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SMAC-ING ADVANTAGE IN STRATEGIC RETAIL LOYALTY PROGRAM � A CASE

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Article · October 2017

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IJSM, Volume 17, Number 2, 2017 ISSN: 1555-2411

INTERNATIONAL JOURNAL OF
STRATEGIC MANAGEMENT®

EDITOR-In-CHIEF

Dr. Mark A. Lee, School of Business, Trinity Western University

A Publication of the
International Academy of Business and Economics®
.
IABE EU

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 IJSM, Volume 17, Number 2, 2017 ISSN: 1555-2411

EDITORIAL BOARD

Dr. [Link], Sastra University, India

Dr. Dipti Rekha Mohapatra, Ravenshaw University, India
Dr. Muhammad Hussein Nouire Elah, Islamc Azad University, Iran
Dr. Alaa Ahmed Hassn Al-Jboury, University of Mosul, Iraq
Dr. Steven Cofrancesco, Northcentral University, United States
Dr. Steven Mchugh, Sr., Centenary College, United States
Dr. Oluwole O. Iyiola, Covenant University, Nigeria
Dr. Khalizani Khalid, Abu Dhabi University, United Arab Emirates
Dr. Olimpia Neagu, ”Vasile Goldis” Western University of Arad, Romania
Dr. Mahiswaran Selvanathan, Segi University, Malaysia
Dr. Christine Lai, Business Department SUNY, Buffalo State, United States
Dr. Vitally Cherenkov, Graduate School of Management [Link], Russian Federation
Dr. Pierre Al-Khoury, Lebanese German University, Keserwane, Lebanon

The IJSM is a Registered Trademark of the IABE.

The IJSM is a publication of the International Academy of Business and Economics. All rights reserved. ©2017 IABE.
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 IJSM, Volume 17, Number 2, 2017 ISSN: 1555-2411

A Welcome Note from the Editor-In-Chief:

It is our pleasure to present the International Journal of Strategic Management (IJSM), Volume 17,
Number 2, 2017 issue. IJSM is a publication of the Academy of International Business and Economics.
The IJSM has the ISSN (ISSN: 1555-2411) and Call Number HD30.28 1553 issued by the Library of
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IJSM, Volume 17, Number 2, 2017 ISSN: 1555-2411

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TABLE OF CONTENTS Page

THE ADOPTION AND IMPLEMENTATION OF ACTIVITY-BASED COSTING: 7

A SYSTEMATIC LITERATURE REVIEW

Rainer Lueg, Aarhus University, Denmark

Niklas Storgaard, Aarhus University, Denmark

SMAC-ING ADVANTAGE IN STRATEGIC RETAIL LOYALTY PROGRAM – A CASE STUDY IN 25

INDIAN PHARMACEUTICAL INDUSTRY

Arabinda Bhandari, School of Management, Presidency University, Bangalore, India

COGNITIVE APTITUDE, EDUCATION AND WAGES: EVIDENCE FROM THE NLSY97 DATA 33

Diamando Afxentiou, New York Institute of Technology, Old Westbury, New York
Maya Kroumova, New York Institute of Technology, Old Westbury, New York

THE FACTORS AFFECTING THE SURVIVAL OF FAMILY BUSINESSES IN LEBANON 41

- AN ORGANIZATIONAL BEHAVIOR PERSPECTIVE

Cherine Jneid, AZM University, Lebanon

Samer Francois Nakhle, AZM University, Lebanon

AGILE PROJECT MANAGEMENT AS A GENERATOR OF STRESS RELIEF AND EFFICIENCY? 67

Stefan Sauer, Institute for Social Science Research, Munich, Germany

ASSET RESOURCE STRATEGIES – AN INTEGRATED FRAMEWORK TO ORCHESTRATE 75

LONG TERM COMPETITIVE ADVANTAGE

Charles McMillan, Schulich School of Business, Canada

THE ROAD TOWARD AACSB ACCREDITATION: 97

THE CASE OF A MIDDLE EASTERN UNIVERSITY

Abrar T. Rizq, Faculty of Economics and Administration, King Abdulaziz University, Jeddah, Saudi
Arabia. Robert P. Singh, Earl G. Graves School of Business and Management, Morgan State
University, U.S.A.

