goes on further to say “which can only
puzzle and perturb – and consequently warp the judgment of – the uninitiated
foreigner”. In effect both these notable thinkers and keen participants of this
society feel that the tendency to assume that there cannot be such big difference in
the culture of the region with that of the Western society would be a fallacy.
Sen quotes a Singaporean Foreign Minister at a Human Right Conference in
Vienna 1993, which further elaborate the Asian perspective of culture as opposed
to Western perspective thus “universal recognition of the ideal of human rights can
be harmful if universalism is used to deny or mask the reality of diversity”.
In the “Argumentative Indian” Amartya Sen (2005) the winner of the Nobel
Prize in Economic defining this region says “Cultural conservatism and separatism
that has tended to grip India from time to time” has left an indelible mark and each
society is an Island on its own. He also establishes Rabindarnath Tagore’s pride in
Indian culture by saying that “India’s culture is not as fragile and in need of
‘protection’ from Western influence”. Such is the impact of culture in this region.
It is strengthened by the lack of education in this entire region, and Pakistan or
440 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Bangladesh have not escaped the strong impact of culture. Each has its own flavor
and doses of religious edicts by the ‘religious entrepreneurs’. And to use Amartya’s
quote “Important as history is, reasoning has to go beyond the past” where then do
we go from the influence of culture? Of course he is advocating opening up of
culture of South Asia to the world. How do we deal with culture with such
pervasive influence? And in speaking of Indian culture one takes it to a great extent
to include the Pakistani Culture where of course there is also the expansion of
religious sectarianism – and fueled by ‘religious entrepreneurism’ for vested
interest. Even when it is not religious motivation, the garb of religion is quick to
invoke severe punishment.
Henry Kissinger (2011) in his book “On China” explains the stark difference
in the Eastern (Asian) Cultural thinking and Western Cultural thinking by giving an
example. The Chinese philosopher Confucius was unlike Machiavelli. The
Confucian philosopher is concerned with the cultivation of social harmony not with
the accumulation of power and using power. Rather it was incumbent as a spiritual
task to recreate proper order and recovery of forgotten principles of self-revelation
(p.14). Harmony is the drawing force in the Asian culture. Furthermore Sun Tzu
(Art of War) proclaims that not every problem has a solution and too much
emphasis on total mastery over specific events upset universal harmony. Harmony
has to be maintained. In contrast the Western traditions prefer decisive clash.
THE SI GNI FI CANCE OF ASSOCI ATI ON AND CHAMBER OF
COMMERCE I N BUI LDI NG CLOUT FOR WOMEN
ENTREPRENEURS: THE NEED FOR EXTERNAL SUPPORT
SYSTEM.
In a paper “Women Entrepreneurs in the Global Economy” Susanne E. Jalbert
(2000) has examined how women entrepreneurs affect economy, why women start
businesses, how women’s business associations promote entrepreneurs, and to
what extent women contributed to international trade. She has also emphasized
economic clout that women have built up and quotes Irene Natividad, Chairperson
US National Commission on Working Women at the 15th Global Summit of
Women “Global Markets and women are not often used in the same sentence, but
increasingly statistic show that women have economic clout – most visibly as
entrepreneurs and most powerfully as consumers”. She finds that women bring
commitment and integrity because they care about economic empowerment. But
according to her finding women entrepreneurs are dependent upon professional and
personal support that is found in business associations. The paper goes on to say
that women entrepreneurs look for role models and mentors that help them to carve
out paths to follow. Citing Susan Caminiti the paper says that conventional
mentoring role of women has changed. Women by nature are given to offering
advise based upon years of experience they have gained. Mentors usually see
mentoring as a responsibility. It’s a payoff for the gains of their life. Therefore
Faculty of Business Economics and Entrepreneurship 441
members of associations, consultants, and trainers are all acting as role models.
This finding supports the findings of our paper and the role played by Dr. Shella
with the role models discussed in Jalbert’s paper and the Chamber of Commerce
has taken on the role of association. She displays leadership and vision and
mentoring ability as will be seen in the case studies. The economic empowerment
of women, the clout, comes from being together on a platform that provides the
support services discussed above. This platform is the associations or the Chamber
of Commerce. Talking of support systems from within the family and society
Rajani & Sardar (2008) state that enterprises started by women are influenced by
the interest and influence of the relatives and family. Two contrasting cases have
been analyzed in their paper. Once again the research within this region reveals that
similar problems and difficulties are faced by female which revolve around culture,
and tradition and way of life.
The external support system is of great significance in such environment. This
does therefore brings out the significance of associations. Business women’s
associations in Malawi, Nepal, Brazil, Canada, Ireland, Mexico and UK all have
provided psychological advocacy required to start small businesses. They create
growth oriented atmosphere and vision for their members through wide spectrum
of activities such as networking and political and economic empowerment of
women. In many societies women’s ability in accessing mainstream organizations
is limited. By establishing and joining a Chamber of Commerce, one can
demonstrate economic clout and force larger organizations and government to pay
attention to their cause. Associations also provide a system of bonding because
they share same problems & issues and the bond of being a business woman
overrides the cultural differences. The paper most powerfully establishes the
significance of Associations or the Chambers of Commerce as a platform. In other
words Chambers of Commerce or associations provide a formidable clout to
women and gives them economic emancipation. (Jalbert 2000)
The realization of the acquiring clout by being together in the Chamber of
Commerce has played a significant role to overcome cultural barriers. We will see
this in some of the interviews of Pakistan female entrepreneurs and in the case
studies.
The conceptual understanding of female entrepreneurs, of their role in the
family and then in the society weighs heavily on the women in Pakistan. The
number of female entrepreneurs has increased. Hence there is a need for research
that covers the area of female entrepreneurs and their efforts in a male dominant
society like Pakistan. But the phenomenon is much the same in other societies as
well as we see from the observation of Brush and Matlay
“… Despite the tremendous growth in the number of women-owned
enterprises and their increasing aggregate impact on society and the economy, there
are few studies researching women business owners in general” (Brush, 1992)
The observation made much later on by Matlay (2005) still paints a similar
tone. But also refers to the difficulty in theory building aspect in female
entrepreneurship.
442 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
“The dramatic rise in female entrepreneurship in contemporary Europe cannot
be realistically or adequately investigated, let alone explained or theorized, as a
new and isolated phenomenon. It is our contention that theory building in this as
well as other aspects of entrepreneurship should be conceptualized in the wider
body of knowledge. ---------------------------------------”.(Matlay, 2005)
Despite a growing enthusiasm among researchers, there has been a greater
failure to build adequate theory around the concept of female entrepreneurs in
Islamic societies. This vacuum is more pronounced in a wider socio-economic
context because women business has a growing contribution to the economy. The
challenge here is to understand what motivates female entrepreneurs in society as
traditionally patriarchal and difficult for woman as Pakistan. The best we could
make of this was from the series of interviews that were conducted on the 30
female entrepreneurs and we are in the process of analyzing and discussing their
views. Not all have been reported but they all belong to a similar status in society
and similar educational background. Except for their leadership which happens to
be highly qualified and educated abroad also.
Female entrepreneurs in Pakistan are realizing their status and position in
society. They have also improved their conditions in society to some extent. Roomi
(2009) goes on to present the role of women entrepreneurs in a Muslim country
like Pakistan.
“Two factors especially influence women’s occupational roles: the cultural
norm of pardah (veil) and the notion of Izzat (honor) (Roomi and Parrott, 2008: 2).
Pardah has significance as an instrument of sexual segregation and seclusion based
on spatial boundaries, (Roomi, 2008) In the strict sense these are inclined to be
socially and culturally oriented. The definition has to be more precise to demarcate
the social & cultural from the religious requirements. ‘Izzat’ is the notion that
women are repositories of a family’s honor, and that their chastity and good
reputation, being highly valued, must be guarded.” (Shaheed, 1990) He further
goes on to state “There is considerable diversity in the status of women across
classes (the socio-economic status of a woman’s family), geographical regions,
ethnic origin and the rural/urban divide due to uneven socioeconomic development
and the impact of tribal, and feudal, social formations on women’s lives” (Roomi
and Harrison 2008: 2).
While he has also hastened to support the conditions of openness for women in
Pakistan by saying they are able to cross the barriers and participate in economic
activities. But in his conclusion he has confirmed “that socio-cultural variables play
an important role in the growth of women owned enterprises in Pakistan.” This
statement establishes once again the inter connectivity of culture and business
venturing of female entrepreneurs. In the true Islamic sense, religion has not
forbidden business to women. A lot of confusion prevails with regards to social
norms and cultural practices and religious biddings.
This doubt is put to rest as he says in his Practical Recommendations about the
role of women in the Islamic context by quoting the Quran and Sunnah/ Hadith
(sayings of the Holy Prophet Muhammad S.A.W.W.)
Faculty of Business Economics and Entrepreneurship 443
“The most important point to mention is that there is nothing in the Qur’an or
in the Hadith which prevents women from working outside the home. In fact the
Qur’an extols the leadership of Bilqis, the Queen of Sheba for her capacity to fulfill
the requirements of the office, for her political skills, the purity of her faith and her
independent judgement (Al Naml, 27:23-44). If a woman is qualified and the one
best suited to fulfill a task, there is no Qur’anic injunction that prohibits her from
any undertaking because of her sex. The hadith literature is replete with women
leaders, jurists and scholars, and women who participated fully in public life. There
is another hadith which states that 9/10 of our sustenance comes from business. For
those who are able and are competent, Islamic society should encourage them to
become entrepreneurs or get involved with other types of business activities.”
(Roomi, 2009)
He concludes by indicating that women face deep-rooted discriminating
cultural and social factors that hamper their growth. Only few receive
encouragement from family members, who have spatial mobility, private transport,
tend to grow. The paper also highlights educational qualification, good HR
policies. The paper comes up with original identification of socio-cultural variables
affecting growth of female owned enterprises in Islamic countries.
The empowerment of the women in Pakistan has been the result of the precedent
and the Role Model of Prophet Muhammad’s (SAW) wife Khadija (RA). Women in
Business are no new phenomena in the Muslim society but the traditions in Pakistan
have prevented the development. Despite its significance, recognized worldwide, not
much work has been done to study the growth of women entrepreneurs in a Muslim
society. In a more, homogenous society it becomes all the more necessary to study the
growth of females in business so as to establish closer linkages among the Western
society and the Muslim society. Dove Seidman the Author of “How” says “When the
world is bound together this tightly, everyone’s values and behavior matter more than
ever … we have gone from connected to interconnected to ethically interdependent” all
the more reason to research the female entrepreneurs of Pakistan because they are
growing into a force and are going global as well. The Muslim of India, Pakistan and
Bangladeshi are roughly estimated to be a little over 500 million and all representing
the cultural complexity of South Asia.
In Pakistan, many women are able to cross these barriers and this is the new trend
observed by Roomi, 2008 & 2009. One of the strength of Pakistan Female
Entrepreneur has been their social capital. They are able to actively participate in
economic activities. It has been found that women in Pakistan are receiving moral
support from immediate family members. A correct interpretation of the perceptions of
Islamic values have played a role in allowing spatial mobility, access to transport, and
interaction with male members at school, college, university and office level, has
helped them grow confident and to venture in business (Roomi: 2009). This correct
interpretation of Islam has come about because of wide range of translating the Islamic
literature to English and Urdu which is a Pakistani language. Previously the Quran &
Hadith was only read in Arabic without understanding what it meant. Today it is read
bilingually and not through a teacher but by most students in their language. It has
corrected many perceptions.
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RESEARCH METHODOLOGY
This study took a case study approach as a tool of gathering data & information,
and has a Qualitative methodology, and now spreads over a period of 05 years.
Outlining the preliminary results of 30 illustrative case studies from Pakistan out of
which 10 have been reported in this paper. The selected entrepreneurs have a similar
status in society and similar educational background except the few leaders such as Dr.
Shela who have been educated abroad and belongs to upper class of society. Case
study approach has been adopted as it provides in-depth knowledge regarding the
phenomenon being studied such as the understanding of the culture, the sentiments and
to understand personal self-reflection need for advocacy and mentoring captured
through the story telling. In this research paper female entrepreneurs were interviewed
repeatedly over a spread of time and reported the ‘voices’ of the female entrepreneurs.
It presents a valuable opportunity for understanding their learning experiences
(Guerrero, 2008).These case studies helped to uncover commonalities with female
entrepreneurs of this region and the learning experiences shared by female
entrepreneurs(Rae, 2005)Further this research methodology may determine the
underlying factors responsible for their progress and success in getting ‘clout’ and
recognition. Case studies are narrated incidences of life experiences. They have
focused on two variable: one the problems faced in getting started and two the building
of the platform in the shape of the Women Chamber of Commerce & Industry. The
story format has acted as historical background with a multiple of case studies to
support the understanding of the prevailing environment. The main case study is that of
Dr. Shehla the entrepreneurial leader of this movement which has been embedded with
smaller case studies. However the theoretical framework has also been embedded with
these case studies. The survey took place in the same period that the women were
struggling to establish the Chamber of Commerce hence the women were
overwhelmed by their efforts and were inclined to bring in their experiences. No doubt
it was something new happening and they knew it, considered learning experience as
central to development of entrepreneurial leadership. Further findings may contribute
to the further development of a conducive environment for women entrepreneurs. The
interviews generally took more than one hour at the premises of each entrepreneur. But
the interviews and discussion with Dr. Shela extend over months intermittently. The
case studies thereby support the theory and create evidence of sentiments, the emotions
the experiences the leadership, advocacy, clout and growth oriented atmosphere and
the behavior pattern of a whole social environment surrounding the emergence of
these entrepreneurs. Those case studies that were not included have been screened for
further research papers.
Faculty of Business Economics and Entrepreneurship 445
I NTERVI EWS AND CASE STUDY DATA
There were two parties claiming ownership for the women’s struggle and
challenge for the Women’s Chamber of Commerce and Industry (WCCI). The
platform was divided into two zones and Dr. Shehla was made PWCCI president
for Islamabad and Punjab and NWFP cities. (Northern Pakistan). The other
claimant to ownership of the women’s chamber was a Karachi-based woman
entrepreneur named Salma Ahmad, who was given responsibility for SWCCI
offices in Sindh and Balochistan (Province of Pakistan comprising Southern
Pakistan).
Dr. Shehla said, “We felt there was a need for such a chamber because the
existing institutions of this kind do not pay enough attention to women. We feel
that one of the most effective methods of promoting women entrepreneurship is to
empower them; this requires an institution solely devoted to this cause’. For many
months I have argued with government officials and private organization about the
ownership of the WCCI and finally, I have won even if its been divided into two
territories”.
This aspect of dedication and willingness to take the mantle of leadership is
the hallmark in her personality. Her leadership acumen was high and she knew
there would be a price to pay.
One of the steps taken by PWCCI which brought immediate acceptance was
the conference organized as “National Beautician Conference” in the September of
2005. This event turned out to be a resounding success and it somehow gave great
confidence to women entrepreneurs. It laid the foundation for women to recognize
their own strength that came through networking and through being united on one
platform. It propelled them into a higher economic status. As Lahore has a large
number of small and micro beauticians they took pride in their profession and felt
encouraged to carry on their business. Some found support from their family for
their business because this business pertained to women. It was a female oriented
business area. It received less hurdles from family and society though a decade ago
this profession and this business was looked down upon.
Uzma Beauty Clinic and Institute- Living with extended family & petty
bureaucrat.
Uzma belongs to a modest middle class background. Her story began when her
husband supported her dream to setup a beauty parlor; The Uzma Beauty Clinic.
Though they pioneered the venture at a time when there was an absolute vacuum in
the market, 1984, she faced numerous threats some real and some perceived. She
could not stabilize her business as she was constantly firefighting. Her relatives at
one time turned their back on her family and her children suffered humiliation
within relatives. “The family plays a very important role in a traditional Pakistani
woman’s life. Face saving is essential within the family. Your profession or your
activities can damage the reputation of the entire extended family from uncle and
aunts to in-laws of the family members. You cannot cut yourself off from your
446 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
family to do your business. Women are not generally seen as bread earners or
businesswomen in this culture” explained Uzma, as she remembered how she had
to deal diplomatically with her father-in-law to continue with her profession.
“Today I find that our society has turned more ‘grey’ and she explained this by
saying “To establish my business I have had to work 18 hours a day. Today I can
say that my networking and my membership of PWCCI has been a great support.
However, the journey was never easy. My real problem has been dealing with these
petty bureaucrats that come from various government agencies. It is not easy to
deal with these Mettlesome officers from Electricity department, or from
Municipality or from the Police, or from the Tax department. They come
threateningly and spreading fear among my girls working for me. At that moment it
appears as if someone has pulled the rug from under your feet”.
She narrated incidents of how she continuously wastes time in firefighting and
depriving herself from quality work. She feels she could do much more if the
environment was more conducive. “Our system has evolved as a culture of
unfriendly environment. Everyone perceives that women entrepreneurs can be
harassed and made to give illegal gratification to avoid further disturbance. Its this
‘grey’ culture, immature attitude, towards your own society that is depriving our
society the fruits of growth and development. I think we, the members of PWCCI
can now contribute towards improvement and empowerment of women for a better
tomorrow”.
Moral of the Case:
Uzma has identified all the areas that were mentioned in various literature
reviews. Her emphasis on face saving and her experience of the petty officers is a
reminder of the way the environment existed. But her positivity is reflected in her
statement that ‘our society has turned more grey’ meaning that there was a slight
change in the environment. This shows exceptional emotional intelligence and
resoluteness to continue. She had learnt from this experience and took care of her
staff with mentoring and comforting attitude to give them confidence. She has the
vision to set the changing environment. She reflect a women leadership
capabilities.
Another event that gave boost to the Women Entrepreneurs was the public
display by the Government that they supported the struggle of women
entrepreneurs. The then Prime Minister Mr. Shaukat Aziz awarded a shield to
Shehla, President PWCCI, on September 14, 2005, in recognition of her
accomplishment and performance of promoting the Chamber of Commerce for
Women. It was an acknowledgement for the struggle for this Forum. Until this time
it was not recognized officially or legally as the Women Chamber of Commerce
and Industry, though even this was not a legal recognition, yet it gave them enough
clout to be heard.
‘Re-Grow’: Herbal Hair Oil
Taking Care of Members: Counseling and Mentoring by the Chamber of
Commerce Leadership of the WCI was a responsible and understanding role by Dr.
Shela as an women leader.
Faculty of Business Economics and Entrepreneurship 447
The events that led Rukhsana Zafar to become an Entrepreneur is yet another
story. She had a master’s degree in zoology, and had invented herbal hair oil that
she named as ‘Re-grow’. She wanted to sell it. However, her husband was a
businessman and was doing quite well so he did not allow his wife to pursue it. So
she came to Shehla and said “I have invented this product and I want to sell it in
the market and you have to take care of my husband, I have a lot of faith in you”.
“This meant that I would schedule a counseling session with her husband and
giving him confidence and assurance of his wife’s capabilities, which he should
empower and take pride in”.
Shehla was thinking of the past on providing this account said; “She was one
of the first who came to me when my chamber was announced, she brought with
her a very old and shabby looking pamphlet which I think she might have made
when she was in school or college. She also brought with her a very old packaging.
I didn’t know how old it was, but all I can say is that it was years and years old.
One good thing by now, her children were grown up. Now she is very successful
and is traveling with us everywhere we go. It was all done with a bit of
counseling”. One of the thing she felt that this incident taught her was to become a
counselor to the families of her members. It had become essential in her capacity as
a leader of these women to give counseling. She felt she was strongly positioning
herself for counseling not just the women but also their husbands.
Moral of the Case:
Once again this depicts an educated entrepreneur having conviction in her idea
and going about it with an approach to achieve it. Dr. Shela once again displayed a
high sense of emotional intelligence and adopted the role of a mentor and leader
and not shirking any responsibility in her role as a leader of women entrepreneurs.
She knew she had to build membership o the PWCCI but also empower women to
take on role as serious entrepreneur. She successfully counseled the spouses of the
members and took her role of mentoring and counseling seriously as leadership is
more demanding today, especially for women. She was willing to go back to her
followers to support them to walk the distance.
SOCI AL, CULTURAL AND TRADI TI ONAL TABOOS: WOMEN’S
ROLE I N BUSI NESS
The social, cultural, and traditional taboos on women allow men to carve
legitimacy for themselves in public affairs, as well as in the sphere of production
and related economic activity. Women are not acceptable, seen as running
businesses. Tradition and convention and culture have never allowed it. This
culture and traditional taboo even prevented women from obtaining education.
As Shehla said “The main issues were ownership of property, lack of control
over capital land and business. That if a woman wants to do any business her
husband or her father would not give her property (to be used as collateral). They
448 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
will give it only to the son, but not to her. This puts her at a disadvantage with her
banker, who advances only against collateral”. There is also inherent lack of
encouragement from male family members. The absences of networking
mechanism and patriarchal social norms have prevented women from running
businesses. The situation was more grave, serious and to great extent dangerous for
rural women. There were no role model of rural women who rose up against the
traditions and taboos till then. It was inconceivable that a woman would have the
guts to defy the norms of society and become an entrepreneur or a social
entrepreneur.
Mukhtara Mai – the rural scenario
It was probably the worst of times or best of times for women.
One could see that an environment was developing that supported the rights
and recognition of women. It was in June 2002 that a woman, Mukhtara Mai was
raped by the landlord family of Meerwala near Jatoi in the remote corner of Rural
Punjab. She was the victim of one of Pakistan’s more ‘politics of rape’ a infamous
crime against women. She shocked the traditional mindset by approaching the
Government and the Police for help against ‘politics of rape’ in Pakistan. This
incident also received international attention. “After she was brutally assaulted the
illiterate Pakistani was supposed to restore her family honor by killing herself.
Instead, Mukhtara Mai chose to live, to fight for justice and to find a better life for
women like her. She became the symbol of women’s right”. “I want to remain a
symbol of oppressed women until someone shoot me” she says. The Government
rose to the occasion and supported her and provided her legal support. (Reader
Digest JAN 2008). Ultimately, it was the financial support from the Government of
Musharraf and donors from Canada and Norway that helped her in setting up the
Mukhtara Mai Model Girls School and Mukhtara Mai Women’s Crises Relief
Centre, home for women hit by crises. Today its educating 650 girls who would
have faced a dismal future and it employs 50 providing shelter to women exploited.
She remains today a source of inspiration, relentless to pressure to withdraw case
against the perpetrators of that horrific crime. (Express Tribune July 25, 2010)
Moral of the Case:
The case study of Mukhtara Mai depicts – the change and empowerment of
women at this period in time. What is important is that these little incidents add to
the change of the whole picture. It’s the progress which is more relevant for such a
movement and change follows. The point in this case is that women as social
entrepreneurs or as entrepreneurs are noticeable. They have learnt to stand up for
their rights. The clout in this case come from media.
The logical outcome of a gender biased environment was the low status and
weak bargaining position of women. That indicated the disadvantaged position of
women who try to start or run a business in Pakistan. However as we have seen in
Islam women in business are not frowned upon.
Faculty of Business Economics and Entrepreneurship 449
CHARACTERI STI CS OF WOMEN ENTREPRENEURS I N
PAKI STAN AND I MPACT OF PWCCI
According to a survey report, (prior to the emergence of WCCI), ‘Women
Entrepreneurs in Pakistan’ (Nabeel Goheer) ILO Islamabad 2003, eighty percent of
the women in business were between the age 20-49 years. They were generally
found to have only one or two children (65%). It was also found that a woman
entrepreneur usually belongs to family living away from extended family with
husband and unmarried children. That helped them to keep out of the social
cultural influence. Similarly their literacy rate was above national average, and had
obtained professional training. Barriers, some real, some perceived and some self-
imposed, confront women entrepreneurs. In the area of export marketing, obstacles
include limited international business experience, inadequate business education
and a lack of access to international networks. A similar observation was made by
Roomi (2008). His sample consisted of 265 and of these 54% managed micro
enterprise, 36% managed small enterprises and 10% medium enterprises. Roomi
found 82% engaged in traditional sectors of textile, apparel, education, food,
beauty, and health sector. It is here he noted deep rooted social cultural values
segregating female entrepreneurs they were serving female customers. Small
investment and they usually began with pilot project at home. Usually in their
sector male, female interaction was almost nonexistent.
Whereas Goheer also observed most women headed businesses operated from
home, and financial matters were taken care of by male family members. Women
entrepreneurs were seen in subordinate roles; with low levels of education and
technical skills; low exposure to business; lacking role models; lacking peer
support and business associations; and, low income and poor investment capacity.
About sixty percent of women entrepreneurs in Pakistan have opted for traditional
business such as parlors, bakeries, boutiques. However, the largest numbers were
in the garments and handicrafts businesses.
Other than these, societal, cultural norms and forces of patriarchy and a
systemic subordination of women by men also impeded women in business. Other
challenges faced by women in particular are; financing, globalization of social and
economic environments, marketing, and management. Economies such as
Pakistan’s economy can pose difficult hurdles such as banking, legal contracts,
political contracts, customs tariffs, and impediments by petty bureaucrats who daily
invent new mechanism for the simplest procedures. However Roomi (2008) states
that literacy rate plays important role in creating awareness of their rights. 82% of
his samples were high school graduate, 53% had bachelors and 15% post graduate.
Roomi (2008) states that women have been denied the right to education despite
Islam having made it compulsory for men & women to peruse education. He also
draws attention to the rights given to own property, inheritance, business, to keep
her madden name and to hold political office. Based on these facts verified from
Hadiths and the Quran, the dichotomy is that religious entrepreneurism is
450 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
misleading the general public and wrongly denying the female entrepreneurs of
their position in the economy.
Yet the major problem seen was the lack of confidence of women
entrepreneurs and extreme shyness to approach organizations for support. In the
opinion of Shehla, they also did not have the capability to present their case or
proposal hence they were unconvincing to the bankers or the financers.
The below mentioned cases reflect a spectrum of experience over a long time
span. It is a fairly good description of the environment confronted by the women
entrepreneurs.
Nikki’s Beauty Saloon
Mrs. Ayesha had lost her husband at a very young age. They had four
daughters and a son and three of whom were minors and two were as yet teen-
agers. ‘Nothing is more devastating then to have your world shattered while you
are still young. In a country like Pakistan, women take the backseat and are taken
care off by their husbands. It takes time to get your bearings and I found myself
fumbling with my husband’s business - an auto car sale agency “Soon I realized I
must do some business to survive but it was not my cup of tea to run a car agency.
Therefore, I soon negotiated a sale of my husbands business and went into the
beautician business”.
What had raised her confidence in the business of beauty saloon was her
friends who admired her makeup skills. Occasionally she would do the makeup of
some brides getting married in her family and among friends. She had a natural
talent for it and now she was being appreciated by her friends and peers. It was at
that moment in time when she was convinced that beauty saloon was the kind of
business she wants to be in.
As a matter of fact the business of beauty saloons had come of age. PWCCI
had given it a big boost by organizing a conference on the subject. The concept in
Pakistan of beauty saloon was initially introduced by Chinese Parlors. All
weddings require bridal makeup and the Chinese beauty parlors performed this
service. Another source of business were the professional working women who had
no time to take care of themselves. Hence beauty saloons were becoming
responsible for grooming women. Technology too had played a vital role. (Based
on the interviews conducted by Maira Taqi and Kinza Malik)
Moral of the Case: Taking a Stand to fight for your cause:
This case depicts scenario when women inherent business when they loose the
male member of the family. But it also depicts the enterprising side of the female
entrepreneur. It’s a case when a family business is dropped in your lap by
circumstances. But it also depicts how a woman chose her path and line of
business. The confidence comes from the availability of a forum and from role
model. These women have become the pioneers Women Entrepreneurs of Pakistan
and have proved it.
Anjum Rafi the owner of ‘Qashang Boutique’ and ‘Heritage School System’ is
a Masters in Textiles. Though she successfully came out of her teething problem,
Faculty of Business Economics and Entrepreneurship 451
still faced numerous problems. She quickly learnt that to be a member of a
chamber or association was really beneficial for her in a male dominated society.
Hence, first she joined Lahore Chamber of Commerce and Industry and later the
Pakistan Association of Women Entrepreneurs. It was a great boost to her to join
the PWCCI. She felt that this had empowered her to think in terms of international
business and to participate in fashion shows abroad. But most of all, this gave her
status among the Business Community.
Moral of the Case:
Despite her experience she needed the clout and the forum of the PWCCI. It
opened other vistas such as the international market.
On the other hand, Bushra Iqbal who had been running one of the first beauty
clinics Bushra Iqbal Beauty Clinic in Lahore after qualifying from Hannereuth says
that “The worst of all was dealing with orthodox government officials”. At that
time, there was no support or sympathy for a woman entrepreneur.
Moral of the Case:
There was no growth oriented atmosphere from women until they setup their
forum the PWCCI. The petty bureaucrats stopped harassing these ladies realizing
the establishment of the platform the PWCCI.
Farah Yousaf of Comeily Collection, a garment unit, reflected questions she
confronted, “Doing business is the responsibility of men. Why are you doing it?”
For a long time the absence of a support system hampered her growth as with every
woman entrepreneur. It was essential for her to join the Women Entrepreneur
Society of Pakistan and the Lahore Chamber of Commerce in 1998 and eventually
the Punjab Women Chamber of Commerce and Industry.
Moral of the Case:
Women in Pakistan needed to be members of an association to be heard and to
carry a clout. They have setup role models for the world.
Robina Jamil not only confronted the humiliation of the male dominated
business environment but also the derogatory attitude of the relatives. On the other
hand nobody was willing to do business with her because she was a woman. All the
whole-sellers would not respond to business deals handled by her and would insist
on doing business with the male.
Moral of the Case:
It was very difficult for women to penetrate the networking platform for
business without being members of a Chamber of Commerce or an Association.
These mini cases are reference points that lay the ground to establish the theory of
female entrepreneurship in Pakistan environment. The multi-dymentional social factors
that hinder women entrepreneurship and despite the cultural taboos these women have
emerged as a force and have gained acceptance. There may be the need to study deeper
to profile the emerging picture of Pakistan female entrepreneurs.
It was Dr. Shehla’s persistence and conviction that the women need a full-
fledged chamber. She used every resource in her reach to propagate a separate
452 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
chamber for women. But it was on ‘bridge championship’ organized by the family
in memory of her father that she had got a chance to meet the President of Pakistan
and talk about promulgating an ordinance for a women’s chamber. She finally
approached President Musharraf at the Bridge Championship and the President
eventually agreed to promulgate a new Ordinance to support the establishment of
Women Chamber of Commerce and Industry.
Eventually after long struggle by the Women in Karachi and Lahore a final
recognition of the women’s right to do business was established in the Pakistan
2006 Ordinance called the Trade Organization Ordinance (2006). It allowed more
representative associations including the women to have their own Chamber of
Commerce and Industry. The women are now able to form their own associations
without male sponsorship. Hence women such as Shehla in Lahore and Salma in
Karachi moved for achieving legal registration of their respective Chambers. But it
was not as easy as it seemed.
ANALYSI S OF FI NDI NGS
What choices did women have? They have always led a dominated life without an
outlet. The options were limited. With that kind of background, it was not possible to
conceive a Women Chamber of Commerce and Industry. As a matter of fact there are
only a handful of examples of WCCI existing in the world though progress has been
made in Asia and Africa. But Pakistan is a society of paradoxes where a women’s
exclusive bank existed (First Women’s Bank). It is a society where all over the country
there are many schools, colleges and universities segregated and exclusive only to
women, besides co-education institutions. It is a society with tradition of a woman
being its Prime Minister twice. It proves that the women have a conviction of purpose
and cause to pursue. Yet the paradox is that women are really very weak in this culture.
The other paradox is that where as women are striving for economic emancipation,
they never desired emancipation from their family. There is no place for a single
woman; she must have her family standing in the back ground. Her husband or her
children have to be in her picture. Their strength comes from the association with the
family. (And Muktara Mai is one example of a woman finding her way back in her
society among her own people). Legitimacy came from the strong association with the
immediate family so a new norm of society has emerged. PWCCI was the new
platform of culture and emancipation from dependence but not from family. Culturally
Pakistan is an emerging culture, a society which has influences of different cultures of
societies, specially those that were in the subcontinent like Hindu society, the Turkish
and Iranian culture. This brings us to the Research Questions.
1 Given the cultural overcast, what entrepreneurial traits or characteristics or
competencies can be identified among the Pakistani female entrepreneurs, for
gaining recognition and clout?
Women entrepreneurship in Pakistan is in a transitory phase. The emerging
role models in the 21
st
century have given a lot of weight to women entrepreneurs.
Faculty of Business Economics and Entrepreneurship 453
This can be seen in each entrepreneur displaying her characteristics. Each woman
is a case uniquely responsible to bring about a change. The case studies are not in
isolation from the theory but support them. They are the “voices” of the Forum the
PWCCI. They are the evidence of the sentiments, the emotions the experiences and
the behavior pattern of a whole social environment surrounding the emergence of
these female entrepreneurs. On the other hand they also reflect the grit and
perseverance of Dr. Shehla and the challenges she accepted as a leader of the
women entrepreneurs. The displays leadership by showing dedication and
willingness to take the mantle of leadership.
2. Especially what entrepreneurial leadership characteristics are depicted
through the case studies?
The leadership style of women entrepreneurs in Pakistan has been the same as
in other regions. The consultative style has been the hallmark of their leadership
traits. Shehla herself showed flexibility and accommodation to the prevailing
circumstances, yet stood her ground relentlessly to achieve her goals. Culturally
neutral concepts such as the theory of leadership have been equally applicable in
this environment. What could not be considered suitable was the entrepreneurial
intention or motivation of other regions such as European or American or Russian.
Each region has its own unique characteristics and traits. The conclusion that one
can draw from the comparison of different cultural background and different
societies is that theories developed so far in the western societies do not apply to
Pakistani environment as there is not sufficient evidence and research knowledge
of the women in business.
It was observed that the experiential learning developed the entrepreneurial
competencies of the women and in turn increased the confidence and level of
entrepreneurial leadership capabilities among all the women entrepreneurs. Yet the
most basic principal of management was the most sought after training by the
members of the newly formed PWCCI.
Some of the characteristics that emerged from the case studies have been;
mentoring, psychological advocacy, willingness to search for opportunities,
networking, using the platform for their problems, bond of being a business woman
overriding cultural differences, dedication willingness to take the mantle of
leadership, resoluteness, long hours of work, learning leadership and
entrepreneurship through experience.
It was also observed that the female entrepreneurs are more educated than her
male counterpart as seen in the western societies. But her professional experience
often falls outside of traditional business sector e.g. an engineer may set up
garment business or a boutique or bakery.
3. What brought about the Women Chamber of Commerce and Industries in
Pakistan as the forum and platform for women?
Women by nature are inclined to go for mentorship or coaching and it has been
amply demonstrated that the success of the establishing the PWCCI was because of the
coaching & mentoring role of Dr. Shehla and the team. Women entrepreneurs look for
role models and mentors that help them carve out paths to follow. However the impact
454 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
of experience and training has been observed as a factor for building leadership self-
efficacy among the female entrepreneurs similar to western societies. Such theories are
culturally neutral. Mentoring and coaching is a payoff for the gains of their life. The
Chamber of Commerce and Industry and its leadership is being looked upon for
psychological advocacy required to start small business, to create growth oriented
atmosphere, create networking and economic empowerment. The WCCI is also being
looked up for providing guidance how to approach banks and force governments to
pay attention to women entrepreneurs’ requirement. It also provides a system of
bonding because they share the some problems.
None of the barriers that stood in the way of these aspiring pioneering women
entrepreneurs were religious or Islamic ideology based. These were socially and
culturally oriented and represented the norms of the society. (A society that still
preserved certain customs and traditions and norms). Some were deeply rooted for
centuries and had taken this form and appeared to be religious edicts. It is the
realization that culture is the biggest hurdle in the economic emancipation of women
entrepreneurs, which led to a growing desire to have their own platform. Hence the
long drawn struggle by a set of women to establish and have it recognized.
It has also been established that economic emancipation was not emancipation
from men dominance or against family bond. It was economic freedom and more
an expression of capability, an expression of an art form, an expression of skill and
ability and competence to do what one had chosen to do. In fact it was an
expression of equality given by Islam as stated by Quran and Hadith. Women
entrepreneurship is not alien to Islam. The ‘Izzat’ and ‘pardah’ was the defensive
mechanism provided to women and it, protected her if she knew how to allow it to
be implemented. Religious entrepreneurship imposed its own version of Islam on
women entrepreneurs; it was under the guise of religion that this concept was being
used to prevent women from spatial mobility. But the awareness and education has
made women realize their status and position in society.
CONCLUSI ON
The social cultural and traditional taboos on women allow men to carve
legitimacy for themselves on women. It was this exploitation by men that led the
women to set up a common forum to claim equal rights that were theirs by virtue of
Islam. Once the platform was legally established and officially recognized, it
brought more opportunity and clout to assert their economic and legal rights. As
time passed these members realize their growing strength and the value of the
association or the platform of Women Chamber of Commerce and Industry. They
have opened the gateway for women in other parts of this country. Today Pakistan
has experienced growth of more Women Chamber of Commerce. Almost every
province has its own Chamber of Commerce as of 2015.
Family and spouses played a very strong supportive role as in the case of their
western female entrepreneurs, acting as advisors and legitimizing the
Faculty of Business Economics and Entrepreneurship 455
entrepreneurial ventures in the society. However successful women entrepreneurs
were found to be living outside the domain of extended family allowing the
parental controls but expecting husbands to give understanding and support.
We also conclude that the economic empowerment of women, the clout,
comes from being together on a platform that provides the support services and to
be able to raise their voice. This platform that fit the requirement of all their needs
was the Chamber of Commerce & Industry. It infact it provides a formidable clout
to women and gives their economic emancipation.
Though the serious work on female entrepreneurship has not been attempted
but is the need of the hour now. However now there is a range of it available. There
is always reference to the influences of culture on women but it has not brought out
the strong South Asian impact that exists among the female entrepreneurs of
Pakistan; Roomi has time and again emphasized the freedom to do business in
Islam and has given the role-model in Islam for the Muslim women but has not
focused on the various crucial cultural barriers which are the real hindrance and
precipitators of sufferings by the women in pursuit of economic independence. In
this respect much work remains. Researchers could well bridge this gap by
undertaking step by step cultural taboos, geographical regions, ethnic origin, rural
and urban divided, tribal & feudal bearing on culture and influence women in
Pakistan. There is vast scope for such serious research, which will evolve into a
situation of change as has the correct knowledge of Islam done to the current
leaders and female entrepreneurs in Pakistan. This would have an impact on all
other neighboring countries of South Asia.
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[7] GEM, Global Entrepreneurship Monitoring Report 2007 (2007) Babson
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[25]Sajal K. Maiti, (2008), ‘Women Entrepreneurs and Emerging Profession: A
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458 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
IMPORTANCE OF OWNERSHIP TRANSFER
PLANNING FOR FAMILY BUSINESS ENTITIES
Dragan Milosevic, PhD
46
Dragica Jovancevic, PhD
47
ABSTRACT
There are a number of definitions of family enterprises in literature. Depending on
the fact which definition is used, the statistical data about their number and results will
differ. According to one short definition used by the EU, family enterprises are those
enterprises in which the company founder and his family members (including the
descendants) have, based on their participation in basic capital, a minimum of 25%
voting rights. In such a way, family members become the most significant interest
group which influences business activities of the business entity. Family business
entities on a global level take up 30% to 90% of the total number of enterprises, with
an annual profit level of over a billion dollars. It is a common expectation that family
companies can be found in the group of small and medium enterprises (hereinafter:
SME), but they are also present in the group of large corporations such are Toyota
(Japan), Hilton (USA), Walmart (USA), BMW (Germany), FIAT (Italy), IKEA
(Sweden), Lego (Denmark), Tata Group (India), etc. With the aging of one generation
of founders and their retirement, there occurs a transfer of ownership to the heirs. In
certain cases, after this type of ownership transfer, family business entities are sold to
new owners. This is the case when the heirs have chosen other business activities. Each
change in ownership structure can cause a series of other significant changes in the
way of implementing the business activities of the business entity which leads to larger
or smaller crises in business activities. In fact, ownership transfer from one generation
to another is something that is repeated in numerous cases. This is the reason why
transformation stages are recognizable, so that the entire transformation process can
be systematically influenced. Thus, the problems caused by the change of founder can
be minimized and the advantages of ownership transfer supported. The aim of this
paper is to define the key elements and effects of the long-term ownership transfer
process in family business entities. Based on research, the possibilities of increasing
efficiency through the process of long-term planning can be reviewed.
Key words: Family Business Entities (Companies), Ownership Transfer,
Planning of Organizational Development.
J EL Classification: D23, O21
UDK: 334.722.24:347.232.3
46
Dragan Milosevi?, Faculty of Business Economy and Entrepreneurship, Belgrade, Serbia,
[email protected]
47
Dragica Jovancevi?, Faculty of Business Economy and Entrepreneurship, Beograd, Serbia,
[email protected]
Faculty of Business Economics and Entrepreneurship 459
I NTRODUCTI ON
The terms family business entities or enterprises, family companies, family-
owned businesses, companies under the control of one family are the various
names which can be found in literature to describe family enterprises (IFC, 2011).
In accordance with the Charter on SMEs (European Commission, 2008) business
entities are “each entity engaged in economic activity, no matter its legal form.”
According to Serbian legislation and in accordance with the Law on Economic
Entities (National Assembly of the Republic of Serbia, 2011) economic entities are
companies and entrepreneurial businesses. The common feature is an engagement
in economic activities and these entities are taxpayers regardless of the legal form
of registration. In the further text, the term family companies (or FCs) will be used
as a synonym for family businesses due to simplification and a following of global
statistics.
Due to the way in which families and businesses are connected, FCs have a
series of specificities by which they differ from other enterprises. Namely,
problems within the family can be reflected on the business activities of the
enterprise and vice versa.
In FCs, the long-term benefit of the family and the enterprise are tightly
connected. The long-term goal of the family and the development of their business
are continuation and increase of mutual benefits. Both the material and non-
material values of the family and their business are also tightly connected and
cannot be observed separately. To manage them in the long-term, they should be
acknowledged and understood.
They are a very common phenomenon in all parts of the world, the
development levels, activities, sizes and various legal forms. The most common
form is within small and medium enterprises (hereinafter: SMEs), even though
there are large international companies which are successful family companies.
There are a large number of definitions of the term ‘family firm’ which differ
between themselves. In each definition there is a tendency to connect family,
enterprise (legal entity) and the method of managing business development.
Family business is, according to IFC (2011) a company in which most of the
votes are in the hands and under the control of one family, including the founder
(or more of them) which tend to transfer their business onto their descendants.
According to the Family Firm Insitute, Inc. (2014) family companies are
defined in various ways. In one definition, family companies are enterprises which
manage and/or lead dominant coalitions of one family or small number of families
through the multiple generations, with the intention to follow the vision of business
activities. The same source gives multiple definitions which are primarily
connected to the participation of one of more families in the ownership of the
enterprise.
460 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Family companies are those companies in which several family members are
involved in managing the structure as majority owners or managers, at the same
time or during a period of time (Miller et al., 2007).
A somewhat different definition of family enterprise is offered by Deakins &
Freel (2012) according to which the enterprises in which two or more capital
owners have more than 20% of the voting right and are mutually connected
through family relations, are called family companies. The enterprise, in order to
be called an economic entity, must have at least two family members who are
within the ownership structure.
According to the definition offered by the European Commision (2009) family
companies are enterprises of a certain size if they meet the following requirements:
1. The major managing rights are owned by one or more individuals who
have founded the enterprise and/or by spouses, parents, children or
their descendants.
2. Most of the managing rights are direct or indirect.
3. At least one representative of the family or relatives is formally
involved in the process of enterprise management.
4. The enterprises satisfy the definition of family enterprise if the criteria
of founder or family members (including the descendants) are based
on participation in the capital, with a minimum of 25% voting rights.
The noted definition is very wide and most of the private (solo) enterprises
with one owner can be classified into this category, even when there is no change
of generations of founders in the ownership structure of the enterprise. This group
also includes enterprises with only one founder who can potentially extent into the
second generation in real family enterprise, but this time in a narrow sense. This
definition of FCs will be used in this paper, as EU statistics have been compiled on
the basis of this officially adopted classification.
According to the foreword written by Boris Vuki? (Ward, 2006) it can be noted
that one company will become a family entity only after a change in the descendants of
the first generation of founders or, in short, family companies are enterprises which are
owned by more than one generation of the same family members.
All the given definitions observe three crucial elements:
1. The number of founders.
2. The minimum voting rights of the founders based on owning the basic
capital of the enterprise.
3. Ownership transfer from one generation to another one. If we apply this
criterion we have a definition of FCs in the narrow sense of the word.
Without the third criterion, a large number of private companies, including those
with one founder, fall under the category of FCs. If we include the third criterion in the
definition we will have FCs in a narrow sense as they now represent enterprises which
have already been through ownership transformation in the family and they are in the
second stage of the life cycle. Applying the third criterion, we get a significantly (around
50%) smaller number of enterprises which meet this condition.
Faculty of Business Economics and Entrepreneurship 461
These definitions do not insist on a vision of development but only on voting
rights based on participation in capital. During the founding of small and medium
enterprises (SMEs), the founder can with certainty predict that the company will
become a family enterprise. It can be a founder’s desired development policy
although this undoubtedly is not the only factor which can influence such a policy.
It is hard to speak about the vision of business activities of one family during
generations as it can be related to attitudes about the values and beliefs which in
turn are a reflection of the attitudes of the founder’s family.
The ownership transfer from one generation to another is much more than a
simple ownership transfer. Besides the inheritance of the capital share, the heirs
also receive a series of material and non-material benefits from the life experience
of the older generation. The following generation of family business heirs, along
with property, also receives the family social status, knowledge about surviving in
business, and a reputation in front of other interest groups on the market, such as
suppliers, buyers or financiers.
According to Ward (2006) almost one half of the total number of family
enterprises fail to survive to the next generation. Matters are also changing in the
USA, and thus it is predicted that in the future, 40-50% of family companies would
be led by sister and brother co-owners.
This is the reason why planning the ownership transfer of one family
generation to another is a part of a more extensive subject which is in the world of
traditionally successful enterprises called the long-term plan for developing family
businesses (FBC, the Family Business Development Center, ASEE, 2014).
The aim of this paper is to define and analyze the crucial elements and effects
of the long-term multiple process of ownership transfer on family business entities.
Based on this research, the possibilities of increasing its efficiency through the
process of long-term planning are reviewed.
THE ROLE OF FCS I N THE ECONOMI ES OF DI FFERENT
COUNTRI ES
FCs are very much appreciated as partners and loan borrowers in financial
circles, as the survival of such an enterprise is connected to the financial interests
of an entire family. This is the reason why everyone is devoted to preserving the
family business, even when the personal interests are not the same as the family
interests. There is an ingrained attitude that FCs are more reluctant to borrow
money even when there are rational reasons for it. FCs founders would rather
sacrifice a higher growth rate than increase the risk and potential higher growth
rate through engaging external financial sources. Thereby, a lower growth rate is
intentionally accepted, as well as the responsibility for business survival. FCs,
furthermore, tend to secure continuity in business activities and have a tendency
toward long-term planning.
462 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
According to the data published on the Family Firm Institute Inc. website
(2014) from the total number of registered economic entities, 70% to 90% are
family companies of various legal forms and sizes (Figure 1). There are large FCs
such as the Fiat Group (Italy), Walmart (SAD), Ford Motors (SAD), Porsche (EU),
Benetton (EU), Henkel (EU), BMW (EU), the Samsung Group (South Korea), Tata
Group (India), Foxccon (Taiwan) and numerous others.