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THE ADOPTION AND IMPLEMENTATION OF ACTIVITY-BASED COSTING:

A SYSTEMATIC LITERATURE REVIEW

Rainer Lueg, Aarhus University, Denmark

Niklas Storgaard, Aarhus University, Denmark
[Link]/10.18374/IJSM-17-2.1

ABSTRACT

The paper reviews the literature on the adoption and implementation (A&I) process of activity-based
costing (ABC). The paper finds that the majority of the studies have tried to identify technical, behavioral,
organizational and other contextual factors that result in the adoption and successful implementation of
ABC. However, findings have been inconclusive and only found few specific factors for instance top
management support, implementation training, non-accounting ownership and business size, to be
associated with a successful process. Only few studies challenge the well-behaved adoption and
implementation process assumed in the factor studies, as the process actually includes legitimization
issues, power struggles among individuals and pressure from certain institutions. To advance the
research within the adoption & implementation of ABC, a future research agenda is [Link]
includes a request for research within new geographical regions and organizational sizes, a demand for a
new research framework in contingency-theory related factor studies and a call for research within
alternative management accounting research perspectives to illustrate the complexity of the adoption &
implementation process.

Keywords: implementation, activity-based costing

1. INTRODUCTION

Activity-based costing is a concept that has gathered wide attention and maintained a status of a high-
profile management accounting innovation for several years (Innes & Mitchell, 2000). Therefore, ABC has
gained the attention of academics, universities and practitioners as a potential costing technique (Malmi,
1999; Liu & Pan, 2007). However, the adoption rate of ABC has been surprisingly low, which has resulted
in the discussion of the ABC paradox (Gosselin, 1997). Regardless of the low adoption rate, factors that
relate to a successful adoption and implementation process of ABC have been a popular research topic
(Bjørnenak, 1997; Gosselin, 1997; Krumwiede, 1998; Shields, 1995). Nevertheless, the above quoted
research contributions have assumed a change process which is linear, controllable and affected by
certain variables (Otley, 2016; Baxter & Chua, 2003).On the other hand, Baxter & Chua (2003) argue that
accounting change has never had any technical elegance nor excellence but is actually founded by
conflicts and diverse interests. As studies have different methodological assumptions and, to some
extent, only show snapshot pictures of the adoption and implementation process of ABC (Innes &
Mitchell, 2000), the lack of overview in the field of ABC regarding the process has led to the following
research question:

Within ABC literature, how is the adoption and implementation process introduced and elaborated?

The literature review provides several contributions. First of all, it synthesizes the literature on the
adoption & implementation process of ABC. The majority of the studies are conducted in large
organizations located in the manufacturing industry in developed countries. Secondly, the majority of the
chosen studies only find few factors that actually contribute to either adoption or implementation success
of ABC. Moreover, the factor studies treat the definition of implementation success and usage of ABC too
lightly leading to comparability issues and inconclusive results among factor studies. Thirdly, only few
studies challenge the notion of an idealistic implementation process by indicating that the process is far
more complex. Lastly, a future research agenda proposes additional research within the adoption and
implementation process based on current limitations of ABC literature.

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The article continues as follows; the second section briefly describes theory that helps to characterize the
majority of the relevant articles. The 3rd section includes an introduction to the search process. The 4th
section groups and interprets the literature within specific perspectives to identify dominant trends in the
literature. In the 5th section, a discussion of the trends, limitations of the study and a future research
agenda are presented. Finally, a conclusion is offered.

2. THEORY

Concerning research on the implementation of ABC, several factor studies have been carried out
throughout the years. In the early 90s, research was conducted to show how technical characteristics
were carried out to improve the implementation of ABC (Cooper, 1990) without paying much attention to
the employees and their role in the implementation (Shields, 1995). Therefore, several companies have
experienced difficulties implementing an ABC system (Shield, 1995). The unsuccessfulness of ABC has
lead to research on contextual factors, behavioral and organizational factors that might increase the
probability of adoption or successful implementation of ABC (Anderson, 1995; Brewer, 1998; Foster &
Swenson, 1998; Krumwiede, 1998; Shields, 1995). In order to create clarification among several studies,
Liu & Pan (2007) identify categories of factors associated with ABC adoption & implementation. Liu & Pan
(2007) discovered four categories of factors, namely technical, behavioral, organizational & other
contextual factors. The technical variables include characteristics such as process design, selection of
activities or cost drivers (Liu & Pan, 2007). Furthermore, behavioral and organizational factors serve a
similar purpose within an organization, namely to increase the preparedness of the employees, ultimately
leading to a higher degree of employee involvement or acceptance of the ABC system (Shields, 1995).
Examples of organizational factors are top-management support, adequacy of resources, training of
employees and organizational structure (Liu & Pan, 2007). Furthermore, behavioral factors include
initiatives that increase the involvement of individuals in the implementation process. The last category
named "other contextual factors" include variables, that might not be applicable within either the
organizational or behavioral categories, but are still related to the context of the company (Liu & Pan,
2007). Examples are linkage of ABC to performance evaluation, company size or the competition in the
industry (Liu & Pan, 2007).