Figure 1: Percentage of family businesses in the private sector
Source: Family Firm Institute Inc., 2014
According to data (Deakins, Freel, 2012) two thirds of private companies in
Australia are FCs, while the situation in Great Britain is even more in favor of family
companies, as almost ¾ of all enterprises are owned by families, and in Italy 90% of all
companies are FCs, while this number in the USA is 96%. If we take Italy under
consideration, it is obvious that the most developed part of Italy is Lombardy, whose
economy is characterized by a large number of successful family companies.
Most FCs, per number of employees, work volume and capital under their
disposal, belong to SMEs. It is estimated that FCs on the global level participate with
70%-90% of the world annual GDP. On the levels of national economies, FCs
participate in creating the national GDP with 50% to 90% (Figure 2). FCs are showing
a higher level of profitability related to the other enterprises if observed long-term.
According to Professor Blagoje Paunovi?, research indicates that in the future
there will be more FCs. The EU in their documents recognize the significance of
family economic entities to whose further development full institutional support is
given. In Serbia, knowledge of the advantages and disadvantages of family
economic entities is still not sufficiently promoted, as there is no real information.
The feature of all FCs is that one family is the owner of significant shares in
the ownership of the company (more than 20%, mostly over 51%) and based on it,
it has acquired the right to manage the company in proportion with its participation
in the capital. The larger the participation, the greater are the managing rights of
the family.
Faculty of Business Economics and Entrepreneurship 463
Figure 2: Percentage of family business contribution to the national GDP
Source: Family Firm Institute Inc., 2014
EMPLOYMENT POLI CY
The major and basic motive of the entrepreneur to start his/her own business,
in most cases, is to provide a source of financing for the family and himself/herself.
All other reasons such are self-reliance, self-realization in certain areas or
independent time managing, etc., are less present.
During the foundation of their own SME, entrepreneurs create their own work
environment. They employ the needed labor force, one which could fit within their
system of values and working mode. The entrepreneurs are the ones who create the job
and working atmosphere, giving direct orders and directly communicating with all
employees. This is the reason why most SMEs never grow into large companies and
furthermore, only a small number of entrepreneurs, 5-10% according to Deakins & Freel
(2012) create the enterprise as a system which should develop and grow during time.
According to data from the Family Firm Institute Inc. website (2014), during
2012 between 50% and 80% of workplaces in most world countries were created
by FCs (Figure 3). For financing the start of business, 85% used family funding.
464 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 3: Percentage of workforce employed by family businesses
Source: Family Firm Institute Inc., 2014
Same sources claim that in the EU, family companies create over 5 million
workplaces which make 40% to 50% of the total number of workplaces. During an
economic crisis, FCs will delay the positioning of new people in management
positions, as well as engaging professional management, but will attempt to retain
or employ a new labor force. The tendency of retaining a labor force, even in
negative macroeconomic trends, is a fact which can be seen in the statistical
records of the number of employees in EU SMEs (Gagliardi et al., 2013), during an
economic crisis and the decrease of the GVA created by economic entities.
According to research by the Agency for Regional Development (TNS
Medium Gallup, 2013) the reasons for starting a private business in Serbia during
2012 differs according to gender. Firstly, there is a desire to be independent (self-
employed) (33% of men and 30% of women). Secondly, unemployment is a major
factor for 17% of men and 22% of women. Thirdly, another reason for founding a
SME is spotting a business chance in the area of the founder’s previous
professional area (with 23% male and 18% females).
FAMI LY ENTERPRI SES AS SMALL SOCI O-CULTURAL
SYSTEMS OF THE FOUNDER
Family enterprises reflect the features of their founders. As illustration for
such a theory is quoted by Boris Vuki? (FBC Family Business Development
Center, ASEE, 2014) which gives the following three axioms of family enterprises:
1. All founders see their companies as their own children.
2. All children look like their parents.
3. Possessive parents make their children ‘imbecilic’ and incapable of
fighting through life.
4. If the founder fails to personalize the company (enterprise) and does
not move forward from ‘entrepreneurship to professional
management’ and does not make clear rules, then his biological
grandchildren will not get to know the family enterprise.
Faculty of Business Economics and Entrepreneurship 465
Adopted values are of a long-term character and are very hard to change. They
represent some sort of starting point in forming the long-term strategy of the
development of the family and family business.
Family companies represent socio-cultural systems of the countries where the
family originates from and/or in which family members have spent a significant part of
their lives. This is firstly related to the value judgments and culture which the family
members have accepted as their own standards in life. It can also be connected to the
environment which they originated from, with small or large influences from other
environments and cultures where they spent a significant part of their lives.
Just like family enterprises can reduce the unemployment of emigrants from
other cultures and speaking areas, they can also, in the long term, represent the
restrictive factor of their own development. The problem of the inclusion of ethnic
minorities is one of the big problems which even the most developed countries
have failed to solve, albeit investing significant sources into various programs.
The family enterprises of immigrants as a rule employ firstly their relatives and
employees which come from their own regions, speak the same language and belong to
the same culture. Their premises usually abound with national symbols of the culture
they originate from. To facilitate communication with customers and suppliers, they
are often located within quarters and parts of the city where other members of their
national minorities settle. Thus, districts in where members of one nation or culture
dominate are created, such as Chinese, Indian, Muslim, Christian, etc neighborhoods.
In some cases, many years pass by and immigrants from various countries never
learn the language of their host country. In a certain way this isolates entrepreneurs
from national minorities and limits the development of their family enterprises in
regards to the possibilities offered by the country. Due economic migration, migration
directions as a rule develop from less developed to more developed countries and
regions. The host country offers much greater possibilities than the settlers had in their
home environment but due to insufficient language skills and a lack of formal
education, the immigrants often cannot meet the employment conditions and when
they do, they often have smaller wages than their hosts. It is without doubt that there is
discrimination but the mentioned reasons make false differences. Thus, family
enterprises formed by immigrants can be a restrictive factor for employment.
Ceja et al.,(2010) claim that an organization can create strong emotional
relationships between the employees if it has goals and values which coincide with
the individual values of the employees. Sharing the common values and
accomplished results can make employees feel proud to work in such an
organization, no matter how big or significant the business activity is. In this way,
each employee striving to fulfill his/her own goals will contribute to accomplishing
the goals of the organization. This is characteristic for successful FCs and gives
strength and a recognizable corporative culture. Each member of a FC knows what
the acceptable behavior for an organization. Basically, values are the essence of the
spirit of FCs and lead to accomplishing all matters between a family and its
business. Shared family values of a family business are the basics for making a
strategy and long term plans.
466 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
MANAGI NG A FAMI LY ENTERPRI SE
The long-term goal of family business development managing is preserving
and developing of the family business, which in turn should provide a growth of
wealth and values for the family in time. In the conditions of extremely negative
macroeconomic trends, the goal of managing is continuation of business or
minimizing in the case of profit loss.
Each FC during time goes through a recognizable life model, which can be
completed, depending on the company, in a certain life cycle. According to Ward
(2006) during the generation shift of the founders, each family enterprise is faced
with two crucial challenges:
The transition from one to another generation of owners and enterprise leaders,
Adopting new and unconfirmed approaches for managing a family enterprise,
which the new generation of owners most likely wish to implement.
The family enterprise, according to Irena Bulat (FBC Family Business
Development Center ASEE, 2014), can have several models of ownership transfer:
? Family transfer – a successful ownership transfer from one generation to
another. A new generation of founders often holds the value standards of
their predecessors and culture from which they originate. It is reflected in the
continuity of work by the customers and suppliers, etc., of their ancestors. A
new generation of heirs usually introduces smaller or larger changes in FC
business activities.
? Insider purchase - this usually implies selling the company to the
management or the employees. If the heirs are not interested in the company,
there is a possibility for the company to be bought by the management or the
employees.
? External purchase - selling the company to new owners.
THE MOST SI GNI FI CANT FEATURES
In order to completely understand the problem of transfer of ownership from
one family generation to another, the correlation between the family and their
business must be understood. This correlation is depicted through the features of
family companies. In the further text, some of the most significant features of the
correlation between a family and business related to the various aspects of
managing and the business activities of family enterprises will be reviewed.
Members of family enterprise are, due to family relations and common
business interests, usually loyal to each others. Occasional conflicts and
misunderstandings regarding the managing of the enterprise are secondary
compared to the family business and family relations. Managing of the enterprise is
based on family consensus and the main priority of a family business is the
Faculty of Business Economics and Entrepreneurship 467
development of the family business and protecting personal property. The business
policy is based on safeguarding the long-term interests of the family which gives a
special stability to these enterprises in comparison with their competitors,
especially in times of turbulence. According to the research by KPMG and Family
Business Australia (2013) 83% of the respondents believe that a family business
and family way of business activities help to attain economic stability.
According to the Family Firm Institute, Inc. (2014), the basic features which
depict the most successful FC business activities are the following:
? Optimism of family members - most family members believe that a family
will retain control over a family business in the following five years.
? Loyalty, based on blood and family relations.
? alertness based on the trust that family members will take care of family
funding.
? Competitiveness.
? Innovations.
? Agility.
? Dedication and a desire to create a legacy for future generations.
In their research, IFC (2011) noted that FCs have strong as well as weak sides.
Numerous FCs are not sustainable in the long term. Two thirds to three fourths of
all FCs fail or are sold by the owners. Only 5%-15% of family owned companies
survive to the third generation of an ownership transfer. However, the numerous
deficiencies of FCs can also pertain to other SMEs. They too have strengths and
weaknesses, as follows:
Strengths:
? Dedication of the family to the preserving and progress of the family
business. This is the reason why family members identify themselves with
the enterprise, working hard and reinvesting part of their salary into the
company.
? Continuity of knowledge. The family has a priority of transferring their
accumulated knowledge, experience and skills on to the next generation.
? Reliability and pride. The family business is connected to the family name
and the reputation is linked with their products and services.
Weaknesses:
? Complexity. Managing a FC is, from the standpoint of management, more
complex in comparison with the other companies. A crucial problem in the
management of enterprises is the link between the family and the company.
Family members take up various positions and have different roles in the
management and leadership of the enterprise. Their status in the family and
in the enterprise are not necessarily equal.
? Informality. Considering that they have the feeling that they are managing
their own business, family members pay attention to formalizing relations
and following procedures. If a FC grows, there can occur a problem of an
468 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
inefficient managing of larger and more complex relations, which if
escalated, can be a serious threat to further growth and business
development.
? Lack of discipline. Numerous family members lack to synchronize their
decisions with the chosen FC development strategy. It is customary that
influential family members are more interested in employing their relatives
than engaging a skilled workforce from the labor market. This fact leads to a
work inefficiency and nepotism.
Research conducted by KPMG and Family Business Australia (2013, p. 10)
states that private enterprises have the following competitive advantages in
comparison with other enterprises:
1. Mutual values and a code of ethic.
2. A strong network of family members support.
3. Vision and strategy.
4. A strong brand and participation on market.
5. Customer service.
6. Possibility to make decisions rapidly.
7. Possibility of long-term perspective.
The basis of the relationship between family and their business is the complex
correlation within the family, ownership and the enterprise (Figure 4). Thus, there
are three dominant perspectives for an analysis, these being the following
correlations:
? Family-ownership. This correlation implies the link between personal
funding and that of the enterprise.
? Family-enterprise. This aspect analyses two dynamics of the development of
biologic heirs through forming family relations (sons-in-law, daughters-in-
law, heir of the second line, etc.) with the dynamic of the family enterprise.
? Ownership-enterprise. This aspect is engaged in the problem of inheritance
of the ownership and enterprise managing.
Even this aspect is crucial for this paper, although all three mentioned aspects
have to be observed jointly. A change in one aspect of the correlation impacts
changes in the other two segments.
Faculty of Business Economics and Entrepreneurship 469
Figure 4: The connection between family and enterprise with finances and
ownership
Source: the Family Firm Insitute, Inc., 2014, p. 39
Passing on the business reputation and the experiences of one generation to
another can have very positive and significant effects, along with numerous
problems. These are the following: a transfer of knowledge from one generation to
another, an introduction of innovations and harmonization of the FC with changes
in the environment, using the reputation acquired by older generations with
suppliers and customers, etc.
Due to preparing heirs to take over a private enterprise, older generations
usually invest a lot of effort and time to transfer their management experiences to
their heirs. With some business activities, this can be a significant way to create a
competitive advantage.
Growing up in an environment of a family business, the new generation of heirs
perceives the needs for harmonizing the enterprise with the new market requests.
While older generations are more interested in the traditional leading of business,
younger generations are prone to introducing innovations in their businesses.
The reputation which an entrepreneur enjoys can make it significantly easier to
introduce a young generation into business without the customers fearing any
changes in business conditions or the quality of the products and services. The
same attitude is related to the correlations with the suppliers which together makes
a financial position of a FC more stable. This resolves the numerous problems
which entrepreneurs face during enterprise start-up.
Family enterprises can usually count on the financial help of family members.
In the situations when entrepreneurs are starting a new business, this sort of help is
especially significant, considering that newly-founded enterprise have insufficient
funds for normal business activities, as well as no credit rating at business banks.
470 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Due to years of familiarity long-term mutual family interests, the system of
decision-making in well-organized FCs can be faster than in other economic
entities of the same size.
Along with the significant positive effects of ownership transfer from one
generation to another generation of heirs, there are numerous problems which
should be solved in time and in an adequate way.
The dynamics of family development and the number of heirs can have a
totally different development dynamic than the growth of the family business.
Thus, it can happen that family enterprises, with time, have a smaller number of
heirs or even no heirs at all. The successors which are not family members or are
more distant relatives may not see themselves running a family business when
inheriting ownership shares in a family company. When the number of heirs grows,
then the ownership share of each member decreases. It could happen that in time a
part of the ownership share which a family possesses starts to decrease and thus, a
major family owner becomes a minority shareholder. In any case, the bigger the
number of heirs, the larger the problem of managing a family business is.
The direction of family business development is an issue which can be a
potential problem for forming the long-term policy of the enterprise. Different
family members or even different family divisions can have varying interests and
visions about the development of the family business. In these situations, the
problem how to make decisions about the strategic direction of family business
development arises. The decision about the development direction is usually made
collectively or is made by the family member with a major ownership share, in
consultation with other family members. Family businesses last until there is
harmony in the family and until it is possible to find a common interest.
A long-term family interest can be in conflict with the personal interest and
ambitions of one family member. It has been established that a major long-term
interest of the family members is continuation and improvement of the family
business and property. However, the personal skills of one member can be out of
proportion with his/her personal ambitions. If an individual, as a family member,
has limited mental and physical abilities for managing the enterprise, making him
or her the manager of the family enterprise can endanger the company, which is a
common occurrence. Inheritance law has minimized tensions in struggles for
power, but it has also imposed the question of who will operatively manage the
state or the enterprise. During the history of operational management, persons
which have managed and provided the normal functioning of the enterprise and/or
the state have been chosen.
The issue of professionalizing manager positions and nepotism is ever-present
as the conflict in the choice of family members and engaging professional
managers. If there are no clear rules, FCs could become social institutions in which
members air their unresolved social problems. During the choice of staff, families
may prefer their relatives, instead of experts. As additional problem could be
rewarding family members instead of other employees, due to a lack of any
criteria.
Faculty of Business Economics and Entrepreneurship 471
The problem of separating or inheriting FCs is especially sensitive. Family
circumstances and problems, separation, divorce and inheritance are linked with
ownership distribution in FCs. With the breaking up of a part of ownership, there is
always the issue of financial as well as strategic nature. How to separate property
and not imperil the entire business entity? In some countries, inheritance rights are
separated according to gender. In contemporary economies, inheritors of different
genders have the same inheritance rights.
In the case of managing a family enterprise, it is difficult to distinguish
personal from family finances. Thereby, financial problems are transmitted to the
personal sphere due to bad business-conducting.
The family is the owner but also often the participant in managing these
enterprises or the executor in regular business activities. Top management
positions are usually taken up by prominent family members. In a large number of
cases, especially within SMEs, family members manage and work in the same
enterprises, which means that family members are also in the structure of the
ownership and the managerial structure.
Family members can be engaged in family enterprises in the following roles:
? Owners (a minimum 20% in the structure of the capital with two owners).
? Managers (not compulsory).
? Employees (nor compulsory), whether as family members (in
entrepreneurships), temporary employees or employed on contract.
Professor Walter Zoki, the department chair of the Strategy and Control of
Family Businesses and a consultant describes it quaintly as sitting at four tables.
The first table are the owners, that is the stakeholders, who together with the other
co-owners establish the FC strategy. The second table are the board of directors,
with the representatives of the owner structure or the co-owners themselves
(although it is unnecessary for all of them to sit at the table). The role of the board
of directors is to carry out strategic decisions and protect the long-term interests of
the owners. The third table is the manager team which manages the FC
operationally. The fourth table are the supervisory board members. Their role is to
control the work of the managers, supervise the carrying out of the decisions and
whether the company is conducting business within the confines of the law. If the
same people sit at these tables, a confusion regarding authority is inevitable.
In order for the FC to do business successfully, the roles must be defined. The
most important matter is to define the owner and the operational FC manager. The
system of decision-making and authority must be clear or otherwise the FC can
have problems making decisions and managing. The larger the enterprise, the
greater are the needs for professional managers to manage the business. This fact
separates the roles of owners and professional management all the more.
This process is shown in Figure 5. The smaller white circles symbolically
represent the owners and the larger black ones the business itself. At the beginning
of the process, when the enterprise was founded, the owner and the enterprise
coincide. With the growth of the enterprise into a complex business system, the
472 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
demands for management and development of a business system surpass the
mental and physical abilities of the entrepreneurs, and thus professional
management is engaged. In the situations when the FC becomes a large enterprise,
the owners increasingly start to get involved with social and humanitarian work,
promoting enterprises and family values.
Figure 5: Separating ownership from the function of management in SMEs.
Source: Churchill,Lewis, 1983
In the beginning stages of developing, FCs belong to SMEs. The essence of
the problem of separating ownership and management in SMEs is introducing
professional management into the companies where there are certain prerequisites.
THE I SSUE OF OWNERSHI P TRANSFER
Even though family enterprises are a usual occurrence everywhere, there are
many stereotypes about them. Many consider that they rarely survive more than
three generations. According to this stereotype, the first generation creates an
enterprise which is successful. The next generation uses the benefits and the third
one is left with nothing, and must start from the beginning. From the point of view
of strategic managements, this is a failure.
A family develops a model of a life cycle of a family enterprise through many
generations. The mentioned model represents a recognizable predictable model in
family enterprises during time, which can be used for long-term planning of the
development of a family business, where ownership transfer is one of the main
issues. The long-term strategic planning of a FC is based on the idea of knowing
the basic FC life cycle mode, and creating the activities to create the desired future
of the family business (Ward, 2006).
Ownership transfer from one generation to another implies much more than
ownership transfer in itself. Except for inheriting a market share, the successors
gain several material and non-material uses from the life experience of the older
generations. The following generations of successors of the family business, except
property, also gain the knowledge on how to lead and survive a business, as well as
benefit from a reputation with other interest groups on the market such as suppliers,
buyers or financiers. Also, the new owners are faced with the problem of
introducing innovations and changes in business activities in order to adapt to
changes in the environment. This from one side represents a potential crisis but
also a way in which an enterprise can adapt in the long term to environmental
changes through a business vision of the new owner generation. A change in
Faculty of Business Economics and Entrepreneurship 473
ownership thus represents a moment of crisis in the development of enterprises as
well as a chance for enterprises to be revitalized and directed towards new business
directions. In this way, a fundamental flexibility in strategy management can be
achieved.
IFC (2011) defines the life cycle of an enterprise through ownership transfer. It
records three stages in the life cycle of a FC:
Stage 1 – The founder (or founders). This implies owner control.
Stage 2 – A partnership of brothers and sisters.
Stage 3 – An alliance of relatives.
Table 1 presents the issues and problems faced by owners in life cycle stages:
Table 1: Key issues linked with FC management according to their life cycle
stages.
The stage of a life cycle of ownership
transformation
Dominating owner issues
Stage 1. Founder (or founders).
? Leadership transformation
? Legacy
? Planning property
Stage 2. Partnership of brothers and
sisters.
? Maintaining teamwork and
harmony
? Sustaining of family ownership
? Inheritance
Stage 3. An alliance of relatives.
? Allocation of corporate capital:
dividends, loans and profit
levels
? Pay-out of dividends to capital
owners
? Resolving family conflicts
? Participation of family and their
roles
? Family vision and mission
? The link between family and the
business
Source: IFC 2011, p. 16
In literature, there are several works which mention the model with three more
or less same stages in the life cycle.
474 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
The paper will present the model presented by Ward (2006) with four stages,
of which the first three are the same. He claims that FCs have four stages of life
cycles which they pass through:
Stage 1. The company managed by the entrepreneur as the owner.
Stage 2. Partnership of brothers and sisters.
Stage 3. An alliance of relatives.
Stage 4. Long-term perspective.
STAGE 1. THE COMPANY MANAGED BY THE ENTREPRENEUR
AS THE OWNER.
Entrepreneurs found their enterprises in order to carry out their business idea.
An entrepreneur identifies himself and his idea with the fate of the enterprise.
When the demands of the enterprise exceeds the possibilities of the entrepreneur, it
is necessary to leave the work to professional management.
With the growth of the business, the entrepreneur first engages his family
members, the work force from the labor market and after that professionals in order
to secure a long-term business success. The family forms its value system which it
conveys to the enterprises, and which is the basis of the reward system of all the
members. In order to motivate the professionals who come from outside and are
not family members, the family is given the possibility of acquiring wealth. The
conducted research (Family Firm Institute Inc., 2014) points out that the reward
system for working in FCs is less stimulating than in other enterprises.
Successors are taught about family values from early childhood, whereupon
the family is in the first place and business in the second. They are first trained in
formal education and later on acquire practice in their family business. A
significant part of the education system are representatives of the older generation
which spend a lot of time in contact with the young people in order to convey
knowledge and experience in business conducting.
If they achieve success in business, the older generation feels it is their
commitment to educate the young family members of the future generations how to
behave with family wealth. The problems which occur in personal lives and the
functioning of the family are passed on to the business of the private enterprises,
and this is the reason why a family takes care of each member, even getting
involved with the private problems of individuals. At times, the border of
involvement into privacy is hard to gauge.
Faculty of Business Economics and Entrepreneurship 475
STAGE 2. PARTNERSHI P OF BROTHERS AND SI STERS
After inheriting the ownership share, family members who have the same
values and similar interests continue to cooperate, motivating other successors to
sell their shares and leave the family business. However, there is an endeavor for
the family to buy off the company shares in order to retain majority management
rights.
The members who remain in the family business invest jointly in business but
also family members. Investment activities start to appear within the community,
as the family and enterprises support and help one another.
The family endeavors to ensure that the most competent family members are
involved with the business. In order to reduce taxes and achieve significant results,
owners start to hand over a part of their ownership to their children and
grandchildren. FCs are, with the enlarging of wealth, significant philanthropists,
donating significant funds to social and humanitarian causes within their
community (Family Firm Institute Inc., 2014).
With the aging of the second generation of successors, the educating of the
following generation begins. Parents introduce them to enterprises early on in order
to motivate them to acquire formal as well as practical experience. However, they
do not exert any pressure on their heirs to commit themselves to continue the
family business.
The family makes sure that its members in the early years have ‘rainy day’
funds and retirement. This in a certain way is also accomplished by the FC “reserve
financial fund”. Siblings make agreements regarding further investing into good
opportunities.
Families carefully instruct their spouses, which are not blood relations, in the
areas such as family values, culture, the nature of work, family agreements and
conflicts, etc. Thus there is acquired support of the spouses and their eventual
tutoring of the children until they become independent and until they start to
manage the family business on their own.
The values fostered by the family are from the beginning installed into the
successors and enterprises, as a part of the organizational culture. In order to
centralize the decision-making system, the family sets up a central personality,
which has the greatest trust of the majority of family members. Such a person is
viewed as a leader of the entire family, taking care of the interests of all the family
members. Except for the role of the central figure or the pillar of the family, this
person also plays an important emotional role for the family. The central figure has
certain commitments, such as maintaining contact with relatives which are not
blood relations, the media, the community and others. This is a respected person
who represents the family and its interests to the world but the family as well. In
the case of family conflicts, this person should be the reconciler for the conflicted
parties and a possible arbiter.
476 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
STAGE 3. COOPERATI ON BETWEEN RELATI VES
Even though they are not blood relations nor do they belong to the cultural milieu
of the family, relatives may alter the culture of the family and the enterprise and thus
they contribute to the family and the family enterprises to become more flexible. Their
influence can to a large extent contribute to strategic changes in business.
If these changes are accepted, they can inspire family members to deal with new
jobs and turn to new entrepreneurial ideas. This in turn stimulates new endeavors,
useful in the commercial as well as social sense, which helps to integrate new family
members and create a feeling of unity and dedication to family. The changes incurred
and a new common dedication to work creates the success of the family, which in turn
creates the conditions for a further increase of wealth and social respect from the
community members. A feeling is created that “this company will last forever.” All the
family members do not fare equally well but the family helps to learn about business
and capital management within the family.
The family enables a free sale of shares to all the family members equally,
under certain conditions and at fair prices. With the growth of the business and
separating ownership from the management, the capital owners experience the
family business less as a profit-making vehicle and increasingly endeavor to
develop an entire family business system.
Family meetings are organized on a regular basis, in the interest of the family.
New members are from an early age taught about ownership responsibilities, from
knowing the business, finances and reporting to management. Spouses are often
included in these programs.
Family members try not to get involved in the operational managing of the FC,
as they support the adopted strategy and act as cultural ambassadors. They support
their management in the function of managing the FC.
Family members are trained in three basic areas:
? Communication skills, necessary for managing the growing business.
? Personal growth and development, through formal education.
? Family culture and tradition.
Family and relatives experience the role of the family leader as being very
significant. The family leader can be a respected member of the group of family
members (larger families). His role remains more or less the same, to take care of
all the family members as well as the family business. His role is also to offer help
to family members who are in trouble, the causes of which can be purely personal
reasons or some special needs (illness, addiction and similar). The politics which
the family leader takes up is conveyed to all the family members, and must be
adhered to. Each family member is considered equally significant and valuable.
The family devotes increasingly more time to humanitarian work, and family
members not in the FC structure are also included in these activities, as family cohesion
is thus maintained and the power and status of the family is demonstrated to the world.
Relatives understand that occasional rivalries and conflicts are less valuable than the
advantages and power which is enabled by the unity of the family and its support, and
Faculty of Business Economics and Entrepreneurship 477
thus they contribute to reducing the tension among the conflicted sides in the family. This
helps to placate the conflicts among blood relatives and increases family cohesion.
Family members attempt to define the family mission separately from the FC.
This enables the family members to strengthen their dedication to the family and
the FC, also enabling the family and the FC to review various options of further
development. Family values are conveyed to the institutions established by the
family, as a result of their social and humanitarian work, such as foundations,
endowments, and similar.
The conviction of family members that the company is a means for achieving
the common good increases which serves to further increase dedication to the
family and its values.
The process of maintaining continuity becomes especially significant, as it
helps to coordinate personal attitudes and interests with long-term family attitudes.
An individual learns how to work and think as a member of the team (group). In
this way, every family member matures through the process of continuity and
decision-making, learning how to become a respected family member.
Respected and appreciated families start to share their enthusiasm and
knowledge about the family business with other families and its members.
STAGE 4. A LONG-TERM PERSPECTI VE
Families which understand and embrace the challenges posed by time increase
the chance to increase the continuity of the family and the family business. This
need for change and adapting is characteristic for all families which endeavor to
preserve the essential values of the family. Furthermore, each family experiences
values in their own special way.
Even though there is trust among family members which originates from
childhood, it is also necessary to take into consideration the opinion of experts, who
view the situations from different angles. All families have problems which are more
or less the same and thus predictable. Consequently the help of expert consultants is
essential and can help to overcome problems more quickly. It is equally important that
there are different views and perspectives of viewing the problem and solution, as is
the fact that family members need to rise above their personal opinion and bring a
decision which is in the long-term is acceptable for all members.
Two things are relevant in this process: communication and the decision-
making method. Communication is essential for the exchange of information on the
attitudes of the other side and the possibility of presenting the personal attitudes of
the other members. The possibility of understanding and accepting other
perspectives and attitudes is the second part of this problem. If the participants in
decision-making are prepared to accept other attitudes as well and not just their
own, there is a possibility to arrive at a sustainable solution which is acceptable for
everyone. Furthermore, the final solution does not necessarily have to seem like the
solution which all the parties had at the beginning of the negotiations.
478 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Key for long-term planning is sustaining continuity. Planning in this stage is
carried out on the following levels:
1. A business strategic plan.
2. A plan on inheriting, leading and ownership in the family.
3. Personal financial plans of family members.
4. Plan of family continuity.
KEY SUCCESS FACTORS OF OWNERSHI P TRANSFERS
According to Srisomburananont (2004) many consider that an FC depends on
the competence of family members, their dedication and hard work, which is only
partly true. For the family, it is important to maintain its business in the long term.
Reducing the impact of all the external and internal factors which can disable a
successful transfer can be achieved by three approaches:
-The existing of awareness about negative feedback and corrective activities.
A negative feedback is made up of three significant dynamic forces:
? The ability of managing a FC by family members. During time, the
possibility of the family to efficiently manage and control the business is
continuously falling. As a result of the limitations which occur with the
possibilities of the family to manage complex work demands, there occurs a
tendency of stagnation which reduces the work volume and raises it to a
level which family members can manage.
? Organic forces. The negative impact is reflected through loss of flexibility
due to an increase of bureaucracy which ensues from the growth of the
organization. The more an organization works to raise its efficiency, the
more grow the needs to define the work method, which has the negative
consequence of reducing organization flexibility.
? Work complexity. The growth of the FC also impacts the growth of the
business of the enterprise. Work diversification leads to an increase of its
complexity. This opens the issue of the efficiency of the entire organization.
- Corporate management.
- Professionalism.
The same source claims that for a successful ownership transfer, the following
should be prepared successfully:
? The next generation of successors, for taking over the family business.
? Securing a large dedication to family tradition, values, loyalty and hard work
of all the family members and especially the successors.
? A successful business transformation. It secures the adapting of the FC to
changes in the environment. One of the main causes of the disappearing of
FC enterprises may be organizational inertia which is deeply ingrained in the
processes and organizational culture of families.
Faculty of Business Economics and Entrepreneurship 479
CONCLUSI ON
The development of FCs makes up a great part of the total number of SMEs
with their specific features. The research conducted points to the large significance
of FCs for the economy and development of the entire society. In spite of this
probable fact, the state fails to adequately follow the problems of FC development.
With every ownership transfer, the number of FCs is reduced by about 50%.
Thus, every third generation of successors has only 25% of the total number of
SMEs, which is why the number of FCs in the world is relatively low, even though
their success and impact on business trends is significant. Sustaining a family
business through the generations is considered to be a large challenge.
One of the key issues linked with the managing of FCs is the separating of
ownership and the managing function during a life cycle. In the families where
there is a strong combination of family and ownership relations, traditional family
values can be a big burden for the necessary changes in business and managing a
FC. The traditional values are confirmed by business results from the past and are
used as an adequate way of thinking about the future.
Viewing matters in the long term, the family with their values represent a force
which directs the family and its business in the same direction. On the other side,
changes in the size of the organization and the business environment of the
enterprise demand other changes. Coordinating these three antagonistic forces can
be achieved by a successful preparing of successors which will accept the basic
interests of the family but at the same time seek new work methods and businesses
which will correspond to the demands of the new age.
According to Miloš Švarc, a consultant at the Center for Developing Family
Companies ASEE (2014), the owner can save his/her FC by long-term planning the
development of the enterprise, whereupon the issue of ownership transfer to the
next generation of owners is one of the most important issues. In order to realize
this successfully, it is necessary to plan the following for the ownership transfer
process:
? The company for future changes.
? The successors for taking over the FC management.
? Oneself, as the owner, for the future ownership transfer. Every owner has a
difficult time, emotionally speaking, with ownership transfer.
? The family, for the new owners which will take over the managing of the
family and the FC, introducing the necessary changes.
480 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
PROPOSALS FOR APPLYI NG RESULTS AND FURTHER
RESEARCH
Due to an obvious large economic and social significance which FCs have for
the development of society, it is necessary, from the standpoint of various interest
groups, to carry out the following activities:
1.To be carried out by state institutions and the local self-government:
? Recording and statistical following of the growth and development of family
enterprises.
? Periodically carry out research of the problems faced by the family
enterprises.
2.To be carried out by educational institutions and entrepreneurial associations:
? Promote family enterprises.
? Train entrepreneurs for ownership transfers.
? Stimulate long-term planning of enterprise development.
3.To be carried out by entrepreneurs in family enterprises:
? Attend courses on the methods of ownership transfers in family enterprises.
? Plan the activities of long-term development of enterprises and ownership
transfers.
? Carry out specific activities according to plan.
Perhaps the most important advice which can be given to entrepreneurs is
related to the fact that they should acquaint their successors as children with the
values and attitudes of the family and the business. By getting to know the work of
FCs, the new generations can assimilate the knowledge of the previous generations
and acquire their own knowledge.
Medelsheim, in his thesis (reprint of the 1929 issue) gives advice for FCs
which deal with trade. As the advice is of a universal character, it can be applied to
all FCs regardless of activity. Some of the activities which can be applied to
entrepreneurs for preparing the new generations of successors are the following:
? If your children show any interest in business, let them work for others. This
is the way for them to learn about discipline and work. Also, they will see
other work methods as well, different from yours.
? Allow your children from their young years to be present in your business
space, shops, workshops, offices. Ask them if they are interested in seeing
anything or having something explained to them other than what they have
seen or heard. It may be the case that they will be in the way but this is the
best way to stimulate your children’s interest for the work you do.
? Teach your children to respect your vocation and be proud of their parents.
In this way you can stimulate their ambition to take your place one day.
Faculty of Business Economics and Entrepreneurship 481
REFERENCES
[1] Carlock, R.,Ward, J. (2001). Strategic Planning for the Family Business. New
York: Palgrave.
[2] Ceja, L., Agulles, R., Tapies, J. (2010). The Importance of Values in Family-
Owned Firms. Barcelona: IESE Business School-University of Navara.
[3] Churchill, N.,Lewis, V. (1983). The Five Stages of Small Business Growth.
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[4] Deakins, D.,Freel, M. (2012). Preduzetništvo i male firme. Beograd: Data Status.
[5] European Commision. (2009). Overview of Family-Business-Relevant Issue:
Research, Networks, Policy Measures and Existing Studies. Brussels: European
Commision.
[6] European Commission (2008). A Small Business Act for Europe. Brussels:
European Commission.
[7] Family Firm Institute Inc. (2014). Global Data Points. Preuzeto Jun 22, 2014
sa Family Firm Institute Inc.: www.ffi.org/?page=GlobalDataPoints
[8] FBC Centar za razvoj porodi?nih kompanija ASEE. (2014). Pro?itajte.
Preuzeto juni 2014 sa Porodi?ne kompanije:http://porodicnekompanije.com/procitajte/
[9] Gagliardi, D., Muller, P., Glossop, E., Caliandro, C., Fritsch, M.,Brtkova, G.
(2013). AnnualL Report on Eurpopean SMEs 2012/2013. Brusell: European
Commission.
[10]IFC (2011). IFC Family Business Governance: Handook. New York:
International Finance Corporation IFC - World Bank Group.
[11]KPMG and Family Business Australia. (2013). Performers, resilient,
adaptable, sustainable: Family Business Survey 2013. Melbourne: KPMG and
Family Business Australia.
[12]Medelsheim, C. (reprint of 1929 issue). 120 zlatnih pravila za trgovinu. Novi
Sad: ASEE Books.
[13]Miller, D., Breton-Miller, I., Lester, R.,Cannella, A. (2007). Are family firms really
superior performers? Journal of Corporate Finance, No. 13, pp. 829-858.
[14]Narodna skupština Republike Srbije. (2011). Zakon o izmenama i dopunama
zakona o privrednim društvima. Beograd: Službeni glasnik Republike Srbije br.
99/2011.
[15]Srisomburananont, T. (2004). Key sucess factors in transforming traditional
family business for success and long-term survival in changing markets. MIT
Sloan School of Management.
[16]The Family Firm Insitute, Inc. (2014). Family Enterprise. New Jersey: John
Wiley & Soons Inc.
[17]TNS Medium Gallup. (2013). Istraživanje o stanju, potrebama i problemima
malih i srednjih preduze?a i preduzetnika (MSPP) u Srbiji: Kvantitativno
terensko istraživanje. Beograd: Nacionalna agencija za regionalni razvoj.
[18]Ward, D. (2006), Razvoj porodi?nih kompanija. N. Sad: Adižes.
482 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THOUGHTS ON ENTREPRENEURSHIP AND ITS
LINKAGE WITH INTRAPRENEURSHIP:
IMPLICATIONS FOR ECONOMIC DEVELOPMENT
Muhammad Omolaja, PhD
48
Ana Aleksic
49
ABSTRACT
An entrepreneur is someone who is willing to bear the risk of a business
venture where there is a significant chance for making profit (Chell, Ozkan, 2010).
This is particularly where the opportunity comes from outside of the enterprise.
Entrepreneurship is basically the practice of starting a business in order to earn
profit on new found opportunities (Ercan Ekmekcioglu). Generally,
“entrepreneurship represents a wide area for various business moves where the
entrepreneurial activities take place. How entrepreneurial activities would develop
and whether their result would be positive or negative depends on many factors
that determine the development of those activities”(M. Radovi?-Markovi?,
Muhammad Omolaja, 2010). Alternatively, new businesses that are developed
within a company under the influence of permanent efforts of entrepreneurs for
changes in existing organizational structures are called intrapreneurship. In other
words, intrapreneurship represents restructuring of existing enterprises.
Accordingly, it can be said that there are two ways of developing
entrepreneurship; that is, establishing a new one and restructuring an existing
enterprise in a process known as intrapreneurship. However, what are the
alternative views on the theory of entrepreneurship? Is there a linkage between
entrepreneurship and intrapreneurship? How does this linkage affect economic
development? Provision of answers to this kind of questions is the core of this
paper.
Key words: Entrepreneurship, Intrapreneurship, Economic Development,
Innovation, Business ?deas
J EL Classification: L26, G34, O31
UDK: 005.591.1 005.346 005.961:005.914.3
48
Muhammad Omolaja, Intercontinental University, West Africa, [email protected]
49
Ana Aleksic, Best Western Hotel Šumadija, Belgrade, Serbia, [email protected]
Faculty of Business Economics and Entrepreneurship 483
I NTRODUCTI ON
Entrepreneurship and intrapreneurship have many uncertainties especially
when new products are created for which there is no existing market. Both
collectively affect economic development in many ways. It is through both
entrepreneurship and intrapreneurship that important innovations enter the market
leading to new products or production processes which eventually increases
efficiency or productivity through bringing competition in the market places. This
paper discourses the nature, types and forms of entrepreneurship and
intrapreneurship as well as their linkage and their impacts on economic
development. It also illuminates the ideas and concepts that emerge from
entrepreneurs increasing our knowledge and what consumers may prefer through
introduction of variations of existing products and services in the market. This
speeds up innovations pertaining to introduction of new products in the market as a
result of longer working hours and more efficient nature of entrepreneurs as their
income is directly linked with their working input. Entrepreneurship and
intrapreneurship lead to introduction of new goods with new quality and value.
Their innovativeness introduces new ways of production and new markets that
have not been exploited. It is through entrepreneurship that new source of supply
are discovered and influences creation of new business organisations that directly
affect the economy. Creation of new business opportunities through
entrepreneurship, intrapreneurship, productivity and innovation leads to economic
development. This therefore means that when there is more entrepreneurship and
intrapreneurship innovation in an economy, it will be accompanied by high rate of
economic development.
DEFI NI TI ON OF ENTREPRENEURSHI P
The first attempts at defining the basic meaning of entrepreneurship go back to
16
th
and 17
th
century. It was not until the 18
th
century (specifically, 1725) did
Scottish economist, Cantilion (1725) gave the first significant contribution to
understanding what it means to be an entrepreneur. Cantilion, in his definition,
however, described the functions of entrepreneur, rather than his personality. In
those days, the classic entrepreneur was a farmer, who was willing to take on
business risk despite uncertain climatic conditions and other variable business
circumstances. Later on, this concept began to expand to independent traders,
where more and more, the role of entrepreneur as a leader and a promoter of
“everything new” in the business were recognized.
484 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Adam Smith considered a case of capitalist who lent his money to other people
and so recognized the special function of people who take on the use and risk of
capital. The famous economist John Stewart Mill also noticed that taking risks
should be a part of entrepreneurial function. Say in 19
th
century (specifically, 1803)
in his book “Tractate of Political Economy”, emphasized the importance of
entrepreneurs. He defined an entrepreneur as “a person who moves economic
resources from the area of lower to the area of higher productivity and greater
profit”. Namely, Say defined the function of entrepreneur independently of a social
framework and did not include risk taking in the definition. On the other hand,
Knight in 1921, established his definition of entrepreneurship on the basis of risk
and insecurity. In his opinion, goods are primarily manufactured according to
personal motivations, and not according to manufacturers’ wishes; the
manufacturer takes the responsibility of anticipating the buyers’ wishes. This
definition was heavily criticized by the Austrian economic school, lead by the
famous scientist Schumpeter.
However, the first universal definition of entrepreneurship was developed in
the 20
th
century. It was given by Schumpeter (1934), and it emphasized the role of
innovation and creativity in entrepreneurship. In Schumpeter’s interpretation of
entrepreneurship, all firms, which tend to innovate, introduce one of the following
new combinations: new products or services, new production methods, new
markets, new resources, and new industrial organization. Unlike Schumpeter’s
definition, there is a group of definitions which assume that entrepreneurship is
related to the decision-making process and the development of profitable
businesses. This conceptual description of the essence of entrepreneurship is more
precise than Schumpeter’s definition and is regarded more acceptable. Despite that
fact, this definition has certain weaknesses, primarily because it does not include
the basic indicators for determining how and under what conditions a business
activity should be started.
Huge number of entrepreneurial theorists tried to present economic theory
based upon “rational postulates of human behavior” after Schumpeter and to
synthesize selected theoretical contributions in this area. Scientist Casson is
especially distinguished among these. He criticized the neoclassical economic
school for the fact that it has demonstrated extreme subjectivism, which has been
transferred to entrepreneurs and does not enable them to realistically anticipate the
future. According to Casson, Schumpeter’s, Kirzner’s, Knight’s and Hayek’s
theories are, although different in some aspects, are very much alike. Casson
believes that “entrepreneurs have more relevant information than other people and
are always motivated by personal interests”.
In order to simplify his theory, Casson (1982) focused on entrepreneurs
sincere intentions to gravitate towards maximizing profit at given a amount of
effort by conducting their business. Namely, the amount of entrepreneurial activity
is closely related to amount of possibilities for making profit. Casson believes that
an entrepreneur needs to have great number of specific personal qualities in order
to make a successful business decision. He states some of the qualities (knowledge,
imagination, analytical capabilities, researching capabilities and communication
Faculty of Business Economics and Entrepreneurship 485
skills). Some of these attributes he explains in detail, except for imagination to
which he does not give enough emphasis. Beside those outlined by Casson, other
scientists have added some other entrepreneurial attributes which are regarded as
desirable. Brockhaus (1982), Gartner (1989), Aldrich, Zimmer (1986), Carson
(1995) and Delmar (1996) have determined that key psychological characteristics
of successful entrepreneurs are, readiness for risk-taking, ambition, optimism,
willingness for independence and the need for power. Besides describing the
attributes which may contribute to an entrepreneur’s success, none of those
mentioned any universal or common attributes of successful entrepreneurs.
THEORI ES OF ENTREPRENEURSHI P
By reviewing the great number of theories and approaches, it is crystal clear
that it is not simple to answer the question of what entrepreneurship is and how to
distinguish one definition as the most universal. Perhaps one of the most universal
and, accordingly, the most acceptable definitions is the one given by the American
economist R. Hisrich (1985). According to him, entrepreneurship is “a process
which consists of creating something new which needs time and huge effort, while
psychological, financial and other types of risks are taken, and material satisfaction
is returned”. Beside the Hisrich’s definition, there are also a number of
contemporary approaches that have contributed to the theory of entrepreneurship.
Stevenson and Stahlman have systematized these theories from the last two
hundred years in an excellent manner. In 1987, they systematized these theories in
three basic groups; that is, theories that regard entrepreneurship as an economic
function, theories that define entrepreneurship from an individual aspect, and
theories that define entrepreneurship from a behavior aspect.
So, while some theories are based upon economic functions, others are based
upon researching the individual characteristics of entrepreneurs in trying to
understand and explain entrepreneurship. The other theories stress those personal
attributes that only entrepreneurial people possess. The scientists’ challenge from
those theories is therefore to identify personal attributes that are unique to
entrepreneurs, and to determine those attributes that play a key role in a successful
entrepreneur. This approach includes the psychological, sociological and
anthropological aspects of entrepreneurship. In the newer theoretical considerations
of entrepreneurship, Delmar’s (1996) theory stressed that earlier behaviorist
approaches are incomplete because they mainly focus on those entrepreneurs’
attributes that are stable and are not subject to frequent changes. He gave his
contribution to the contemporary theory of entrepreneurship, trying to integrate
economic-psychological models of entrepreneurial behavior, by developing a
model which is based on understanding the entrepreneurial behavior and
environment, as well as determining their influence on entrepreneurial
performances (the development of business and finances). “Entrepreneurial
behavior is determined by individual differences like intellectual capabilities,
486 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
motivation and business characteristics”. For those reasons, he represents the view
that interpersonal and organizational approaches are very important to the
understanding of entrepreneurship.
Some of contemporary entrepreneurship scientists have tried to explain small
differences between entrepreneurship and marketing. Scientist Gartner stated his
opinion that the development of entrepreneurship will greatly influence the
development of marketing theory and practice. Also, in 1992, this scientist tried to
demonstrate a difference between entrepreneurial and organizational behavior. For
an organization, to be an entrepreneur means relating personal capabilities to the
needs of the organization itself.
Meanwhile, despite the differences in definitions of the essence of
entrepreneurship, the common theme in the majority of definitions is that
entrepreneurship has creative functionality in the creation of new values by an
individual or group of business partners. In addition, in most agree that there is a
special kind of behavior which includes taking the initiative, taking the business
risk, business creativity, and organizing and innovating in all aspects of the
business where needed. A conceptual definition of entrepreneurship should
consider that differences in the interpretations arose primarily because economists
have different approaches to the matter than psychologists, sociologists or
anthropologists. Consequently, the dominating approaches are economic, cognitive
and behaviorist to entrepreneurship. Recently, organizational, marketing and
financial approaches have also been added.
However, all of these approaches should be as integrated as possible in order
to provide a complete understanding of entrepreneurship. Also, a conceptual
determination and definition of entrepreneurship should study the way organizing
and conducting entrepreneurial activities change over time. It should follow the
changes in the roles and tasks of entrepreneurs as the main conductors of these
activities, influenced by new flows of economic operation. These changes have
occurred not only in the “new economy” on firm level, but also on the global level.
TYPES AND FORMS OF ENTREPRENEURSHI P
According to Carree and Thurik (2002), entrepreneurs in history have often
been represented in many faces and assumed different roles. As identified by
scholars such as Schumpeter, Kirzner and Knight, entrepreneurs can be termed as
innovators, profit opportunists and uncertainties and risk takers respectively.
Schumpeter drew his attention to understanding an entrepreneur as an innovator.
As an innovator, the entrepreneur performs new combinations which Schumpeter
called enterprises (Karlsson et al, 2004). An entrepreneur according to Kirzner
perceived profit opportunities. This role is what was labeled Kirznerian
entrepreneurship. The last role of an entrepreneur is that of assuming the several
risks and uncertainties which may be associated with running a business. This role
is labeled Knightian entrepreneurship. As the individual introduces a new product
Faculty of Business Economics and Entrepreneurship 487
in the market or starts a new business, this entrepreneurial role can be described in
terms of the three labels. As posted by Audretsch, Lehman (2005), the individual
who launches a new firm or introduces new products can be termed as the
innovator and he assumes that he has perceived a previously uncertain profit
opportunity. The innovator also takes risks that the venture or the new product may
eventually turn out to be a total failure (Todtling, Wanzanbock, 2003).