3. METHODOLOGY

Search combinations Search result (# articles) Relevant articles

"Activity based costing" AND Implementation 388 39
"Activity based costing" AND Adoption 167 23
"Activity based costing" AND Antecedent 15 1
"Activity based costing" AND "Accounting Change" 33 3
"Activity based costing" AND "Diffusion" 36 10
Total number of articles 639 76
Unique articles 58
Duplicate articles 18
Further exclusion of articles
Non-empirical articles removed 5
Articles discarded due to incorrect research purpose 4
Articles removed due to low quality 23
Additional articles added after search process 1
Total articles 27
Table 1: Search Strategy & Exclusion of articles. Source: Own creation based on the search strategy

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This article is a systematic literature review as proposed by Denyer & Tranfield (2009), following the usual
steps of application (e.g., Albertsen and Lueg, 2014; Andersen and Lueg, 2017; Lueg, 2008, 2015; Lueg
and Carvalho e Silva, 2013; Lueg and Julner, 2014; Lueg and Radlach, 2016; Lueg and Vu, 2015). The
search process has been conducted in the database ABI Inform Global to be able to cover a large
quantity of literature in numerous journals within several fields. Before the search process began, we
chose to limit ourselves to English peer-reviewed empirical articles. Moreover, the search only included
articles in the timeframe of year 1989 to 2015, since activity-based costing was introduced by Cooper &
Kaplan (1988) in the late 1980s (Bjørnenak & Mitchell, 2002). Initially, the search process included 4
steps.

First of all, we started the search process by doing a simple search of the word "Activity based costing",
which yielded 2,770 articles. Secondly, to minimize the number of articles, we chose to do a boolean
search in which we searched for the word "Activity based costing" combined with one of the following
words "Implementation", "Adoption", "Antecedent", "Accounting change" and "Diffusion" which were only
searched for in the abstract, title and key words of the article. The words were chosen specifically in order
to limit ourselves to the adoption and implementation process of ABC. All in all, we were not interested in
the diffusion rate of ABC, the comparison of neither ABC with other cost management techniques nor
whether the economic benefits of the ABC implementation were positive or negative. Each word
combination was searched individually and yielded a total of 639 articles. Due to the individual search
process, duplicate articles were found in each individual search. Within each search, we scanned through
the title and the abstract of the articles in order to identify articles contributing to the explanation of the
implementation process of ABC. The scanning process led to 58 unique articles. Of the 58 articles, a read
through of the introduction and conclusion revealed 5 articles that only included non-empirical data. An
additional 4 articles were also removed because they did not focus on the adoption & implementation
process. This led to a total of 49 articles. Thirdly, to ensure academic quality, we limited our search to
include journals with a rating of 2 or above in two consecutive journal guides (2015 & 2010) in the
"Academic journal guide 2015" published by the Association of Business Schools (2015). Based on the
ratings of the journals, we eliminated 23 of the remaining 49 articles. Furthermore, a scanning of the
reference lists of the chosen articles led to the inclusion of one article that the search process did not
include. Therefore, we have discovered 27 articles which will be analyzed further in this paper.

4. ORGANIZATION AND INTERPRETATION OF LITERATURE

To clarify and analyze the articles, Denyer & Tranfield (2009) propose an exploration and elaboration of
certain categories that will enable a more efficient interpretation and cross-tabulation of the articles.
Therefore, the literature will be organized with a similar approach as was utilized in Gosselin (2007),
Albertsen & Lueg (2014) and Bjørnenak & Mitchell (2002) in which different categories are used.

4.1. General course of action

To identify similarities and deviations among the articles, the data categories are divided into three
perspectives: Overall context, author's perspective and adoption and implementation perspective (A&I
perspective) (Albertsen & Lueg, 2014). First of all, overall context includes categories that will identify
organizations within common categories such as geographical region, sector and year of publication
(Bjørnenak & Mitchell, 2002). Even though some articles were removed due to the non-acdemic nature,
the removed articles will be included in certain categories as they reveal interesting aspects regarding the
time and geographical trend of the adoption and implementation literature. Moreover, the inclusion of an
author's perspective was also deemed necessary. Each author has a predisposed philosophical attitude
that influences the study in a specific direction as it influences choice of objective, meta theory and data
(Eriksson & Kovalainen, 2008). Therefore, categories such as theory, types of data and ranking of
objectives are included, as they enhance our understanding and the trend of the literature. Regarding the
A&I perspective, the perspective illustrates the focus of the organization and the researcher when ABC
was implemented or adopted. This includes whether the study identifies factors such as behavioral,
organizational, other contextual and technical factors that were crucial in the implementation process. The

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A&I perspective also includes actors involved in the research literature, since research might have missed
actors that are essential in the implementation of ABC.