However, according to one of the classifications of entrepreneurship by
professor Gartner (1986), we can distinguish eight different types of
entrepreneurship:
? Presenting something new: here, the businesses are partially started and
usually organized among family members and relatives with low degree of
innovating;
? Business network development: businesses are connected through
manufacturers, suppliers and distributors (different business aspects linking).
Everything operates perfectly due to “the right” selection of all participants
for business activities performing;
? Use of previous experiences, knowledge or business contacts: in this case, an
individual has no long-term interest to start a new business, which relates to
business risk. Therefore, individuals often start a business with little capital
(usually their personal savings), spending very little time in sales analysis
and marketing activities. Instead, they usually use previous experiences,
knowledge or business.
? Buying a company: individuals may get interested in buying a developed
company for running their own business. In this case individual’s attention is
focused on finding business with the least business risk;
? Conducting expert investigation: when an individual is not able to estimate
whether a business idea is good for the business or not, this is the approach.
In this case, one should hire teams of experts for conducting an
investigation, which should determine and present the validity of a new idea.
? Use of consulting companies services: an individual (small business owner)
may use services of authorized consulting companies when employing and
educating employees, giving expert advices related to various areas of
business activities, etc.
? Paying special attention to one idea: in this case, the emphasis is only on the
idea, which is not technically specified or is too complex to be implemented
easily. Regarding the fact that it has special quality, it demands hiring
experts and production of a report. Such expert opinion should be used as a
basis for development of, usually, a long term business;
? Development of adequate methods for new business organizing: An
individual (owner) is using various, well-known methods of business
planning, with intention to use them as a basis for creating his own method.
In addition, he is being acquainted with necessary details that are important
for starting a new business.
488 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
In general, entrepreneurship represents wide area for various business moves
where the entrepreneurial activities take place. How entrepreneurial activities
would develop and whether their result would be positive or negative depends on
many factors that determine the development of those activities. However, the most
relevant factor are economic environment, political conditions, technical-
technological level of development achieved and cultural environment General
social and personal context are closely related and therefore they have common
influence on performing suitable entrepreneurial activities. While on one hand
entrepreneurial activities change resources giving economical, political and social
contribution on local, national and state level (products, services, export, etc.), on
the other hand, economic conditions are especially important for development of
new businesses, including available capital and high-risk investment.
Considering that the largest number of business is financed from
entrepreneurs’ personal resources (savings, loans, etc.), their family members or
close friends, tax policy plays a significant role in starting and developing a new
businesses (Birley, 1988), as well as economic conditions (country’s economic
stability, benefits when applying for credits, etc.). Availability of capital, resources,
large goods and services markets, represent possibilities for gaining money and
appear as significant variables, which include perception of market conditions, risk
degree, unemployment rate, transporting costs, life standard, etc.The size of market
is a variable that is directly related to industry and new businesses and it includes
appropriate market structure – the number of vendors and customers,
differentiation of products and the degree of vertical integration, as well as market
development rate (Sandberg, 1986).
Social system, cultural environment, political and other conditions, under which an
entrepreneur starts new business, influence whether the new business will be successful
or not. Namely, the conditions for starting new businesses vary from national and
geopolitical, to industrial, governmental and cultural factors. These differences may be
considered when we explain difficulties, which encounter those who create policies for
favoring the development of new business and entrepreneurial activities.
DETERMI NANTS OF ENTREPRENEURSHI P
There has been a wealth of knowledge on the determinants of entrepreneurship
over the last few decades. Although studies bringing forth this knowledge have
rather been based on theoretical grounds, others have been drawn from empirical
evidence. Scholars have also been keen in investigating the impact of
entrepreneurship in relation to economic development which has further led to the
explosion of extensive literature in this field (Van Stel, Carree,Thurik, 2005). It is
important to note that a significant amount of existing literature has been based on
the observation of firms, establishments and regions in terms of their economic
performance, development and survival. The facts that can be derived from these
studies link economic development with the size and age of the firm or an
Faculty of Business Economics and Entrepreneurship 489
establishment. According to Van Stel, Carree and Thurik (2005), newly established
firms and very small firms experience systematically faster development compared
to the already established larger firms.
These findings have been found to hold in the modern industrialized economies as
well as across time periods (Karlsson et al., 2004, p.3). The connection between
entrepreneurship and economic development measured in terms of performance of the
firm has been extended even beyond observing the establishment to accommodate
geographic regions. This paper discourses how entrepreneurship can be related directly
economic development and how entrepreneurship is at the heart of economic
development of any nation. Entrepreneurship is a challenging task as many businesses
which start fail to take off
THE CONCEPT OF I NTREPRENEURSHI P
As a consequence of social and economic trends in many countries, which
appear due to fast marketing changes, there has been increasing number of new
businesses, both inside and out of existing organizational structures. New
businesses that are developed in a company under the influence of permanent
efforts of entrepreneurs for changes in existing organizational structures are called
intrapreneurship. In other words, intrapreneurship represents restructuring of
existing enterprises. Accordingly, it can be said that there are two ways of
developing entrepreneurship; that is, establishing a new one and restructuring an
existing enterprise in a process known as intrapreneurship.
Intrapreneurship is becoming the main component of existing enterprises’
development, which rose as an efficient answer to new challenges and extremely
competitive environment. Namely, for a company, in order to encourage
entrepreneurial spirit and creativity, it is necessary to develop appropriate
organizational structure. What it would be like or would it be able to change and adapt
itself, largely depends on existing business climate in a company. In other words,
where traditional management dominates, hierarchical structure will develop more
strictly, with main goal to cut down the business risks. In this manner, good business
results are achieved in shorter time. On the other hand, creativity and flexibility of a
company are reduced. Due to that, most companies demonstrate the need for
intrapreneurship development, in order to create good conditions for encouraging
development of new ideas, elimination of bad and attractive jobs expansion, teamwork,
long-term planning, adequate rewarding system and motivating the best individuals, as
well as providing the support of the top management.
Introducing intrapreneurship has great benefits because of the use of existing
technological base, developed marketing network as well as the employees who know
one another well and who had developed good relations. Besides all these advantages of
intrapreneurship, it demonstrates certain disadvantages, primarily concerning great
dependence on environment and needs for all employees in organizations to be
convinced in validity of new ideas and the need for their implementation.
490 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I MPLEMENTI NG I NTRAPRENEURSHI P I N ENTERPRI SES
For implementation of intrapreneurship process in an enterprise, it is necessary
to secure systematic realization of several phases of this process. As shown Fig. 1,
the first step in the process of intrapreneurship implementation in modern day
enterprises is providing support of the top management and mid-level management.
Without it, organization will not be ready for all the changes related to inner
transformation and restructuring of the company. One of the necessary initial
frameworks of new business concepts, in order to identify, select and train the
leaders of intrapreneurship, is development. This training should point out
providing adequate human resources in organizations.
Figure 1: The Process of Intrapreneurship Implementation Enterprises
Source:Adopted from M. Radovi?-Markovi?,Muhammad Omolaja (2010), Modern
Entrepreneurship: Concepts, Practice and Innovations)
During the training, it is necessary to develop mentor work, as well as to
provide sponsors for it. Without sponsors, there is little hope that something will
change, because the success or otherwise of introducing intrapreneurship greatly
depends on providing adequate financial means. Parallel to training of potential
entrepreneurs is the fact that it is necessary to train managers to enable them to
pool and share their knowledge with other colleagues. The training is usually
organized once a month and lasts for probably eight months.
The process of
implementing
intrapreneurship in
enterprise
Top management support
for intrapreneurship
Development and
representation of
intrapreneurship concept
and collecting
entrepreneurial ideas
Education of
entrepreneurs and
managers
Faculty of Business Economics and Entrepreneurship 491
REQUI REMENTS FOR I NTRAPRENEURSHI P
To in introduce intrapreneurial process in an enterprise, the following factors
are of paramount significance: understanding of the environment, vision and
creativity determination, flexibility in operations, creation of manager options,
encouragement of team work, and encouragement of open discussions among
colleagues at work whether senior or otherwise. Taking one after the other, these
facts are explained as follows:
? Understanding the environment includes monitoring and analysis of internal
and external company environments in order to have complete insight into
possible weaknesses, advantages or internal abilities of the company,
? Visionary approach is needed for determining company position, prices,
expenditures, planning of the informational technologies and demands for
hardware and software in order to provide company’s development and to
improve business efficiency,
? Flexibility in operations assumes quick adaptation to changes; namely, if the
organizational structure relies on flexibility of operation, it will be able to
change at will within a short time,
? Creating managers’ options means that managers should not only change
their behavior, but also their opinions and to offer various solutions to
problems of the moment. We should also keep in mind that managers are
different in their approaches to changes. It is perfectly natural that many
managers are usually afraid of changes and that they see them as stresses
before they are able to see their advantages. Likewise, many assume that
they cannot easily change their way of thinking and see the needs for
changes in a different way,
? Encouraging teamwork is necessary, as well as information flow in order to
keep managers’ efforts constructive and resulting positively. Bad
communication will hardly lead to positive changes,
? Open discussions among organizational members are necessary so that all
employees as well as other organizational members will get to know the new
ideas and possibilities of organizational change and to have a feedback. In
this way, confidence is built among the employees and faster acceptance of
changes will be assured, and
? Finally, we should point out that this kind of tasks are organized as integral
part of the organization or system, and not as independent business units; so
it is necessary to establish good cooperation and collaboration with different
units of the enterprise.
492 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
THE LI NKAGE BETWEEN ENTREPRENEURSHI P AND
I NTRAPRENEURSHI P
Going by the discussion so far in this paper, it would be crystal clear that
entrepreneurship do occur mainly from the outside of an enterprise whereas
intrapreneurship usually originate from, and operate within, a particular enterprise.
All innovations and creativities aiming at generating and improving gains or profits
within an enterprise are tantamount to intrapreneurial activities nowadays
commonly termed internal reengineering or organisational restructuring in modern
management. This approach to modern management in most cases lead to creation
of new products (goods or services) or improving the existing ones but it must take
place within a particular enterprise.
On the other hand, all efforts concerning new innovations and creativities with
the ultimate aim of making profit or improving productivity from outside of the
organisation as well as setting up of new business ventures are tantamount to
entrepreneurship. Hence, Intrapreneurship and entrepreneurship are complements
of each other. Both concepts in practice collectively lead to productivity
improvement which, in turn, lead to profit by the entrepreneurs, and as a
consequence, they play integral parts in economic development through creation of
more jobs, making availble more facilities (amenities) as well as advancement in
technology. In practice, however, not many people would differentiate between the
concepts of entrepreneurship and intrapreneurship as they see them synonymously.
Hence, from now onward, we will use the term entrepreneurship to refer to both of
them for the ease of analyses and explanations.
UNDERSTANDI NG ENTREPRENEURSHI P AND ECONOMI C
DEVELOPMENT
In terms of how entrepreneurship has been a stimulant in economic
development, there exist enormous discussions and debates but it is however
eminent to realize the importance of constant innovations and rivalry enhancement
(Todtling, Wanzanbock, 2003). There has been a problem in defining and
measuring entrepreneurial factors and this has further complicated the exact
contributions to economic development. According to Carree and Thurik (2002),
the concept of entrepreneurship is multidimensional and largely ill-defined.
Understanding the role of entrepreneurship in the process of economic
development will therefore require a framework because of the nature of
intermediate variables and connections which exist (Bygrave, Minniti, 2000). The
best examples of these intermediate variables include innovation, competition
mainly characterized by exit and entry of firms, variety of supply and particular
energy and efforts of invested by entrepreneurs. Other conditions of
entrepreneurship also add up when it comes to their contributions to economic
Faculty of Business Economics and Entrepreneurship 493
growth (Robbins et al., 2000). These conditions according to Carree and Thurik
(2002) include personal traits, cultural and institutional factors as shown in Figure
2 that follows:
Figure 2: Appreciating Entrepreneurship
EXTENDED DEFI NI TI ON OF ENTREPRENEURSHI P I N
RELATI ON TO ECONOMI C DEVELOPMENT
While entrepreneurship is all about the activities carried out by individuals, the
concept of economic growth has often been relevant at firm level, industrial,
national and regional levels (Robbins et al., 2000). This implies that linking
entrepreneurship to economic development will be to amalgamate individual to
aggregate levels. Considering this linkage however requires revisiting the
definition of entrepreneurship, whereby entrepreneurs, either as individuals or a
team, manifest their willingness and abilities to create new opportunities in
economy (Todtling, Wanzanbock, 2003). In this manner, novel products,
production modalities, organizational schemes and product-market combinations
are created. The entrepreneurs seek to introduce their newly crafted ideas in the
existing market in the face of obstacles and uncertainties. They also make critical
decisions in terms of business location, forms and the utilization of available
resources and institutions. In a nutshell, entrepreneurship refers to the behavioral
attributes of individuals and should not be confused with well-defined professional
persons (Lloyd-Ellis, Bernhardt, 2000).
Entrepreneurship (largely multidimensional)
Intermediate Linkages (Innovation, competition variety and entrepreneurial
efforts)
Conditions (Personal traits, institutional and cultural elements)
Economic Development
494 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ENTREPRENEURI AL EFFECTS I N THE DEVELOPMENT OF
ECONOMY
To sum up the contributions of entrepreneurship to economic development,
Carree and Thurik (2002) have provided five strands of empirical evidence to show
their involvement. The first evidence mainly deals with the turbulence effect of
entrepreneurship on the development of economy. Turbulence can be viewed as the
total entries and exits in regions or industries and can easily be interpreted as one
of the powerful indicators of entrepreneurial activities. The effect of and changes in
size distributions in regions represents the second strand of evidence as identified
by the two researchers (Lloyd-Ellis, Bernhardt, 2000). It is believed that the change
in size distribution and its ultimate effects can have a significant impact on the
development of economy (Carree, Van Stel, Thurik, Wennekers, 2002). Thirdly,
the number of market participants in any industry will finally have an important
effect on economic development and this is recognized as another strand of
evidence of the role of entrepreneurship in economy expansion (Chell, Ozkan,
2010).
Empirical literature has also identified the effect of the number of business
owners and self-employed individuals in economic development. This is the fourth
strand of evidence that seeks to appreciate the role of self-employment in the
development of economy in any state. Lastly, the economic history of previously
centralized and planned economies will also have an influence in economic
development of countries (Carree et al., 2002). For instance, in Eastern Europe,
small enterprise development served as the most vital part of the transitional
process which has seen economic development in the area.
The turbulence effect of entrepreneurship on economic development refers to
the entry and exist which however appears to have minimal contributions to the
development of the economy in the short run (Bathelt, 2001). Nevertheless, the
entry-exit turnover will make a significant contribution especially in service
industry than in manufacturing industry in the long run as evidence by empirical
research done by Bosma and Nieuwen-huijsen (Chang, 2011). The effect of size
distribution changes of firms on development performances has also been
recognized particularly when examining the share of small firms in the
manufacturing industry in the European states. Competition among firms which is
a commonplace for entrepreneurs has been shown to have a positive effect in the
development of economy (Carree, 2002). The increased numbers of participants in
the market compounded with entrepreneurial activity are some of the contributions
of entrepreneurship in economic development (Chell, Ozkan, 2010). In particular,
local competition which is measured in terms of the relative number of businesses
in a region per worker encourages development of employment in industries thus
economic development.
Entrepreneurship encourages self-employment and this has been found to have an
impact in productivity development (Chang, 2011). This is however a much contested
Faculty of Business Economics and Entrepreneurship 495
observation whether countries should adopt the equilibrium or the elf-employment
model which has largely failed counties such as Italy. According to Chang (2011), the
high levels of self-employment in the country have proved to be inefficient for
economic development. Italy has in the past experienced large negative impacts on the
development of its economy because of self-employment. Scandinavian countries
represent cases of countries with relatively low rates of self-employment than the
equilibrium and have often been characterized by extensive public sector and low rates
of entry and exit. The contrary is seen when analyzing the business structure in West
Germany where they have low rates of self-employment (Van Stel, Carree, Thurik,
2004a). In Germany, there is a total failure in the restructuring the economic policies as
the United Kingdom has done. The industrial policy in German has repressed the
structural changes by solely supporting large-scale industries with enormous subsidies
(Van Stel et al., 2004b). This has led to the lack of a vibrant economic development
made of new industries and firms in German and thus a serious barrier to innovative
activity.
FUTURE PERSPECTI VE I N ANALYSI S
From various strands of literature, there have been many insights that have
inspired a number of frameworks which should be embraced in the analysis of how
entrepreneurship plays a critical role in economic development. Carree and Thurik
(2002) found three different levels of analysis to be evident when associating
entrepreneurship to economic development as this meant that the individual level could
be linked to the macro-economic sphere. These levels include the individual, firm and
the macro levels of analysis. According to Bruce, Deskins, Hill and Rork, (2009),
entrepreneurial actions usually take place at the level of the firm and thus require a
vehicle which can transform their individual ambitions and qualities into workable
actions (Todtling, Wanzanbock, 2003). In small firms, the entrepreneur usually has the
controlling stake which acts as the vehicle for transformations. Larger firms have also
been found to mimic smaller firms in terms of business units, joint ventures and
subsidiaries in order to introduced entrepreneurship or corporate entrepreneurship. The
results of such entrepreneurial manifestations at the level of the firm must do with how
novel processes, products, innovations, and entry to new markets or start-ups are
(Tesreau, Gielazauska, n.d). At national, industrial and regional levels, entrepreneurial
actions are all composed of new experiments.
496 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
CONCLUSI ON AND FURTHER RECOMMENDATI ONS
Entrepreneurship play a critical role in the development of the economy as this is
the key contributor to innovativeness and product improvement. It is one of the
important ingredients to the creation of new employments and in the building of
communities in ways of offering them jobs. By contributing to local charities, taking
part in local business, investing in projects in communities and creating and
participating in different networks in entrepreneurship, they build up robust
communities which contribute to the community development. Governments should
develop policies which will enhance entrepreneurship by understanding the critical
difference existing between small business owners and entrepreneurship. At the same
time, a misconception about entrepreneurs and where entrepreneurs can be found can
also help the local people to create the right picture of entrepreneurship and thus
become aggressive and contribute to economic development.
REFERENCES
[1] Acs, Z.J, Armington, C. (2004); Employment Development and
Entrepreneurial Activities in Cities. Regional Studies, 38(8):911- 927
[2] Audretsch, D., Lehman, E (2005); Does the knowledge spill over theory of
entrepreneurship hold for regions? Research Policy, 34: 1191-1202
[3] Bathelt, H (2001); Regional competence and economic recovery: divergent
development paths in Boston’s high technology economy, Entrepreneurship &
Regional Development, 13(4): 287-314
[4] Bruce, D., Deskins, J.A., Hill, B.C.,Rork, J.C (2009); Small business activity
and sta economic development: Does Size matter? Regional Studies, 43(2):229-
245
[5] Bygrave, W.D., Minniti, M (2000); The social dynamics of entrepreneurship.
Entrepreneurship Theory and Practice, 24(3)25-36
[6] Carree, M., Van Stel, A., Thurik, R., Wennekers, S. (2002) ; Economic
development and business ownership: an analysis using data of 23 OECD
countries in the period 1976-1996. Small Business Economics, 19: 271-290
[7] Carree, M.A (2002) ; Industrial restricting and economic development, Small
Business Economics, 18:243-255
[8] Carree, M.A., Thurik, A.R (2002) ; The impact of entrepreneurship on
economic development. Website 22
nd
March, 2012
[9] Chang, E.P (2011) ; Exploring the effects of entrepreneurship capital on the private
economic impact of American counties. Retrieved 24
th
March, 2012, from:http://usasbe.org/knowledge/proceedings/proceedingsDocs/2011/PaperID99.pdf
[10]Chell E., Ozkan, K. M (2010); Nascent Entrepreneurship and Learning.
Northampton: Edward Elgar
Faculty of Business Economics and Entrepreneurship 497
[11]Karlsson C., Friis C., Paulsson T (2004); Relating Entrepreneurship to
Economic Development. Retrieved 24
th
[12]March, 2012, from:http://papers.cesis.se/CESISWP13.pdf
[13]Lloyd-Ellis, H., Bernhardt, D (2000); Enterprise, inequality and economic
development, Review of Economic Studies, 67: 147-168
[14]Robbins, D.K., Pantuosco, L.J., Parker, D.F.,Fuller, B.K (2000); An empirical
assessment of the contribution of small business employment to U.S state
economic performance, Small Business Economics, 15:293-302
[15]Tesreau, K., Gielazauskas, V; Entrepreneurship: a driving force in the new
economy, Retrieved 24
th
March, 2012, from:http://www.missourieconomy.org/community/econ_policy/pdf/en
trepreneurship.pdf
[16]Todtling, F., Wanzenbock, H (2003); Regional differences in structural
characteristics of start-ups. Entrepreneurship & Regional Development, 15:
351-370
[17]Van Stel, A., Carree, M., Thurik, R (2004a); The effect of entrepreneurship on
national economic development: An analysis using the GEM database.
Retrieved 24
th
March, 2012, fromhttp://www.ondernemerschap.nl/pdf-
ez/N200320.pdf
[18]Van Stel, A., Carree, M., Thurik, R (2005); The effect of entrepreneurial
activity on national economic development. Small Business Economics,
23:311-321
498 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
JOURNEY OF A SMALL TOWN ENTREPRENEUR : AN
INDIAN CASE STUDY
Reena Agrawal, PhD
50
ABSTRACT
This case study showcases the vision and initiative of a small town
entrepreneur who belonged to a business family and who inherited the legacy of
entrepreneurial traits from his father. He always had a passion to establish and
operate a business of his own and generate employment opportunities for others in
the society. This case study showcases his exemplary work and discusses in detail
the education acquired by the entrepreneur, his vision, how he became an
entrepreneur, his entrepreneurial endeavours, the milestones achieved by him,
major challenges faced by him, the growth enjoyed by him and his plans for future
expansion and growth.
Key words: entrepreneurial traits, revival of sick unit, entrepreneurial
initiatives, future growth
J EL Classification: L26, F43
UDK: 005.961:005.914.3(540-77)
50
Reena Agrawal, Jaipuria Institute of Management, India, [email protected]
Faculty of Business Economics and Entrepreneurship 499
I NTRODUCTI ON
As early as the 1950s, researchers began looking for personality factors that
determine who is – and who is not – likely to become an entrepreneur. McClelland
(1961) found that entrepreneurs had a higher need for achievement than non-
entrepreneurs and were, contrary to the age old belief, moderate risk takers rather
one can say they take calculated risk. A great deal of research on the personality
characteristics and socio-cultural backgrounds of successful entrepreneurs was
conducted in the 1980s and 1990s. Timmons (1994) in his analysis of more than
fifty studies found a consensus around six common characteristics of
entrepreneurs: (1) commitment and determination; (2) leadership; (3) opportunity
obsession; (4) tolerance of risk, ambiguity and uncertainty; (5) creativity, self-
reliance and ability to adapt; and (6) motivation to excel. A related stream of
research examines how individual demographic and cultural backgrounds affect the
chances that a person will become an entrepreneur and be successful at the task.
For example, Bianchi’s (1993) review indicated that factors such as: (1) being an
offspring of self-employed parents; (2) being the oldest child in the family and (3)
being a college graduate often etc often lead a person to take up entrepreneurship
as a career. In the words of Timmons (1994) "Entrepreneurship is the process of
creating or seizing an opportunity and pursuing it regardless of the resources
currently controlled".
The present case study truly brings out that the Anil Singhal`s choice to
become an entrepreneur was not a sheer chance or pure luck but was the outcome
of several other factors that closely touched his life his family background,
family`s financial condition, his role and responsibility towards his family, and
above all the basic personality traits that he possessed.