4.2. Overall context

To create an overview of the articles and their coverage of the adoption and implementation of ABC, a
chart, with the number of publications during the time-period of 1989-2015 has been generated. The chart
includes the 27 articles, which meet the selection criteria in section 3, but also the articles that were
disregarded due to a low rating by the Association of Business Schools (2015). By observing the chart,
the number of articles in the early 90s is low with only two articles published. However, during the mid 90s
and onward, the number of articles increases substantially, in that 13 of the 27 included articles are
published from 1995-2000. This is fairly consistent with the findings of Bjørnenak & Mitchell (2002), as
they concluded that the number of publications in the beginning of the 90s was low but steadily increased
in the mid 90s. Therefore, articles, dealing with the A&I process of ABC, were difficult to find during the
first years as the companies had to be persuaded to adopt ABC before academics could study the
adoption and implementation process (Gosselin, 2007). Thus, a slight delay in publications was expected.
Lastly, the number of publications of the included articles decreases between 2000-2010 where the
number of non-academic articles begins to increase. This leads to each time interval after 2000 to include
a total of articles between 4-9 articles.

In order to explain the downward trend of the included articles and the imminent increase in non-
academic articles, the geographical regions of both categories are investigated. In the 27 included
articles, 30% and 19% of the articles consist of companies from North America and United Kingdom,
respectively. The initial research conducted in Asia, Middle East and Africa is fairly low and shows that
qualified research has mainly been conducted in developed countries. Except for Nassar et al. (2013),
high-quality research on the adoption or implementation of ABC has not been conducted in the Middle
East. However, studies in Asia have started to emerge because researchers have discovered the missing
research in developing countries (Liu & Pan, 2007). Moreover, the majority of the studies include only
organizations within a single country. However, one case study investigated the impact of cultural factors
on the implementation process. Brewer (1998) conducted a study in both USA and Malaysia to compare
the cultural differences and their impact on the process of the ABC implementation. The trend in ABC
research was expected to be found mainly in USA and UK since the entrepreneurs of ABC reside in the
US and the development of ABC was a response to the emergent manufacturing environment in the US
(Jones & Dugdale, 2002). Briefly, comparing the geography of the research in practice-oriented articles
with the number of publications in 00s, ABC begins to see further research in developing countries, which
explain why the adoption and implementation process have continued to gain attention in the 00s.
However, few studies conducted in developing countries have been published in highly rated journals.

Additionally, the research has been conducted in the private sector, primarily, as 24 of 27 studies were
conducted in the private sector. Nevertheless, Baird (2007) investigated Gosselin's (1997) 3 levels of
activity management and factors related to each activity level in the public sector. However, the adoption
and implementation process is still a fairly unwritten topic in the public sector (Baird, 2007). Cooper &

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Kaplan (1988) initially presented ABC as a method to deal with distorted cost information in which they
used examples with manufacturing firms, hence encouraging the private sector to adopt ABC.

Industrywise, the majority of the case studies include organizations in the manufacturing industry. As
expected, 56% of the included articles (15 articles) have been conducted in the manufacturing sector,
since Cooper & Kaplan (1988) presented numerous examples, which included manufacturing companies.
Moreover, research argues that adopting ABC relies on the degree of overhead cost in the organization,
thus the manufacturing industry is the optimal choice (Bjørnenak, 1997; Krumwiede, 1998). However,
ABC is also found in other industries such as retail (3 articles) and the service industry (3 articles).
Related to the public sector, health care and education have attempted the implementation of ABC. This
might be a sign of the growing accountability and performance issues that the public sector faces, thus
public organizations might feel forced to implement ABC (Baird, 2007). Moreover, the sizes of the
included organizations also show a significant trend. 78% (21 articles) include large organizations, which
indicates a significant trend among researchers to choose large organizations. The dominant position of
large organizations also corresponds to the fact that larger business size tends to encourage the adoption
of ABC (Baird, 2007; Bjørnenak, 1997). Therefore, to some extent, it might be due to lack of other
alternatives. Furthermore, 22% (6 articles) included multinational organizations. However, the number
might be even higher since it is hard to identify whether multinational companies are present in the
surveys, as only the general trend of the sample is mentioned in the surveys. Lastly, 15% of the articles
(4 articles) include SMEs. Therefore, qualitative research in SMEs is scarce because SMEs are mainly
present in surveys (Gosselin, 1997; Nassar et al., 2013).

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4.3. Author's perspective

As mentioned earlier in the review, the authors of the respective studies have significant influence
regarding the scope of the articles because the authors determine the importance of each research
question, types of primary data and philosophical standpoint. In the current review, 19 of the 27 the
studies focus on the adoption and implementation process as its main objective, indicating the importance
and relevance of the A&I process. 7 of the remaining 8 studies have implementation or adoption as a
coequal research objective. Frequently, the A&I process is combined with a survey that investigates the
current diffusion or adoption rate within a specific country such as Bjørnenak (1997), Nassar et al. (2013)
or Innes et al. (2000). The remaining article where the objective is subordinate, the adoption process is
only devoted a limited section in the study (Innes & Mitchell, 1995)

Regarding the data used, the predominant method is a case study method (15 articles) in which multiple
sources of evidence are employed such as observations, data from the company databases, participation
in the companies or even surveys. Even though, many of the studies employ a case study approach, the
exploratory nature of the case studies lead the researchers to combine both surveys and interviews. For
instance, Malmi (1999) utilized both surveys and interviews to determine what drives diffusion of ABC in
Finland. To be more precise, 8 of the case studies also included company data from the research sites, 8
studies included direct observations and 7 studies included secondary data in order to triangulate their
findings. More interestingly, 12 studies only included survey data which shows the quantitative nature of
the research. In the studies where only survey data was used, the response rate ranged from 11%
(Schoute, 2011) to 69% (Nassar et al., 2013) with an average response rate of 54%. Therefore, the
studies are close to the average response rate of 55% in management accounting journals (Van der
stede et al., 2007). Lastly, 3 articles utilized either action research or participation in the company, thus
the authors were asked to offer their expertise on the subject (Liu & Pan, 2007; Malmi, 1997; Soin et al.,
2002).

The last category of the author's perspective is the theory of the studies as it can explain the trend within
the A&I process of ABC. Even though, it is difficult to group studies into certain theories, the attempt still
contributes to the interpretation of the literature. Before presenting the theories, it should be mentioned

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that a factor study does not necessarily use contingency theory as case studies are also identified as
factor studies. However, the objective is primarily the same; namely to identify factors positively
associated with the A&I process. As can be observed, the majority of the studies, namely 19 of 27
studies, use contingency theory or conduct a factor study in which they identify factors that are positively
correlated with adoption of ABC or success in the implementation process. Even the study employing
action research is ultimately conducted to identify factors that were positively associated with
implementation (Liu & Pan, 2007). Surprisingly, limited amount of studies focus on the interactions among
different actors. Few studies employ theories such as ANT (2 articles) or institutional theory (1 article),
which incorporate the interactions and influences from a diverse set of actors (Alcouffe et al., 2008; Briers
& Chua, 2001; Soin et al., 2002). Closely related, two studies are critical towards the implementation
process (Bhimani & Pigott, 1992; Malmi, 1997) as they argue that the process is related to power and
politics, which might lead to a change of power authority within the organization. Lastly, one study
employs grounded theory because it does not want to frame the implementation process (Norris, 2002)
and two studies employ more than one theory because they find the implementation process to be too
complex to be explained by a single theory (Major & Hopper, 2005; Hopper & Major, 2007).

4.4. Adoption & implementation perspective

The final perspective is the adoption and implementation perspective, which is also illustrated in table 5.
To illustrate the focus point of the studies within the organizations, the studies are grouped into studies
that focus on adoption, implementation or both processes. First of all, 9 case studies solely center around
the adoption process where 9 focus solely on implementation. Lastly, the attention of 9 studies is on both
adoption and implementation. For instance, Krumwiede (1998) investigates how different contextual and
organizational factors have varying impact depending on the stage of the adoption and implementation
process that the company is currently situated in.

Secondly, the involved actors in the surveys and case studies are also studied. In 8 of the articles, top
management was asked or included, which is a surprisingly low involvement, since a mechanistic
organizational structure is argued to be associated with successful adoption of ABC (Gosselin, 1997).
Therefore, top management would be highly relevant to include in adoption and implementation studies.
However, a majority of the surveys were sent to organizations without a specific inquiry to get answers
from the top management, because they already struggled with low response rates (Brown et al., 2004,
Schoute, 2011). On the other hand, the majority of the studies included inputs from middle management
(21 articles) especially within accounting & finance departments (15 articles) but also from non-
accounting staff (14 articles). Accounting and finance are primarily included because they have
knowledge of ABC beforehand (Krumwiede, 1998).