METHODOLOGY
The methodology adopted includes the following: visiting the project site,
conducting series of interviews of the entrepreneur and interacting with the other
stakeholders. A questionnaire was drafted and then those questions were
administered on the entrepreneur. A rough draft was prepared and then it was
refined. The entrepreneur`s endeavours, experiences, hardships, success and other
nuances of business have been developed by way of a case and the vital learning’s
drawn have being illustrated by way of figures and diagrams.
500 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
ABOUT THE ENTREPRENEUR
Mr. Anil Singhal is a resident of Bahraich district in Uttar Pradesh. He
belonged to a business family and his father had an oil mill. He completed his
education in arts stream from a government college. While he was still pursuing his
education, his family was going through financial difficulties and he being the
eldest child in the family was compelled to look out for opportunities to earn an
livelihood and give financial support to his family. The only thought that struck
him was Anil to start a business of his own. As he belonged to a business family he
had seen life of a businessman very closely and had experienced all the shades of
highs and lows. These had inbuilt in him several entrepreneurial traits such as self-
motivation, courage, ability to take risk, hard work and patience. He had inherited
several characteristics such as leadership, interpersonal skill and co-operative
nature from my father. He was hardworking person, who was open to new ideas
and who would pursue his work with great passion. He asserts that, the personality
traits that assisted him in becoming a successful entrepreneur are his patience, hard
work, capability of handling the complexities, an eye for opportunity and the
ability to tap the opportunity on right time, self-motivation and positive attitude.
Figure 1: Factors that made Anil an Entrepreneur
Father
As
Mentor
Oil
Manufacturing
Unit
Family
Business
Background
Personality
Traits
Entrepreneur
Practical
Exposure
Hard Working
Risk-taking
Ability
Leadershi
p
Skills
Passion
Self-Motivation
Patience
Entrepreneurship
Development
Program
Faculty of Business Economics and Entrepreneurship 501
ENTREPRENEURI AL I NI TI ATI VES
Once Anil decided to start a business of his own he realized that establishment
of a business required huge capital investment and at that point in time he was not
in a position to arrange funds to initiate a venture. But he did not get disheartened,
he looked for another alternative. The idea that crossed his mind was of re-starting
his father`s oil mill which was shut down due to unavoidable reasons. He knew he
would need funds for the same. He had a small saving of INR 12,000/- which was
not sufficient for the cause. He prepared a business plan for re-starting the sick oil
mill and submitted the same to the Unemployed Yojna Samiti, a government
agency, which provided financial support to the projects, which had financial
viability. His business plan was appreciated by the agency and they sanctioned him
a loan of INR 50,000/- with which he re-started his father`s oil manufacturing unit.
The reasons for re-starting the oil mill were: the capital investment was minimal as
the machinery such as spiller and filter was already installed; he as a child
accompanied his father to his work place so he already had practical exposure in
that business; he knew the experienced work force and had to make little effort to
bring the back to work; there were existing business contact which he could soon
revive.
Figure 2 : Revival of a Sick Unit
The process involved in manufacturing of edible oil was as follows: firstly,
mustard was bought from the market and cleaned; second, the clean mustard was
put into machines and oil was extracted and third it was filtered and stored in tanks;
Sick Oil
Manufacturing
Unit
Hiring Skilled
Employees
Funding From
Government Agency
Practical Experience of
Operating the Business
Reviving the Old
Business Contacts
Profit Generating Unit
502 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
fourth the packing was done in the tinned boxes of 15 kg and drums of 180 kg and
lastly it was dispatched to market. The initial production capacity of the oil plant
was 112,000 kg per annum but gradually he expanded the production capacity to
324,000 kg per annum. He could generate an annual income of INR 72,000/- from
this business. He largely catered the local market and a few markets of the
neighbouring cities. Although the amount was not big enough, but was enough to
fulfill his family’s basic needs. Till four-five years, his business was operated
profitably but then it started experiencing a down ward trend, this was alarming but
with his business acumen Anil managed to retain the stability. But he realized
within that it was appropriate time to look out for new business opportunities
During this time he got an opportunity to join a seven days “Entrepreneurship
Development Programme” conducted by National Alliance of Young Entrepreneur
and sponsored by the Government of Uttar Pradesh. He stated that he greatly
benefitted from that program. As he was an arts graduate he never acquired formal
business education. The learning’s drawn by him from that program included the
following: how to identify new business opportunity, how to conduct a research
before starting a venture, how to initiate a new venture, what are the different
sources from where the funds could be arranged, how to arrange necessary
resources, how to manage the day to day operations, how to tap a new market etc.
He asserted that the training programme instilled in him courage and confidence
and he passionately moved towards his goals and progressed in life.
Figure 3: Learning Drawn from Entrepreneurship Development Program
How to arrange funds and other
resources?
Entrepreneurship
Development
Programme
How to identify new
business opportunity?
How to conduct
market research?
How to initiate a
new venture?
How to manage the
day to day operations?
How to tap a new
market?
Faculty of Business Economics and Entrepreneurship 503
As there no scope for further growth in the oil manufacturing business, he
decided to venture out for some new product. He thought he should deal in such a
product which enjoys constant demand in the market, he did some market research
he analyzed that demand for rice never come down. He decided to establish a rice
mill. He arranged the necessary resources and with a capital investment of INR
100,000 and on a land area 2,400 square feet he installed the machines such as de-
husker and an imported polisher. It was a very risky decision for him as he was
invested all that he had earned so far in his life. But his thinking was that, a person
who takes risks succeeds in life, and high risk gives high returns. He strongly feels
that every entrepreneur must have an ability to take risk. The production capacity
of the rice mill was 5,184 tons per annum. The production process included the
following steps: firstly paddy was cleaned, second clean paddy was dried, third it
was put into de-husker in which rice and husk was separated, fourth the rice was
polished, fifth it was packed and sixth it was dispatched. He majorly catered to the
various markets within Uttar Pradesh. With this rice mill he was able to earn INR
20,000/- per month which was much higher than what he used to earn from oil
manufacturing unit. This was a turning point in his life where he started getting
progress in his business and the credit goes to his hard work and his never ending
motivation towards his life. Till a few years, he was individually handling his
business but he was facing some problem in the finance and accounting due to
which he had to suffer a few losses as well. Anil had a number phobia since his
childhood, so he engaged his brother to take care of the monetary aspects. Anil said
an entrepreneur should be able to do self assessment and should not shy away from
his weaknesses rather he should be able to design a proficient and trustworthy
support system for all the missing expertise.
504 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Figure 4: Entrepreneurial Initiatives by Anil Singhal
Successful execution of the rice mills boosted Anil`s confidence and he started
looking for another business opportunity. He then took an agency of Gold Mohur
rubber roll, it is rice polisher rubbers used in machines used in rice mills. This rubber
roll was the best quality rubber available in the Indian market and was manufactured
by a company called in Delhi. Anil knew that there would always be a regular demand
for such rubber rolls in the rice mills. This new business preposition generated
additional revenue for him. Today he supplies the rubber rolls in all over Uttar Pradesh.
Anil wanted to expand the rice business even further and he desired to expand
his reach in the foreign markets as well. So he decided to apply for a license to
Agricultural and Processed Food Product Export Development Authority (APEDA)
Ministry of Commerce, Government of India so that he could seek the necessary
permission, to export rice outside India. He got the license and started exporting
rice to Nepal. Today he exports almost 2,400 tons of rice annually to Nepal. This
again resulted in substantial growth of the revenues. With this increase in market
size Anil decided to set up one more rice mill to fill up the gap. Gradually he also
started exporting cattle feed in Nepal which he bought from local market. He also
supplied cattle feed some of the states in India as well.
Two
Rice
Mills
Technolog
y Institute
Export of
Cattle Feed
Export to
Neighbouring
Country
Agency of
Industrial
Rubber
Dairy
Unit
Singhal Enterprises
Ice-
Cream
Factory
Chilling
Plant
Domestic
Market
Faculty of Business Economics and Entrepreneurship 505
Anil believes that “today there is a need for knowledge based society, having
skilled youth who bring innovations and lead the world.” Therefore, technical and
professional institute of global standards needs to be established all over the country.
He observed that the Purvanchal region in Uttar Pradesh lacks behind in educational
development. There was lack of good quality technical institutes in the region. The
youth living in that region either moved to other cities, which are recognized as
educational hubs, to seek education and those who could not afford the same had to
forgo their dreams. So Anil decided to open an engineering institute in the Purvanchal
region. He gathered support of some like minded people and together they established
an institute named “Buddha Institute of Technology”, at Gida in district Gorakhpur,
Uttar Pradesh (India). It is approved by All India Council for Technical Education, a
statutory body and also the apex body of Government of India for technical education
and affiliated to Uttar Pradesh Technical University, a state level affiliating body for
technical education. The programme that is offered is B.tech. At present 5 branches
engineering such as Civil engineering, Computer Science, Electronics and
communication, Information Technology and Mechanical Engineering are being
offered to the students. They have total of 300 seats. The institute has picked up well
and serving the society in special manner.
Anil recently started a Dairy Unit which has milk chilling plant and an ice
factory. The capital investment was of INR 4,000,000. The production capacity of
this milk chilling plant is 30,000 liters per day. Milk is procured from local
vendors, then cooling is done in the chilling plant, the milk is supplied to the ice-
cream factory and a local milk powder manufacturing unit. The daily production is
of 30,000 kg of ice creams per day.
OPERATI ONAL STRATEGY
He stated that he has a policy of changing the machineries in every five years. This
facilitates the use of latest technology; ensures superior quality production and also
prevent undue wastage of money on repair and maintenance of the machineries.
Anil started with a workforce of six people and today he is providing
livelihood to hundreds of people. He lays special emphasis on the training and
development of the workforce. People are trained to handle the machines in safe
and proper manner. This helps in avoiding undesirable mishaps at the work place.
He arranges medical insurance for all his employees along with their families and
gives bonus during the festival season.
The major challenges faced by him included cut throat competition, fast
changing technology, climatic condition which affected the agricultural produce.
These hardships helped him to learn that one must build long term relationship
with the customers, to be always ready with the product when demanded by
customers and the most important is to be confident and the ability to stand against
the failure. Another important thing is to have goodwill in the market. A business
should be known for its quality of production, timely supply and fair dealing. All
these are important principles for enjoying sustainable growth.
506 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
Anil who started with an annual turnover of INR 200,000 per annum today
approximately has an annual turnover of INR 70,000,000.Starting with a single
manufacturing unit today Anil owns and owns and pilots six different diversified
projects. Today his product basket comprises of: agricultural products; industrial
products; dairy product and education.
AGENDA FOR FUTURE GROWTH
Anil stated that he has come a big way but he feel he still has to go for mile.
He would constantly be on a lookout for new business opportunities. He said that
due to globalization and liberalization there are fast moving changes in the
government policies, economy and society. There are new avenue which are
opening up and people demand diversified products and services. So if he comes
across any financially viable business preposition he would certainly love to
venture into the same. As of now he has a dream to establish school to impart
primary and secondary education to the kids living in his region. He plan is to
create a state of art infra structure, employee highly qualified and trained faculty
and deliver a contemporary curriculum which is at par with the world`s best
schools. At the moment he is busy drafting a blueprint for his dream project.
TEACHI NGS FOR YOUTH
One must work hard and be fully dedicated to whatever work they do. One must
keep their eyes and ears open for any upcoming opportunities and grab them on time.
One must be ready for failure, keep taking challenges, and don’t let the failure bring
down the morale and self-belief. One should deliver his very best. Before plunging into
any specific sector one must have in-depth knowledge of that sector, must gather
necessary expertise in that field, work hard to arrange the necessary, work passionately
the most important thing is have patience. Once a person has firm determination there
is nothing in this world that cannot be achieved.
REFERENCES
[1] McClelland, D. C. (1961). The achieving society. Princeton, NJ: Van Nostrand.
[2] Timmons, J.A. (1994) New Venture Creation: Entrepreneurship for the
21
st
Century. Fourth edition. Irwin Press, Burr Ridge, IL.
Faculty of Business Economics and Entrepreneurship 507
THE APPLICATION OF THE EU PUBLIC SERVICES
GUIDELINES IN SERBIAN PUBLIC ENTERPRISES
Daliborka Petrovic, PhD
51
Tihomir Gligoric, PhD
52
ABSTRACT
The subject of the paper refers to the unique concept of public services at the
level of European Union. The main principles of the management of these services
are outlined and issued by the European Commission within the White paper of
Services of General Economic Interest (SGEI) in the year 2004. The aim of this
paper is to analyze the level at which the management of public enterprises in the
Republic of Serbia is aligned with the new European Union’s public services
concept and management principles defined in the White Paper of SGEI. In order
to achieve the aim of the paper, empirical research and collection of the primary
data were necessary. The research method applied is qualitative by nature. The
interview with in advanced prepared section of questions was used as the research
instrument. Based on the results of the empirical research it could be concluded
that there is enough place for making the adequate changes that would improve the
market and consumer orientation of Serbian public enterprises, which would
substantially contribute to alignment with the EU guide principles in this field.
Key words: Services of General Economic Interest, European Union, Public
Service Management, Republic of Serbia
J EL classification: M20
UDK: 005:351.076(497.11) 005:351.076(4-672EU)
51
Daliborka Petrovic, University Business Academy, Novi Sad, Faculty for apllied management,
economy and finance, Belgrade, [email protected]
52
Tihomir Gligoric, University Apeiron, Banja Luka, Republika Srpska,
[email protected]
508 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
According to the new European Union concept of public services, all public
services are divided into two groups- Services of General Interest (SGI) and
Services of General Economic Interest (SGEI)- based on the (non)economic nature
of their activities. The first group of services refers to the public services such as
police, security, judicature and a like, where the active role of the state in their
provision and delivering is indispensable. The second group of public services
includes: electricity, public transport, postal services and telecommunication.
When it comes to the services of general economic interest, new elements such as
introducing market mechanisms, strengthening the competition, improving the
consumer and market orientation and professionalization of public management are
added. With the aim to give member states the framework for organizing the
services of general economic interest at the national level, in the year 2004 the
European Commission issued the White paper on SGEI outlining the basic
principles of management of these services. Although public management in the
European countries has undergone several changes since 1980 (England) and 1990
(Germany), this new EU framework for public services makes all European
countries more interested in finding the ways to improve management of public
enterprises especially in order to improve the quality of services, efficiency in their
provision and citizens’-consumers’ satisfaction. Putting the accent on the
competition, market and consumers, new EU concept of services of general
economic interest arises more interest in the professionalization of management in
the process of public service provision and delivery.
THE NEW CONCEPT OF PUBLI C SERVI CES I N THE
EUROPEAN UNI ON
The main characteristic of the new concept of public services in the European
Union refers to the unique combination of the two economic traditions- continental
and Anglo-Saxons. In the field of public services, the traditional continental
economic approach emphasizes the equality, social justice, universal access to
services for all citizens, absence of discrimination, support for low income,
vulnerable and marginalized social groups as well as the strong, active role of state
in the provision and delivery of public services. On the other hand, the Anglo-
Saxons economic approach put the accent, among the others, on the improvement
of public service quality and efficiency in the process of their provision, on the
availability of alternatives for citizens who should be seen primarily as consumers
of the public services and the professionalization of public service management.
The role of state is considered to be very important in the domain of planning,
making adequate policies, monitoring and controlling rather than in the direct,
Faculty of Business Economics and Entrepreneurship 509
often monopolistic provision of public services. Instead of choosing only one way,
European Union, from the year 2000, opted for the harmonious combination of
continental and Anglo-Saxon economic approaches, respecting the elements of
both. As a result of that, the idea of European citizens and socially balanced Europe
has been enriched with the concept of consumerism, competition and market-
oriented approach to the management of public services.
The new European concept of public services has two aims- modernization of
public service system on the internal market while maintaining the fundamental
European values in the domain of social politics where the state is perceived as
their main guarantor. In other words, the European Union strives for balance
between high level of social protection, fair national income redistribution and
achievement of planned growth rate and the improvement of EU competitiveness
(Maroto, Rubalcaba, 2002).
Modernization and competitiveness of European public services are supposed to
be achieved by selective introduction of certain Anglo-Saxons economic elements,
such as opening the market, introducing some form of competition, treating the citizens
as consumers of public services offering them the chance to choose among different
alternatives and have more influence by ensuring mechanisms for their potential
complains and reclamations. In other words, the channels for two-way communication
should be developed in order to encourage the citizens’-consumers’ active involvement
in the service provision process. Apart from that, Anglo-Saxons approach to public
service management, known as the New Public Management, also stresses the
importance of researches of consumers’ real and actual needs, their attitudes, opinions
as well as the level of their satisfaction with the various aspects of public services they
use and pay for, either directly or through taxes. Additionally, elements such as
evaluation of performances, inclusive management, better transparency and protection
of consumer rights are also highly ranked in this system of public service management.
The possibility of the integration of more economic approaches into one,
unique, European approach could be explained by the fact that social politics is
perceived not as the burden but as the important prerequisite for sustainable
economic growth in Europe (Clifton et al., 2007). Therefore, European tendency to
competitive public services goes hand in hand with the project of socially balanced
Europe which indisputably includes the guarantee of access to basic public services
for all citizens and care for socially vulnerable groups. According to that specific
mission, all enterprises providing and delivering the public services are obliged to
accept and respect the rules defined by Universal Service Obligation.
In conclusion, the idea of implementing certain elements from Anglo-Saxons
approach to public service policy and management should be understood in that
specific context of European public services concept; not as the opposite, but more
as the compatible additional elements that supports and strengthen current attitude
of the European Union that all citizens should have rights to affordable, good
quality public services which efficiently satisfy their actual needs.
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I NTRODUCI NG THE NEW EU TERMI NOLOGY I N THE FI ELD
OF PUBLI C SERVI CES
Respecting the traditional, continental economic approach as well as the
mechanisms like competition, market-orientation and consumer right to choose,
European Union opted for new, unique concept introducing even new terminology.
All public services are divided into two groups according to the predominant nature
(economic or noneconomic) of the activities of public services. Group of services
with predominantly economic nature of activities are opened to the competition on
the internal European market and named “Services of General Economic Interest-
SGEI” (electricity and gas, telecommunication, postal services, public transport).
The second group includes services which are non-economic by their very nature,
where the role of state has always been essential for their provision, like the police,
security, and judicature. This group of “Services of General Interest-SGI” is
excluded from the competition on the internal European market. This
categorization of public services in the European Union matches the orthodox
economic dichotomy of public good- pure and non pure public good, by the criteria
of non-rivalry and non-excludability (Gnjatovi?, 2005). So, the SGEI are non pure
and SGI are pure public good.
EUROPEAN REGULATORY FRAMEWORK FOR SERVI CES OF
GENERAL ECONOMI C I NTEREST
The process of forming the European regulatory framework of services of general
economic interest (SGEI) has been going through a long and continuous process,
which is characterized by the active involvement of the state members, the formulation
and updating of the official documents of the European Commission. Although the
process of creating regulations in the area of services of general economic interest is
still subject to amendments and modifications, it is possible to distinguished basic
legislative and regulatory documents governing the area of services of general
economic interest. These are: Treaty of the European Community ECT, in particular
the Articles 86 and 16, Green Paper on SGEI, White paper on SGEI. For the purpose of
this paper, Green Paper on SGEI and specially White Paper on SGEI are accented.
In the year 2003 the European Commission published Green Paper on SGEI
which is the first document at the supranational level dealing exclusively with the
issues of SGEI. The goal of Green Paper on SGEI was to open the series of
important questions in this area, and invite all member states, as well as other
stakeholders, to actively participate in shaping the future of the European concept
of public services. Hence, Green Paper on SGEI represents the first step toward the
formulation of the official European regulatory framework for services of general
economic interest. Green paper on SGEI is consisted of five main parts, in addition
to the introduction and operational conclusions.
Faculty of Business Economics and Entrepreneurship 511
The first part refers to the new terminology and definitions, as well as the role
of public authorities in the system of services of general economic interest. The
second part deals with the objective that the Community wants to achieve through
their engagement in the area of services of general economic interest. The third
chapter deals with a number of elements that could potentially constitute a common
concept of services of general economic interest. The common principles refer to:
the universal access, continuity, quality of services, affordability, consumers’ and
users’ rights protection. Additional principles had been later added as a result of
member states’ participation in the process of forming the final common European
framework of SGEI. The fourth part covers issues relating to the organization,
financing and evaluation of SGEI, while the fifth part is devoted to the
international dimensions of services of general (economic) interest.
White Paper on SGEI is consisted of introduction as a first part of the document,
Second part deals with the issue of common responsibility of public authorities in the
EU and the member states. In the third part there are basic common principles for
SGEI defined and outlined. These principles represent the EU guidelines for Services
of General Economic Interest, and as such, are given special attention in the following
part. The fourth part deals with the policy improvement with the aim to accomplish the
higher degree of coherency in the area of services of general economic interest along
with the respect of diversity. Hence, White paper on SGEI is final document regulating
this field. But it has not nevertheless to be understood as a finite step in shaping the
common regulatory framework for SGEI.
Common EU principles defined in the White paper on services of general
economic interest are in line with the basic idea of linking up the elements from
European continental and Anglo-Saxon economic traditions. Although the sharp line
can not be underlined, still it is possible to note that the principles of cohesion and
universal access to services for all citizens, respecting diversity of situations,
maintaining safety and security, providing legal certainty reflect the traditional values
of European continental economic approach. On the other hand, the principles such as
achieving public service objectives within competitive open markets, highlighting the
consumer rights, monitoring and evaluating the performance, increasing transparency
are in line with the Anglo-Saxon economic tradition.
EU GUI DELI NES FOR SERVI CES OF GENERAL ECONOMI C
I NTEREST
In the year 2004 the European Commission published the White paper on
Services of General Economic Interest, based on the suggestions and conclusions
of member states that took part in the constructive dialog at supranational level.
Despite the expected differences in opinions and attitudes of member states,
consensus was reached that services of general economic interest should be
organized with a harmonious combination of market mechanisms and the specific
mission of public service.
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In the third part of White paper on SGEI, nine guiding principles of the
Commission’s approach are outlined: enabling public authorities to operate close to
the citizens, achieving public service objectives within competitive open markets,
ensuring cohesion and universal access, maintaining a high level of quality, security
and safety, ensuring consumer and user rights, monitoring and evaluating the
performance, respecting diversity of services and situations, increasing transparency
and providing legal certainty (Commission of the European Communities, 2004).
Very important new part of EU public services policy reffers to the separation of
the process of policy formation from the process of the direct delivery of the public
services. Those who are involved in the defining the policy framework of public
services are not included in the production or direct delivery of services of general
economic interest. This part is done by the other subject or organization, which is
engaged by public authorities. Between these two parties the conflict of interest must
not exist and their mutual relationship is regulated through legal means and contract.
This kind of separation of production and delivery from policy making has already
been done in several member states of the EU, specially in England and Germany.
Based on these experiences, authority in charge of the policy making forms the policy
framework but in order to organize production and direct delivery of services of geeral
economic interest, this authority makes contracts with other parties-organizations and
agencies, which on the behalf of the public authoritz and in line with the previously
defined policy, have the responsibility for the quality and the efficiency of delivered
services. The public authority, which chooses and makes the contract with other
organizations or agencies, is accountable for monitoring and control of the delivery
process. Apart from that, in the cases where some parts of public authory are included
in the direct delivery, there has been a practice of making the semi-contracts with those
parts. This kind of semi-contracts approach forms the internal quasi market where the
relations are defined and based on the contractual principle. In addition to that, the local
authorities also has the right to engage the other parties for public services delivery and
improvement at the local level. In this case local authority enters into a contract with
the chosen organization. Reasons for local cooperation in the domain of services of
general economic interest can range from overall improvement in quality and
efficiency of services up to the need for organizing tailor-made services' delivery for
special or marginalized population groups. In all these cases, the organizations in
charge of production, organization and direct delivery of services of general economic
interest are run by professional managers.
The separation process of policy making from production and direct delivery of
services resulted in the greater and clear distinction between the policy decision making
and the professional management process. It is the relation known as principal agent
relation, in which one party (agent) acts on behalf of the other party (principal). This kind
of relations are well known in the private sector, but it is regareded as innovative in the
field of public sector. For example, the companies' shareholders (as principals) choose
management (agents) to act on their behalf. Precize conditions of the relation between the
principal and agent is defined by contract. The separation of the policy makers from the
professional management is considered to be crucial for the development of market
mechanisms in the domain of services of general economic interest.