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However, only 7 articles included operating staff. According to Gosselin (1997), the disregard of the
operating staff seems to be perfectly normal, since adoption of ABC tends to be more likely in
organizations with mechanistic structures. However, operating staff, especially manufacturing staff, is
argued to have impact on the implementation process (Major & Hopper, 2005). Optimally, the perspective
of the operating staff should have been included even more, as individuals tend to have different
perceptions of the ABC system and its success during implementation (Malmi, 1997, Krumwiede, 1998).
Moreover, 8 of the studies also included input from consultants/experts, which address the importance of
the supply of ABC in the adoption and implementation process. The inclusion of consultants confirms the
possible importance of the supply-side of ABC in the adoption of ABC (Lueg, 2009; Major & Hopper,
2005).

Lastly, the table includes the categories of factors associated with adoption of ABC or implementation
success, which were described in the theory section. Firstly, 8 of the articles were non-applicable in the
settings of the chosen factor categories as they did not have the intention to discover factors associated
with ABC (See appendix D).

As observed, other contextual factors have been the most dominant category with 15 of the 19 studies
examining factors within that category. Additionally, 14 of the 15 studies found other contextual factors to
be positively associated with either adoption or implementation success. However, it also becomes clear
that only business size might have an influence on adoption and implementation, since 5 of the 14 studies
indicate that business size is associated with ABC (Appendix C). Therefore, size might encourage
adoption of ABC because they have the necessary network and resources to commit to further
implementation (Bjørnenak, 1997; Baird, 2007).

Next, organizational factors have been examined in 14 of the 19 studies where 13 of the studies found
organizational factors to be significant regarding adoption or implementation success of ABC. As
observed in Appendix C, top management support is the dominant organizational variable with 11 of the
studies confirming its significance to the implementation and adoption process, hence verifying that top
management support can drive the implementation process (Liu & Pan, 2007). In addition, 6 of the
studies confirm that training of employees is crucial to the success of the implementation process as it
gives employees a chance to familiarize themselves with ABC (Shields, 1995). Moreover, 9 studies have
examined behavioral factors in which 8 of them found behavioral factors to be significantly related to
adoption and implementation of ABC. As observed in Appendix C, 4 of the 9 studies find that internal
agents promoting and taking ownership of ABC, to be crucial for the adoption of ABC as they continue to
convince others about its relevancy in the organization (Bjørnenak, 1997; Brown et al., 2004; Malmi,
1999). Furthermore, convincing employees in non-accounting departments to gain a certain ownership
feeling of ABC is also crucial for the implementation process (Appendix C).Non-accounting departments
tend to embrace ABC if the ABC system is tied up to personal welfare of the employees or if top
management makes significant initiatives that shows their support to ABC (Krumwiede, 1998; Shields,
1995).

Additionally, 7 studies addressed technical factors but only 2 studies found technical factors to be
associated with ABC adoption. This is coherent with the general trend that technical factors are not the
decisive factor in the implementation or adoption of ABC (Shields, 1995; Liu & Pan, 2007).

Lastly, an additional category, besides technical, organizational, behavioral and other contextual factors,
should be considered; namely culture (Dalby et al., 2014). 4 studies investigate if national culture
(Brewer, 1998; Morakul & Wu, 2001) or organizational culture (Baird et al., 2004; Baird, 2007) affect the
implementation process of ABC. 3 of the 4 studies conclude that culture does have an impact, since
national cultures described by collectivism and hierarchy lead to a more successful ABC implementation
(Brewer, 1998; Morakul & Wu, 2001).

Therefore, it can be concluded that other contextual factors, organizational and behavioral factors have
shown to be significantly associated with ABC adoption and implementation. However, research has not
found significant results regarding specific variables. There are only a few exceptions. Within the
implementation process, factors, such as ownership feeling in non-accounting departments, involvement

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of staff and implementation training are highly important in order to mitigate resistance that might arise
during the implementation of an ABC system (Shields, 1995). Additionally, internal agents that promote
ABC and business size tend to increase the probability of adoption. Lastly, the most significant factor
regarding the adoption and implementation success of ABC relies on the support from top management.
Summary of included factor studies can be found in appendix B.