Faculty of Business Economics and Entrepreneurship 513
The new, contract - based relatinship in the field of services of general
economic interest led to the profound change of traditional hierarchical relations,
which had generally dominated in the public sector for a long period of time.
Instead of that, modern EU aprroach puts an accent to the relations based on
contracts, with clearly defined responsibilities and accountability.
The party, which is responsible for direct delivery of public services, gets
more freedom at the operational level but at the same time it is more accountable
for the quality and efficiency of services delivered to the citizens. The party, which
is responsible for policy making is also in charge of control and monitoring of the
chosen organization's work and management. The innovative contract- based
approach also changes the previous hierarchically structured control in the public
sector towards the control based on the contract, where all the rights and
obligations of both parties are defined and specified. Therefore, the cooperation
becomes the standard in the domain of public services. By engaging the other
parties, the public authorities enlarge their capacity to offer the better quality
services to the citizens. Apart from the fact that cooperation has positive effects on
the savings in public spending, main goal of including partners in the delivery of
services to the citizens refers to the greater capabilities to offer services of better
quality (Gray, 2003). The contractual principle in the domain of public services
encourages institutional competition between the public enterprises, public-private
and regulated enterprises, cooperants as well as social organizations.
New EU framework for services of general economic interest requires the
definitions of the responsibilities for the performances of these services. Wheather
the public authorities enters into the contract with the private enterprises or the
special agnecies within the public authorities are formed, the clearly defined roles
and responsibilities are neccessary for the achievement of overall quality and
efficiency improvements in the the process of public services' delivery to the
citizens. Following the example of the private sector, public sector also turns
towards professionalism, by strenghtening the role of and significance of
management and employees who are directlz involved into the process of public
services' delivery. Although the performance appraisal is new for public sector, and
its effects are very specific, yet the general processes and techniques for the
appraisal of organizational and individual performances are considered to be the
solid foundation whcih can be apllied in several fields, regardless of whether the
organizations belongs to the private or public domain (Daley, 1992).
Appraisal of performances entails also the need for precise definition of goals
which have to be accomplished, as well as the clear criteria for appraisal of
performances and responsibilities. The responsibility is closely associated with the
evaluation of performances. If the professional managers are given the greater
control over the resources in order to achieve certain defined results, then they are
considerd to be accountable for the performances of public services (Stewart,
Walsh, 1992).
The price of services of general economic interest, method of payments and
the labor cost in public secotr had long been regulated exclusively by government.
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However, with the changes of relations among the parties and bigger
responsibilities of professional management in engaged agencies and
organizations, governmental approach of price and labor cost determination has
often been seen as obstacle that limits the freedom of management's action and
affects their capabilities for effective and efficient use of available resources. The
requirement for competitive bidding, as an ingredient part of the new EU policy of
services of general economic interest, is not compatible with the restrictive
framework of labor cost and prices determination.
However, the more flexible approach to public services' prices and labor cost
determination entails also the need for the profound changes in the human resource
management in public sector. There is a need for creation of the new business
culture, where employees are adequately motived for more active involvment in the
process of creation and delivery of services of general economic interest. In order
to modernize the public services according to the EU guidelines, it is necessary to
make the public sector more attractive for current as well as future professionals.
Therefore, the new human resource management has to open more space for
personal initiative fostering the enterpreneurial spirit and encouring new ideas and
team work. The role of employees is crucial because they are mostly in direct
contact with the users-citizens and without their full engagement and initiative, the
process of implementation private business like approach would hardly be done
successfully. Modernization of services of general economic interest directly
depends on the operational effectiveness and efficiency of all employees and
management together. The employees should be offered stimulative environment,
where they can have real chance for professional improvement, career development
and promotion according to the achieved results and final outcomes. To make
employees more motivated, there is also a need for delegation of more
responsibility for tasks and operations, as well as for defining the encouraging
system of rewards. Therefore, the careers of employees in public sector should be
in line with their work performances and results achieved. In this regard, incentives
for successfull performances and the penalties for under average results have to be
more precisely defined.
The public services market had long been consisted of only one or a few
enterprises, mostly or entirely government-owned and managed. The consequence
was that management decisions had been evaluated and made in accordance to
political rather than economic criteria. In that case, enterprises involved in public
services' delivery are monolithic because in one center there is a concentration of
whole management, financial monitoring and budget control. With the new EU
policy for services of general economic interest, the existence of more bidders is
encouraged through the mehanism of public tenders. Local authorities are also
suggested to turn to the alternative ways an resources of supply and delivery of
services at the local level. This kind of chnage opens up the possiblity of
competition (or quasi-competition within the public bodies) between different
bidders that have the capacity to cover the market and satisfy users' needs for
public services.
Faculty of Business Economics and Entrepreneurship 515
Additionally, one of the major innovation in the EU public services' approach
refers to the empowerment of the citizens' role since they represent the major users
of public services. Treating the citizens as users of services or clients became
known as the concept of consumerism, well known in the private sector but entirely
new for public sector area. The concept of consumerism, instead of concept of
citizenship, represents one of the main instruments for strengthening the market
orientation in the field of services of general economic interest. Individual needs
and right to choose between different alternatives are emphasized, which is
significantly different from the previous collective, one-size-fits-all approach of
public sector. Concept of consumerism opens up the possibility of marketing
implementation in the public sector, which is also relatively new for this field
(Kosti? et al., 2013). New element of consumerism is underpinned by the fact that
citizens pay for services of general economic interest, either directly or through
taxation, which gives them the right to have better quality services, in line with
their actual needs. Respecting the citizens as consumers of public services chnages
at the certain extant the nature of relationship between the state and its citizens.
This relation is not only about obligations and responsiblities to pay taxes, but also
about getting adequate level of quality and efficincy of public services the citizens
pay for. Therefore, the state is more often understood as the guarantor of rights,
and less as the active economic entity that has to be directly invloved into the
process of public services delivery.
Although the role of government in the direct delivery of services of general
economic interest is reduced, its role in making adequate regulation and legislation,
doing continous monitoring and control of bidders has become bigger and more
important. In the very developed economies, such as England, almost every
privatization of public services had been followed by establishment of regulatory
agency in charge of monitoring and control of the private enterprise bidder
(Stewart, Walsh, 1992). The public authority bodies responsible for supervision
and control of the work processes must be separated from the interests of the
organizations/enterprises over which this control is exercised. So, the previous
practice where the inspection, monitoring, control as well as the regulation had
been done by the same organization is not compatible with the new EU market
oriented approach to services of general economic interest. According to the EU
guidelines, it is important to have independent entity in charge of supervision and
control of those enterprises directly involved in public services' delivery, with their
mutual interest strictly separated.
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TRANSFORMATI ON OF MANAGEMENT
European Union concept of services of general economic interest has given the
impetus for organizational and management changes in the field of public services
at the level of member states. In spite of differences in extent and speed of changes,
there is a clear tendency toward reducing the public sector inefficiency, which
mostly results from organizational differences compared to private sector: soft
budget constraint, lack of bankruptcy, the role of political factors, lack of
competition, specific constrains in employment policy, procurement and budgeting,
presence of principal-agent problem, strong emphasis on bureaucratic goals and
risk avoidance, rigid procedures (Stiglitz, 2004).
Since public services have distinctive mission, purposes and tasks which
private sector does not deal with, the process of introducing market mechanisms in
the management processes must not undermine and jeopardize their fundamental
components such as social justice and equity, public interest and socio-economic
welfare of society. So, the public services should be treated differently than the
private sector services (Van de Walle, 2008) even though some of private sector
mechanisms would be useful for managing the public services. This means that, in
spite of introducing market mechanisms and private sector approaches to public
service management, respect of public interest, social responsibility and traditional
European values remain vital components in the process of public services
modernization.
European socio-economically balanced approach to reform of SGEI
management is mostly focused on creation and implementation of business, private
sector alike approach in managing scares public resources, on defining clear
responsibility and accountability for the results achieved and on performance
management in line with the basic economic criteria of cost-effectiveness and
efficiency (Doherty, Horne, 2002, pp. 16).
Although not limited to that, certain key themes reflecting the transformation
of SGEI management can be identified (Steward, Walsh, 1992): the separation of
the purchaser role from the provider role, the growth of contractual or semi-
contractual arrangements, accountability for performance, flexibility of pay and
conditions, the separation of the political process from the management process,
the creation of market or quasi-market, an emphasis on the public as customer, the
reconsideration of regulatory role, a change of culture.
Faculty of Business Economics and Entrepreneurship 517
EMPI RI CAL RESEARCH ABOUT MANAGEMENT OF SGEI I N
THE REPUBLI C OF SERBI A
Topic of the authors’ empirical research refers to the question at what extent
the principles defined at the level of European union are used in the management of
public enterprises that provide services of general economic interest in the
Republic of Serbia. Since the topic of professional management in the field of
public services is relatively innovative at the national level, qualitative
methodological approach is used.
The research sample is limited by European Union categorization of SGEI so
that includes only those enterprises that provide SGEI at national level: Public
Utility City Transport Company “Belgrade” (public transport), Company
“Elektroprivreda Srbije-EPS” (electricity and gas), P.E. of PTT Communications
“Srbija” (postal services) and Telekom Srbija (telecommunication). Although there
is a certain difference between the management of the enterprises mentioned
above, the aim of this paper is to try to make general conclusions summarizing the
results of the interviews with all four enterprises (marketing departments) in order
to get the average result about the level of EU principles implementation in the
provision of SGEI in the Republic of Serbia.
The research instrument used is the interview, structured in two parts: the
current use of activities which enhance consumers’ orientation of public services,
then the alignment of management with the principles of European framework of
SGEI (defined in the White Paper of SGEI).
The research is conducted by the authors of this paper in the period from
01.07.2012 up to 15.07.2012, on the territory of city of Belgrade. The chosen
enterprises provide SGEI at the national level.
Main limitations/problems in conducting the research relate to the in advance
defined sample of only four enterprises (only SGEI as defined at supranational
level), as well as the strong hierarchical structure of the duties and responsibilities
in public enterprises and closed, “not easy available” way of internal functioning
which make the access to the persons of charge more difficult. Respecting these
rules, full anonymity of interviewees is accepted.
This research is dealing with the perspective of the public enterprises, in other
words, the supply side whereas the opinions of the consumers of SGEI, albeit
demand side, are still there to be enquired, analyzed and synthesized. Accordingly,
suggestion for the future research refers to the consumers’ perspective and their
satisfaction with the access, quality, efficiency and affordability of the services of
general economic interest in the Republic of Serbia.
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SUMMARI ZI NG AND ANALYSI S OF THE EMPI RI CAL
RESEARCH RESULTS
All of the four public enterprises analyzed have the active marketing
department in the organizational structure, within which most of the activities
concerning relationship with consumers of services are dealt with. In other words,
awareness of consumers and customers exists at the operational level in each public
enterprise. However, when it comes to the effective and efficient usage of
marketing principles in practice, there are evident differences between the public
enterprises. Nevertheless the aim of this research is to give the overall picture of
the consumer orientation and professionalization of management in the analyzed
public enterprises, so the comparisons between individual cases and their ranking
are intentionally left out.
Table 1: The level of consumer orientation in the analyzed public enterprises
(providers of services of general economic interest in the Republic of Serbia)
Activities enhancing the consumer orientation
Level of
application
Dissemination of the relevant information to citizens-
consumers
Full
Managing the system of feedback from the citizens-
consumers
Partial
Managing the system of consumers’ appeals and
complaints
Partial
Managing the system of consumers’ satisfaction Nonexistent/low
Source: Authors’ analysis
The main characteristic of SGEI providers in the Republic of Serbia refers to
the nonexistence of competitive environment. Strong monopolistic ambience
discourages the management of SGEI to apply and strengthen the market and
consumer orientation in the process of delivering public services. Hence, in all four
enterprises analyzed, only the mass marketing principles are being used
(characterized for production firms more than the service sector). So, there is only
one-way mass communication. However, from marketing perspective, the
communication means the exchange of information and their flow from two sides-
providers and consumers, supply and demand. The implementation and
management of feedback system from consumers as well as the system of
consumers’ appeals and complaints are only partially developed and used often
only as a way to satisfy the form, leaving the substance aside. Although there are
some forms of collecting the information from consumers, the level of motivating
consumers on active participation in information exchange is very low and in
certain cases even the existent mechanism of appeal is quite complicated and
Faculty of Business Economics and Entrepreneurship 519
therefore discouraging for consumers. Therefore, both mechanisms for two-way
communication with the consumers (feedback and system of managing the appeals,
complaints) are not given the proper attention. Moreover, the almost nonexistent
system of monitoring the consumers’ satisfaction additionally justifies the absence
of two-way communication with the service consumers indicating at the same time
a very low level of market orientation in the field of services of general economic
interest. To conclude, the weakest point of the providers of SGEI can be found in
the relationship with the consumers and overall market orientation of the service
providers. Hence, the development and management of organized, systematized
and strategically focused channels of communication with the final users of the
services of general economic interest should be improved.
Table 2: The application of the European Union’s principles of SGEI in the
analyzed public enterprises (providers of services of general economic interest in
the Republic of Serbia)
Guiding principles of SGEI
Level of
application
To operate close to citizens Partial/Low
Ensuring cohesion and universal access Full
Maintaining a high level of quality, security and safety Full/Partial
Ensuring consumer and user rights Full
Monitoring and evaluating the performance Partial
Respecting diversity of services and situations Partial /Low
Increasing transparency Full/Partial
Source: Authors’ analysis
The analyzed enterprises judge their operations as being close to citizens. In
almost all cases this principle is predominantly understood as active, one-way of
information dissemination through the mass media. However, to operate close to
citizens means much more than mere use of mass media. It also means getting to
know the consumer needs, demands and preferences as well as having more
flexibility in creating the service offer. These elements cannot be found in the
business strategy of the SGEI providers. The probable reason for enterprises
equating this principle with the mass communication comes from the fact that
modern, strategic reform of public sector has not been done yet at the macro level.
Consequently, the providers of services of general economic interest still operate as
a highly bureaucratic monopoly, under the influence of the government structures
and political issues. Without the macro environment that foster competition,
motivation for practicing marketing philosophy at the micro level (level of
enterprises) is substantially reduced and often considered as unnecessary.
Therefore, the public enterprises are still unfamiliar with the notion of real market
orientation and management of their operations close to citizens.
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When it comes to the principal of universal access and territorial coverage, the
situation is quite satisfactory. Moreover, the improvement of the infrastructure in
order to achieve better territorial coverage with SGEI and make them accessible for
all citizens is one of the major business priorities in all analyzed enterprises.
The standard concerning the quality, security and safety is fully implemented
in the management of analyzed public enterprises. Although static, technical and
technological sides of quality are indeed very important, maintaining the full
quality of services requires also the implementation and constant improvements of
its dynamic elements- two-way communication, interpersonal relationships and
orientation to the real needs and preferences of the consumers. So, regarding the
dynamic dimension of service quality, there is enough space for development and
additional improvements. All of the analyzed enterprises comply with the legal
regulations and rules in the domain of consumer and user rights. The necessary
information about every service of general economic interest (type of service,
prices) is publicly available and users are not misled by incorrect, inaccessible,
confusing or outdated information.
Principles of monitoring and evaluation of performances represent the
important segment of management in all SGEI providers. The annual business and
financial reports are regularly published and made publicly available. Nevertheless,
the integral parts of this standard also include the clear definition of responsibility
and accountability for performances and results achieved, the mechanism of
independent, professional control over business performances and the strategy for
timely corrections in case of unsatisfactory results. These elements are quite weak
in the management of SGEI providers in the Republic of Serbia. So, the principle
of monitoring and evaluation of performances is considered as half-done, and
hence cannot lead to a conclusion that the analyzed enterprises are goal-oriented.
In respect of diversity of services and situations the performance vary between
the analyzed enterprises (some of them are more flexible in differentiating their
services than the others). However, in average the level of flexibility in
customizing the services according to the actual needs and possibilities of the users
should be improved. The philosophy of “one-size-fits-all” is still dominating in the
management of SGEI providers. Marketing tools such as segmenting the market,
targeting the certain groups of consumers and creating customized service offer are
not systematically applied in the marketing strategy of these enterprises. Bearing in
mind that services of general economic interest have unique public mission, special
attention should be paid to the services designed for vulnerable and marginalizes
groups of users.
Since the annual business and financial results are published regularly, the
level of transparency is judged as quite positive. However, in order to increase the
transparency this principle should include all aspects of service production and
delivery. According to that, there are still enough places for certain improvements
when it comes to transparency of finance management, human resource
management, evaluation of service quality and efficiency, control systems and
management of consumers’ appeals and complaints.
Faculty of Business Economics and Entrepreneurship 521
CONCLUSI ON
Starting from the new concept of public services in the European Union, in the
year 2004 the European Commission issued White paper on Services of General
Economic Interest (SGEI) stressing the main guidelines for improvement and
professionalization of public service management: enabling public authorities to
operate close to the citizens, achieving public service objectives within competitive
open markets, ensuring cohesion and universal access, maintaining a high level of
quality, security and safety, ensuring consumer and user rights, monitoring and
evaluating the performance, respecting diversity of services and situations,
increasing transparency and providing legal certainty.
In order to see at what extant the public service enterprises in the Republic of
Serbia are aligned with the new, market and consumer orientated EU concept of
public services and at what extant the management practices are in line with the EU
basic guidelines, the empirical research is conducted and primary data are collected
in the four public enterprises at national level.
Based on the analysis of data collected, it can be concluded that lowest level of
compliance with the EU concept can be found in the domain of market and
consumer orientation of the analyzed enterprises. Development and maintaining of
providers’-users’ relationship and “win- win” profitable exchanges have not yet
been applied systematically and seriously in the management of SGEI providers at
the national level.
When it comes to the management principles, certain aspects of SGEI
providers’ management are well aligned with the EU principles (universal access,
territorial coverage, technical quality and safety, respect of consumer rights defined
by the law, system of continues monitoring and evaluation of service performances
and transparency of final business and financial results). On the other side, there
are aspects where considerable changes could be made (conducting business as
closer to citizens as possible, understanding quality management from broader
perspective, expand the system of monitoring and evaluation by defining the clear
responsibility for final results, the system of independent control and the plan for
future improvements, increasing flexibility in service provision and delivery in
order to be able to react on the diversity of situations, making all aspects of
management more transparent).
522 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
REFERENCES
[1] Clifton, J., Comin, F., Diaz-Fuentes, D. (2007), Public Services in the
European Union: competition, cohesion and enlargement. Spanish Ministry for
Science and Technologyhttp://pendientedemigracion.ucm.es/info/sieterem/87.pdf (16.06.2004)
[2] Daley, D.M., (1992), Performance Appraisal in the Public Sector: Techniques
and Applications, USA: Greenwood Publishing Group
[3] Doherty, T., L. Horne, T. (2002), Managing Public Services- Implementing
changes, London: Routledge
[4] Gnjatovi?, D. (2005), Osnovi mikroekonomije, Beograd: Megatrend univerzitet
primenjenih nauka
[5] Gray, A., Jenkins, B., Leeuw, F., Mayne, J. (2003), Collaboration in Public
Services: the challenge for evaluation, New Brunswick, New Jersey:
Transaction Publishers
[6] Kosti?, D., Petrovi?, D, Radulovi?, Z. (2013), Marketing concept in the
Provision of Public Services in the European Union, Gender, IT and Marketing
Issues in Entrepreneurship. Beograd: Faculty of Business Economics and
Entrepreneurship, 262-271
[7] Maroto, A., Rubalcaba, L. (2002), The structure and size of the public sector in
an enlarged Europe. Publin Report No. D14, EU 5th Framework Programme,
Oslo: PUBLIN research project
(http://survey.nifu.no/step/publin/reports/d14Size.pdf (16.06.2014)
[8] Steward, J., Walsh, K. (1992). Change in the Management of Public Services.
Public Administration, Vol. 70 (Winter): 499-518
[9] Stiglitz, E., J. (2004), Ekonomija javnog sektora, Beograd: Ekonomski fakultet
[10] Van de Walle, S. (2008), What services are public? What aspects of
performance are to be ranked? The case of “services of general interest.
International Public Management Journal, 11(3): 256-274
[11]http://eur-lex.europa.eu/LexUriServ/site/en/com/2004/com2004_0374en01.pdf
(18.06.2014)
[12]http://eur-lex.europa.eu/LexUriServ/site/en/com/2003/com2003_0270en01.pdf
(22.06.2014)
Faculty of Business Economics and Entrepreneurship 523
NEW SYSTEM OF ASSOCIATION CORNER SHOP's IN
SERBIA
Nemanja Damnjanovic, PhD
53
,
Slavica Andjelic, PhD
54
ABSTRACT
Retail space has become a set of resource around which a number of entities
are fighting to provide a position for their items on the shelves of Retail Alliances.
Also, the retail space is becoming a new marketing ground with a very strong effect
of advertising on consumers decisions during the buying process. Creating and
maintaining competitive advantage requires that Retail Alliance has advantages
that its rivals do not have on the target markets. Of particular importance is
competitive advantage based on knowledge. Retail stores gathered in the alliance
have the opportunity to make sure that "the competition by working" in association
with providing benefits to all members. The work traces the future activities of
Retail Alliances, the way in organizing, survival in the market in order to
competition and efficient response to consumer demands. The main objective of
this paper is to present a focus on the demands of final consumers, which
represents a general approach to explore the new role of retail in overcoming the
gap between procurement market and sales market. Finally, the goal of the paper
is derived from the object itself, and refers to the tendency to establish a
theoretical framework and adequate empirical platform on which will be
generated opportunities for defining new strategies for positioning retailing
subjects, valid for achieving business success. Method in the study will be consist
in the fact that on the basis of theoretical assumptions and the available published
data to construct a model that future alliance should operate on the basis of the
author's practical experience.
Key words: Retail Alliance, A Partnership, Efficient Consumer Response,
Flexibility, Suppliers.
J ELClassification: L81, D71
UDK: 334.728(497.11)
53
Nemanja Damnjanovic, Graduate school of proffesional studies ,, Prof.dr Radomir Bojkovi?,,
Krusevac, Serbia, [email protected]
54
Slavica Andjelic, Graduate school of professional studies ,, prof.dr Radomir Bojkovi?,,Krusevac,
Serbia, [email protected]
524 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
I NTRODUCTI ON
The main task of this work is to adequately shows the main directions in the
way of gathered action for corner shops on the Serbian market. The main
objectives of the action are: the fight against monopolies, competition in the market
associations, better commercial terms, procurement centralization, greater
purchasing power.
MAI N CRI TERI A FOR MEMBERSHI P AND DEVELOPMENT
PHASE OF THE ASSOCI ATI ON
Retail Alliance in the market is represented as a solvent partner in trade.
Management has to worry about the conditions of competition in the short-term
(meet customer needs) and on the long-term effectiveness of Retail Alliances. So,
strategic management must be oriented in a way that the long-term Retail Alliance
was effective. Management has to prepare an alliance for a successful business in
the future, to answer the questions of what it was before and how it should be
developed in the future, in order to take competitive advantage in the market.
Retail Alliance is a newly formed system which strengthens the competitive
position of local retailers and local shops, and the survival of many small and
independent participants in the trading process. Retail Alliance members should
respect each other in order to progress and improve the operations of retail stores.
Membership in the Retail Alliances allowes them to overcome the weaknesses that
exist in terms of competitiveness of some national retailers. Within members are
exchanging a lot of knowledge and information, where the cooperation of members
takes place in relation to joint contracting, strengthen purchasing power,
cooperation in the promotion, logistics, marketing and lobbying. So, the task of
Retail Alliance is daily strengthening.
The objectives of the association or Retail Alliances:
? strengthening and improving the position of the members;
? belong to the group of top leaders in the market in the sector of high-current
products;
? cover the entire (large) market;
? creation of a single retail systems, ie. unique functional and visual identity of
the alliance;
? advancement made partnerships with suppliers;
? more flexible and longer payment currency and define additional rebates;
? implementation of centrally coordinated marketing activities, sales
promotion: action sales and promotional activities at point of sale;
Faculty of Business Economics and Entrepreneurship 525
? joint public relations;
? computerization of operations;
? opportunity to develop products with trademarks of Retail Alliances.
Retail Alliance mission is to provide consumers high-quality goods and
services for daily use with prices lower than the competition. Also, mission is to
win market share and defending against monopolies. Gathered in alliances
members have the opportunity to see for themselves that "competition through
cooperation" clubbing action provides benefits to all of them. Membership in this
group overcome the weaknesses that exist in terms of competitiveness of some
traders, because in alliance they share a lot of information and knowledge and
achieve a number of advantages. Some of them are:
? advantages in terms of supply chain management and the purchase price
through the definition of lower prices in order to achieve price
competitiveness, as well as more flexible and longer payment currency;
? the possibility of prepayment;
? better meet the expectations of consumers and suppliers,
? reducing the total cost;
? develop their own brands and expanding its image;
? protection from takeovers;
? transparent dissemination of business knowledge, information and
experience;
? the performance advantages of promotional and other marketing activities
? number of specific and short-term benefits (making action leaflets,
secondary position).
Development stages of Retail Alliances can be defined as follows:
? Defining business strategies and criteria for membership
? conducting interviews with prospective members and presenting ideas of
business alliances,
? Beginning of preliminary business discussions with suppliers,
? Defining of the accession treaty in the Alliance
? signing contract with the members and provide all necessary information on
the business member
? continued negotiations with suppliers and the signing of new commercial
contracts for the year,
? the beginning of the implementation of the defined strategy.
The main criteria for membership in the alliance is their liquidity. It is
essential that the potential member is financially capable and that in the last two
years he has not been blocked. Financial liquidity can be easily checked on the
website of the National Bank of Serbia and sales through suppliers in the field. The
most important thing is that each member has to pay its dues payable to the
eventual tolerance, if it is defined in the agreement on business cooperation with
526 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
suppliers. Before joining and signing the contracts with Retail Alliance, each
member must provide the information listed in the following table.
Table 1: The pre-accession documents
No
Name
of retail
outlet
Street Municipality Phone Store
manager
Annual
turnover
Lease or
owner-
ship
Prop
e-rty
size
1.
2.
3.
…
Company Name: Best-selling
products in
2013.
The
largest
suppliers in
2013.
The
vendor
participation in
sales as a
percentage
Company location:
Adress:
Authorized person:
Tax number:
ID number:
Account number:
Number of employess:
Number of vehicles for goods
transport:
Authorized person:
Phone number:
Mobile phone:
e-mail:
Fax number:
Submit copies of the following
1.solution for the Serbian Business
Registers Agency
3.certificate of registration to the
tax
5.notarized signatures of authorized
representatives
2.certificate of incorporation 4.list of signatures 6.ID copy
Faculty of Business Economics and Entrepreneurship 527
Data listed in the table may serve Retail Alliances to meet future member of
the alliance, to form an idea of the financial power of the future item. With the
signing of the contract and receipt of the above information, each member is
required to submit within 7 days information about turnover for a period of two
years. The information must have the following data: annual sales by product
category, the financial market for products and suppliers, as well as sales volume.
Retail Alliance thus can predict their potential, ie. purchase power and thus on
meetings with suppliers negotiate new commercial terms for the new fiscal year.
I NTRODUCI NG PRI VATE BRAND PRODUCTS I N ASSOCI ATI ON
The process of introducing products under private brand is conducted in two
phases (Barac, 1999., pp. 38-45):
? a concept phase and
? executive phase.
Private Label Department conducts their projects based on the business plan
approved by the director of the retail chain where is specified start and date of
implemetation of each project as well as the responsible person. The basis for
corrective measures is to analyze variations planned / realized and identify the
causes. The process of introducing new products under private brands is kept in a
computer program MS Project, which chronicles the phases of the project, when,
how, deadlines, responsible, planned comparison - realized, deviation and
everything else that is necessary for the information of the individual projects.
After the completion of each phase (concept and executive) of each project Private
Label Department informs service projects. At the beginning of the year, Private
Brand Manager informs the Project Director and Sales Director about projects that
are planned for that calendar year. At the regular monthly meetings, Private Brand
Manager report to the Project Director and Sales Director about realized projects
and the results of these projects.
THI RD FI NANCI AL FLEXI BI LI TY ASSOCI ATI ON
In this section, special attention will be paid to the association financial
flexibility through contracting commercial conditions.
Retail Alliance at meetings with suppliers as the main argument for improving
commercial conditions mentioned two things:
? Increased purchasing power,
? financial security,
528 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? implementation of the agreed across the network alliance.
Goal of the meetings is to improve waged on commercial terms, which is the
purpose of the alliance. Agreed commercial terms would apply to every member of
the alliance, regardless of its fair game. Retail Alliance should be seen as one
entity. We will list such commercial terms, if the maximum rebate from a supplier
to any member of the alliance was 11%, with an increase in merger and acquisition
of power, retail alliance will agree to a minimum of 12%, but the vendors are
required to pay quarterly Alliance 1% to finance the operations and management of
the alliance. This would give suppliers a total of 13%.
Price competition recording can easily determine the rebate with competitors. The
purpose of the negotiations with suppliers is to provide similar commercial terms with
other retail systems in the market to competition. Retail Alliance's strategic goals
should be to set up in each fiscal year to sign contracts with suppliers who have a stake
in a maximum of 70% of financial transactions. Why? This is the way it creates
flexibility in payments due debts. If a member of the alliance is unable to make a
payment to a supplier with whom the Retail Alliance has a signed contract, he has the
ability to redirect the money that is intended for suppliers who make up 30% of the
turnover to suppliers with which the contract was signed, in order to respect the agreed
currency and term partnerships with suppliers.
Corollary of this theory is that the vendors with which the alliance has signed
the priority for payment of overdue invoices. Through this flexibility alliance can
survive for long without significant problems that threaten its business.
CONCEPT OF COMPETI TI VENESS AMONG SUPPLI ERS I N
ASSOCI ATI ON
Because of the financial flexibility as a key strategy for the alliance, which
introduces competition among vendors, suppliers to the demands of the alliance
will came out with positive thinking. For example, if there are five manufacturers
of soft drinks on the market, the Retail Alliance will sign contracts with
manufacturers that participate in the trade about 70%. Which vendors will sign
contracts with Retail Alliance is depending on suppliers, their flexibility and
acceptance of the fact for improving commercial terms.
Suppliers with which the alliance had signed agreements will have the
following benefits:
? defined amount per annum,
? defined marketing,
? payment security,
? defined positions in retail stores,
? defined range,
? the increase in turnover,
Faculty of Business Economics and Entrepreneurship 529
? a strategic partnership through the production of products under private
brands.
COMPETI TI ON I DENTI FI CATI ON
Create and maintain a competitive advantage in the retail demands form
Alliance that has advantages that are not available to its rivals in the target markets.
Particularly important competitive advantage is based on knowledge. Once you
identify your main competitors, Retail Alliance must consider their strategy, goals,
strengths and weaknesses. Group companies apply the same strategy in a given
target market is called a strategic group. When Retail Alliance identifies its main
competitors and their strategies, should ask the following questions: what each
competitor in the market is looking for? What affects on the behavior of each
competitor? Many factors influence the goals of competitors, among them: (Ristic,
2008. pp. 98-105)
? size,
? history,
? current management and
? financial situation.
If a competitor is one division of a larger company, it is important to know
whether it uses the parent company for growth, profit and exploitation. One of the
benefits of assumptions that competitors are striveing for is to maximize profits.
However, companies vary in how they bit short compared to the long-term profits.
Another hypothesis could be that a competitor is trying to accomplish a number of
objectives: (Ristic, 2008. pp. 98-105)
? current
? profitability,
? growth,
? market
? share,
? cash flow,
? technology leadership or
? leadership.
Finally, the Retail Alliance must be accompanied by expansion plans of
competitors. The company needs to gather information about the strengths and
weaknesses of each competitor. Generally, companies should monitor three
variables when analyzing competitors: (Kotler, 2006. pp.222-231)
? Market share - share of competitors in the target market.
530 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
? Participation in awereness - the percentage of customers who indicated
competitor when answering the question "Specify the first company that you
can think of when it comes to this industry sector."
? Participation in the emotional attachment - the percentage of customers who
indicated competitor when answering the question "Indicate the company
from which you wish to purchase a product."
LONG-TERM AND SHORT-TERM RELATI ONSHI P I NTERESTS
BETWEEN ASSOCI ATI ON AND SUPPLI ERS
Looking at the substance and the types of relationships with suppliers,
retailers, the right question is the practical feasibility of defining and securing the
common goals of both complementary to the strategic partnership. It is noticeable
that there is a tendency and growth trend of development of strategic partnership in
the channels, but with those entities and to the extent it is economically rational.
Partnership and cooperation are not imposed by force, they are the result of the
need for pooling and concentration of power. However, is a great number of
suppliers with which retail cooperate and continuous trend is to increase this
number, which indicates the inability to establish the same level of quality
relationships with all stakeholders in the supply chain. On the contrary, retail
achieves cooperative relations with various degrees of complexity, which produce
significantly different interests and results of operations. At this point, the question
is raised of defining the boundaries between long-term and short-term interests of
interconnected entities in channels of distribution and quantification of the effects
that are achieved. (Gullberg, 2003. pp. 122-125)
Subjects in the Retail Alliances channel will seek increasingly to establish
long-term cooperation with suppliers due to demand for improving business
performance, resisting competitive pressures, reduce uncertainty and gaining
mutual trust. However, there will always be a certain number of entities in the
chain with which will be reasonable to establish short-term relationships, especially
given the current interest, as opposed to aligning business goals and strategies in
the long run. This trend is present due to dynamic and volatile market conditions,
which require a change in the balance of power, position and role of particular
companies. Although partnership with supliers is common practice in business of
modern retailers there are some real dangers from unexpected flows that can
cause. Partners and alliance members can become mutually dependent, that will
certainly encourage deeper cooperation, but also can reduce the flexibility of the
rapid growth of retail alliances. Because of pleasure of the existing supplier mix
and long-term relationships it can be missed reactions to the changing market
conditions and the emergence of new products that will achieve higher growth in
sales and market share jeopardize existing suppliers. In this sense we can say that
the retail alliance must constantly monitor changes in market supply and market
sales in order to retain the dynamic range management and portfolio of suppliers in
Faculty of Business Economics and Entrepreneurship 531
the supply chain. If the agent is concentrated on the acquisition of existing partners,
it can happen to overlook or ignore better deals from other sources of supply for
the product category for which he is responsibile. Therefore, it should be
emphasized the importance of combining short-term and long-term interests to
maximize profitability and maintain a competitive advantage in the specific
organizational format - Alliance. In the case of a short-term interests between
suppliers and Retail Alliance is when retail sales, developing private trade mark,
trying to replicate the brand of suppliers who have already expressed market
image. The main motive of Retail Alliances to achieve an additional source of
profit is to quickly introduce products to the market under the assumption that
conscious consumers will equate quality and characteristics of products with
private label brand suppliers whose products are copied. In this case the partnership
is not expected, but a priority of both parties can be given by short-term interests
for the supplier - to take advantage of economies scale effects and unused
production capacity, and for retailers to exchange views and experiences in
organizing the production process. After that, both subjects are independently care
for the success of their brands in the market, without pretending to define a
coherent strategy. Finally, it can happen the deterioration of relations and mutual
hostility in the case when Retail Alliance copy brand of the manufacturer's as an
attempt to appropriate a certain amount of national brand goodwill. In extreme
cases there might be a war by market vendors sometimes try to point to the
ultimate retail consumer brands trying to copy the appropriate built a reputation
and image producers. Manufacturers can point out that the production of similar
products is used only to manipulate and mislead consumers in order to achieve
placement with the image of the original brands. Also, in practice, retailers are
really trying to identify the attributes and characteristics of private labels with
attributes and characteristics of the national brands, without investing significant
resources in advertising and promoting their brands as producers have in the
process of building its image. Manufacturers, as brand owners, warn that this type
of unfair competition in the long term lead to a narrowing of choices and less
interest in the future the manufacturer for further innovation. In addition to
accusations of unfair competition, the manufacturers claim that copying designs
and even packaging retail products do not invest in research activities,
development, planning and implementation of marketing campaigns, but also to
account for the effects that are achieved manufacturers, investing in that purpose,
developing and original building of national brands. Because of this situation
producers are less interested in developing new products because there is a high
probability that the copied products of retailers, directly threatening the planned
profit of potential national brands. If Retail Alliance thus prevent producers, who
will lose the sale directly by the production of a copy, they will not be able to
invest enough money in the development of new products in the future. The
occurrence of copies before achieving a certain level of profitability from sales of
national brands hindering the reproduction manufacturers and permanently affects
the decline of interest in investing in the development of new products. The answer
is that the similarity of retail products to their quick and easy comparison,
532 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
encouraging positive competition in the interests of consumers. Retailers accept the
claim that their products are similar as products under the brand manufacturers, but
reject accusations of unfair copying and emphasize a commitment to fair
competition. The next potential field of disagreement interests between suppliers
and Retail Alliance is determining the final price of the product. Each of these
parties wants the possibility of a certain type of control and influence on the price.
Manufacturers often want to project a unique image in the market by attempting to
provide unique price for their products, regardless of the chosen distribution
channel. They even sacrificed their own part of the price difference covering both
retailers lower efficiency compared to others in order to achieve a unique
calculation of rates in all channels of distribution. Nevertheless, many retailers
want to base prices on its image, goals and current business concept. Suppliers can
control prices in the event of system use exclusive distribution, launching its own
retail stores and discount retailers refusing delivery.On the other hand, the retailer
may not have control over pricing in the event that the company is an important
customer, it may inhibit the overall sales of the supplier in the event of termination
of cooperation, that has a range of products under private label items within the
same category or have the ability to sold on the gray market. Sometimes it happens
that deliberately charge high retail margins achieved regardless of the purchase
price in the negotiation process with suppliers, to be able to favor the sale of its
private label products due to their price-competitiveness in relation to the supplier
of the product we have on the shelf. This form of promote sales and create a more
favorable position for its products may jeopardize long-term relationships among
related entities and put the focus solely on short-term transactional relationships
and interests. (Barac, 2008. pp. 89-94)
Next, highlight the advantages with respect to short-term interests are reflected
in the situation when e.g. Retail Alliance requires suppliers to pay compensation
for the involvement of its product in retail stores. As we have said, by requiring
compensation for inclusion in range, Retail Alliance wants to protect itself from the
potential risks of market failure of new products. Thus a source of additional
revenue and profit from the use of force in the channel that was controlled retail
space. Manufacturers, even though they are aware that the practice is widespread,
not look favorably on such a relationship and to understand as unfair way of
redistribution of profits among companies in the marketing channels for the benefit
of retailers. Short-term stress refers precisely these forms quickly and easily make
extra profit, long-term relationships stress the mutual goals of improving
profitability on the basis of growth in sales. In today's market conditions
undoubtedly prevail commitment to collaboration and co-operation in marketing
channels and supply chain. The main areas of cooperation, which are manifested to
a greater or lesser degree are: (Borota, 2006. pp. 145-152)
? Value chain (in the form of savings and optimization of logistic processes
and increase inventory turnover ratio)
? Financial analysis (analysis of the efficacy of pricing policies, presentation,
promotion and ABC cost analysis);
Faculty of Business Economics and Entrepreneurship 533
? strategic marketing (understanding of consumer habits and perceptions,
creating demand and improving the image of the joint).
Cooperation can be achieved in three ways: an open long-term cooperation,
"hot-cold" relationship and transactional type relationships "buy-sell". In any case,
the importance of open collaboration means focusing on creating more customer
value, that is multifunctional ie. team approach, a joint business plan to maximize
mutual opportunities and coordinated development of strategic projects. Finally,
the specific field of operational and strategic cooperation between suppliers and
retail alliances are: (Borota, 2006. pp. 145-152)
? Promotion planning. Associated entities jointly plan the promotion; must
first negotiate a mutual responsibilities, planned expenditures and revenues,
plan execution, and evaluation method generated effects.
? Management of space, which can be seen as a set of common activities and
the development of effective standards of visual merchandising plans,
operational best use shelf space in retail outlets.
? Managing the development of new products, including an active role in the
design, planning, manufacturing process, packaging and defining the basic
functional characteristics of the product.
? The introduction of a new product. The main objective of the joint
introduction of a new product is to reduce potential problems in entering the
market and the costs related to that occurring. The process involves the
choice of a specific product to be introduced in assortman, making the
introduction of the operating plan and related promotion and development of
a methodology for measuring the results achieved in relation to expectations.
? Relationship management costs and prices to ensure fulfillment of the
trunover volume that generates the maximum profit (given the level of price
elasticity and total costs).
? Manage orders include specific activities such as receiving orders,
processing and delivery of goods, in order to meet the demand for certain
goods in the right quantity, at the appropriate time and with the correct
invoice for the goods.
? Transportation management planning process involves joint transportation,
handling, transfer and payments by the manufacturers, distributors and retailers.
? Inventory management is aimed at improving the level of inventory control at all
stages of the supply chain and the optimization of the costs thereof. Plan and
complete inventory of retail stores for the next period depends on the historical
sales data from the POS terminal and expected trends in the market.
? Management of unsold goods not only involves a process in which slow moving
and obsolete inventories down goods, but also preventive actions to forestall the
emergence of phenomena destroyed, damaged and substandard quality goods.
This reduces the costs that are caused in this way, and reduces the number of
cases of return purchased goods that consumers were not satisfied.
534 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
In this sense, ask questions of business ethics in the interaction and
interrelationship between related entities in marketing channels. Respect codes of
ethics and good business practice to the dominant position of power and do not use
unfair for profiting in the distribution of some participants at the expense of others,
whose market power is significantly lower. In the development of mutual relations
and the competitive bidding during the evolution of the channel, reveals and new
forms of pressure on other businesses, so that limits intrusion into the unethical
issues become so thin that it is almost double the possibilities of interpretation,
depending on the angle of observation and possible analyst bias. Notwithstanding
the commitment to long-term or short-term interests, in all respects, to be
honorable requirement to comply with business ethics. This is a necessary
precondition for the further development of Retail Alliances and encourage fair and
loyal competition.
I MPROVI NG MARKET PARTI CI PANTS I N COOPERATI ON
WI TH SUPPLI ERS
When the strategic partnership is established with the aim to improve market
performance of joint operations, critical decisions are related to the selection of
partners. Then you have to define clear criteria for evaluating the benefits and the final
choice of partner. Election of the members in the planning phase of the strategic
partnership is a two-way process. In fact, the producers should choose the traders, and
the trade should choose suppliers. The main objective of the manufacturer when
selecting retail is to ensure an adequate distribution channel for their products to the
consumer and in this sense the new improved market performance of the power of
partnerships. In assessing retailers, manufacturers often can use criteria such as market
share, the number of retail outlets, the number of consumers who shop at these
facilities, financial strength, purchasing and negotiating power, representation
competitor in the retail portfolio and the level of cooperation with them, the future
development retail network and the potential for new markets, the method of supply
retailer prefer, geographic dispersion of retail stores and distribution center distance,
reputation and image among consumers. It is therefore in the interest of retailers to join
forces in order to increase the above criteria.
Retail Alliance when choosing manufacturers as a strategic partner wants to
achiever the availability of products in the package, on the shelves of retail stores
in accordance with the requirements and needs of the end consumers. In this sense,
partner selection criteria can be:
? brand strength,
? quality and performance of products,
? market orientation and taking a global marketing campaign to support the
sale,
? the willingness to accept the return of unsold products,
Faculty of Business Economics and Entrepreneurship 535
? reliable and the possibility of efficient and accurate processing of orders,
? timeliness of delivery,
? the presence of other products in the range of retail,
? supply conditions,
? complementarily with existing retail assortment,
? joint readiness development of new products,
? benefit from the standpoint of supporting private label projects etc.
There are many criteria for evaluating the potential benefits of establishing
strategic partners, long-term relations of cooperation. Finally, we conclude that the
importance of the selection criteria individually selected just depends on the area in
which he wants to achieve the improvement of market performance. Final, Retail
Alliance will be improving economic performance, reduce production costs,
promotion of innovation and increased market orientation through diversification
of economic activities are important for improving the quality of life and a better
environment. (Ostoji?, 2013.)
FI NANCI AL POWER OF STRATEGI C PARTNERSHI P
ASSOCI ATED
Inevitable motive in establishing the strategic partnership of suppliers and
Retail Alliance is to create a joint financial strength of suppliers members,
especially the alliance. In developed market conditions integration and
concentration of capital are growing and becoming a necessity and a critical factor
in the survival of the market. The pooling of resources partners see opportunity to
help overcome the barriers to entry into new markets that increasingly require large
investments, and facilitate negotiations with a management and implementation of
the agreed overall network aliance. Financial power can manifest itself in two
ways: by increasing revenues and profitability on the one hand, and reducing
administrative and other operating expenses, on the other. Associated investments
can provide growth in sales and profits achieved, triggering a spiral of further
growth of financial strength. Certain administrative and operating costs can be
divided between partners or even reduced concerted activities and the exchange of
professional opinion about a possible their optimization. Also, this should be
considered as an advantage and share the burden of the investment risk due to the
combined financial strength. There is no need to analyze individual growth effects
of financial strength which in itself implies. There is a need to emphasize the
possibility of using financial strength of associated members as a strong motive for
entering certain entities in the partnership in alliance.
536 ENTREPRENEURSHIP: FACTORS AFFECTING SMALL-SCALE BUSINESS PERFORMANCE AND DEVELOPMENT EEE 2014
DEVELOPMENT TECHNOLOGY AS A BASE FOR SUPPORT
SERVI CES
Information technology is a necessary infrastructure for the functioning of
modern strategic partnerships. This requires the exchange of information, and the
improvement in this area can be strategic. Affiliate relationships may constitute a
platform for continuous improvement and integration of technology as a support
service to business-related subjects. We can summarize that information
technology is an important factor supporting business concepts like retail alliances
such as:
? quick and efficient response to consumer demand,
? integrated management
? inventory
? joint planning,
? forecasting and replenishment,
? Category Management,
? Customer Relationship Management,
? Shelf Management
? merchandising strategies etc.
CONCLUSI ON
The first and the most important task that needs to be addressed in the policy
portfolio is to identify customer requirements in terms of quality and product
properties. It is, in fact, determine the quality of the properties which will give
consumers a priority. Product purchasing decisions involve choices between a
number of functional, structural and aesthetic properties. Retail Alliance has to
produce quality products on the market, or certain categories that consumers are
looking for. Therefore, management of Retail Alliances must procure and sell
quality products that meets their requirements. Gaps in structuring qualitative
assortment are accompanied by frequent bargains, excessive inventories, and often
permanently lost customers. On the other hand, unnecessarily tying funds for goods
with a low turnover ratio equals disaster. Range policy of Retail Alliances should
coordinate the interests of consumers and producers alliance. This means a balance
between the needs and demands of consumers, on the one hand, and reality
producers, on the other hand. The above equilibrium can not be achieved unless
production and trading companies are not cooperating. Joint planning and
production of the best selling range reflects to the unity of production and
marketing of commercial enterprises. To stumbled upon receipt of the consumer
products, retail assortment structure of the alliance to meet next looks, price and
Faculty of Business Economics and Entrepreneurship 537
consumer demands in terms of quality. Customer can perceive the value that it
provides retail in several dimensions:
? Compliance with requirements;
? the possibility of a wide selection of products;
? the price level and brand image;
? services that add value;
? establishing relationships and creating experiences.
As with any business in general, there are certain risks associated with the
operation of strategic alliances. The primary issue for Retail Alliance is to achieve
the greatest possible value, while maintaining control, and how to choose members
to achieve such a goal. There are two types of risks associated with strategic
alliances:
? risk refers to the probability that the partner will appreciate the elements of a
cooperation agreement,
? the risk environment is the amount of property that would be directly
affected by changes in political, economic and competitive environment.
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Internationaln Conference, Belgrade
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