5. DISCUSSION

In the following section, the included articles and their trends will briefly be synthesized. Limitations of the
trends are discussed and a future research agenda is proposed. As illustrated in the previous section, a
large number of articles present factors that either increase the likelihood of adopting ABC or increase the
probability of success in the implementation process. The first group of "factor studies" identify technical,
organizational, behavioral and other contextual factors that have a positive influence on the adoption of
ABC or success of implementation without dividing the adoption and implementation process into phases
(Baird, 2004; Baird 2007; Bjørnenak, 1997; Innes et al., 2000; Innes & Mitchell, 1995; Nassar et al., 2013;
Shields, 1995). For instance, Shields (1995) concludes that technical factors do not have a significant
influence on the implementation success of ABC but organizational and behavioral factors, such as top
management support, do.

However, the studies disregard the thought of factors having a changing relevance throughout the A&I
process in the company. Therefore, some studies divide the A&I process into several phases in which
they identify factors that can progress the implementation in each phase (Anderson, 1995; Brown et al.,
2004; Gosselin, 1997; Krumwiede, 1998; Malmi, 1999). For instance, Krumwiede (1998) divides the
adoption and implementation phase into 10 stages in which he identifies the importance of various
factors. For example, top management support is more important when the ABC system is turned into a
routine system than the acceptance stage of the implementation process.

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The two groups of ABC studies have mainly conducted research on the organizational level where
individuals are studied as groups in the organization (McGowan & Klammer, 1997). To a certain extent,
the previous macro-studies disregard the individuals' perceptions of factors, such as top management
support or degree of involvement (McGowan & Klammer, 1997). Therefore, McGowan & Klammer (1997)
investigated which factors would improve the individual's perception of ABC. For example, the study
found that the individuals’ perceptions of top management support and staff involvement are associated
with a successful implementation process.

Within contingency research, there are certain limitations that should be questioned. First of all, the
definition of the word "success" has been taken for granted, since the data collection of surveys mainly
includes limited opportunities for the respondents to elaborate their answers. Therefore, few studies have
questioned the word "success." For instance, Malmi (1997) questions why ABC is only seen as a success
if it forces companies to take action as part of strategic decision-making instead of seeing ABC as a
system that can provide clarity of activities in the organization. Only a single study, namely Foster &
Swenson (1997), has a main objective of including several definitions of success in their factor study to
illustrate how determinants might differ in importance from one definition of success to another.

Additionally, the definition of activity-based costing and its use in practice are obscured again by the
research approach of factor studies as the understanding of ABC and its use might depend on each
individual and each organization. Gosselin (1997) defines three levels of activity management (AM),
namely activity analysis (AA), activity cost analysis (ACA) and ABC in order to circumvent the confusion
between organizations that actually employ ABC and organizations that utilize simpler approaches to
activity analysis. However, the 3 levels of AM imply that all organizations and employees have a common
understanding of the concepts. Therefore, mainstream accounting research, which disregards the
subjective actions and individuality of humans and treats ABC as an object independent of the subjects, is
dominant in the factor studies (Chua, 1986). Consequently, it ignores human interactions such as power
and politics that might construct the ABC system differently in each organization (Major & Hopper, 2005).

In factor studies, the adoption and implementation process is assumed to follow well-behaved stages; for
instance Krumwiede's (1998) 10 stages. Moving towards alternative management accounting research
(MAR) perspectives, the assumption of a well-behaved and linear process is presumed to be too idealistic
(Baxter & Chua, 2003). Therefore, alternative MAR perspectives are included to elaborate on the process
(Summary of studies with an alternative MAR perspective is found in Appendix D). In Briers & Chua
(2001), the change process was analyzed through Actor-network theory and was proven to be anti-heroic
in the sense that top management support could not master the craft of bringing people together.
However, change was enabled due to a network of human and non-human actors including accountants,
computer hardware and ABC sponsors that all tried to create a stronger network to facilitate their own
reality. Therefore, ABC was seen as a visual and idealistic boundary object that had the ability to become
a mediator between diverse interests and therefore facilitate change. However, as soon as actors within
the network either left the organization or began to slack regarding ABC-related activities, the system
failed regardless of top management support (Briers & Chua, 2001). To support the notion of a difficult
implementation process, Soin et al. (2002) employed institutional theory to illustrate how the tensions in
interrelationships between the ABC project team and other change agents did not allow a full
implementation of ABC/ABM. As ABC was a drastic change towards the organizational culture which had
a preference for old costing techniques, ABC was devalued by other agents in order to prevent the
company from institutionalizing ABC routines. However, the realization of increased cost information from
ABC eventually institutionalized the routines of ABC. However, the company never succeeded in
implementing ABC/ABM beyond internal cost control as employees in the company did not understand
the possibilities of ABM and therefore resisted the change (Soin et al., 2002). Furthermore, Hopper &
Major (2007) support the practical issues of ABC. The implementation process provokes conflicts over
power, resistance and culture regardless of the amount of top management support. Initially, ABC was
adopted in the case organization due to the belief of efficiency, improvement in strategic decision-making
and to comply with external institutional pressures such as the European Union. However, during
implementation, the production department resisted the changes of ABC as they felt oppressed by the
ABC system due to a shift of power to the commercial department (Hopper & Major, 2007; Major &
Hopper, 2005). Therefore, implementing a new management accounting system is more than identifying

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factors that might ease the change process. It is a process characterized by politics, power and
resistance (Hopper & Major, 2007; Major & Hopper, 2005). Malmi (1997) explained ABC failure by
pointing out the same problems regarding politics but also introduced cultural differences as an
implementation difficulty. As factor studies already proposed optimal cultural components, such as
collectivism and high power distance in a national culture (Brewer, 1998), Malmi (1997) illustrates how
local culture in a single department is one of the causes why ABC systems meet resistance and
eventually fail. In the factory, the local culture was dominated by terminology and concepts of engineers,
because the accounting and market-oriented culture of ABC was ignored and therefore not successfully
implemented (Malmi, 1997).

As shown above, the implementation process is complex and is a matter of mediating between diverse
interests, politics and cultures. Even though, the case studies do support that factors, such as top
management support, are vital drivers in the implementation process (Briers & Chua, 2001; Soin et al.,
2002; Major & Hopper, 2005; Hopper & Trevor, 2007), the assumption that implementation can be forced
and become successful by including certain factors is incorrect and too idealistic. As each individual in an
organization has different interests, the implementation process can become a political process between
different interests that might not be founded on rational thoughts (Major & Hopper, 2005).

5.1. Future research agenda

Now, the literature concerning adoption and implementation of ABC has been discussed, which leads to a
proposal for a future research agenda. The research agenda will be divided into 3 parts, namely overall
context, contingecy theory and factor studies and alternative management accounting research.

5.1.1. Overall context

Within the overall context of the 27 included articles, only 3 studies were conducted in Asia, one was
conducted in Middle East and 0 in Africa (See table 2). As Liu & Pan (2007) argue that Chinese
academics and practitioners are attracted to ABC, future research should focus on developing countries.
Compared to developed countries, developing countries demonstrate several interesting aspects that
could ease or impede the implementation process of ABC. Brewer (1998) already proved that ABC is
easier to implement in countries with a national culture characterized by collectivism and high power
distance. Therefore, research should develop the literature in other geographic regions than in western
countries. Moreover, 78% of the studies included large organizations but only 15% focus on SMEs. If this
is an indication that SMEs do not employ ABC, studies should be conducted to investigate why SMEs find
it difficult to implement ABC. As few factor studies already proved, size does increase the probability of
adopting ABC (Bjørnenak, 1997; Baird, 2007). Therefore, future research should perform case studies in
SMEs currently implementing ABC to identify challenges that SMEs might face.

5.1.2. Contingency theory and factor studies

Within contingency theory, the quantity of research literature in developed countries has been
appropriate. However, the contingency studies cannot agree on which factors should be included in their
studies. Therefore, the studies find few similar factors that are positively correlated to either adoption or
implementation success of ABC (see section 4.4). According to Otley (2016), contingency theory
research within management accounting has not replicated each other's studies, thus it is difficult to
cumulate research. Current studies do find inspiration from the frameworks in Anderson (1995) or Shields
(1995) but as the frameworks include different variables, it is difficult to compare and interpret results from
the studies. Conclusively, researchers should develop a unified framework in order to make it easier to
compare and conclude on specific factors. Moreover, definitions of different levels of activity management
(Gosselin, 1997) and a broad definition of success (Malmi, 1997) should also be included to prevent
studies from misinterpreting results otherwise, research will continue as current literature; namely too
inconclusive and exploratory. Lastly, to propose a new framework is a bold move as Otley (2016) argues
that common factors might not be identifiable because organizations are complex and characterized by
uncertainty (Borisov and Lueg, 2012; Lueg and Borisov, 2014).

5.1.3. Alternative management accounting research

Lastly, the amount of research employing an alternative MAR perspective is limited (Lukka & Granlund,
2002). However, further research with critical research perspectives should be included to nuance the

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implementation process, as only few studies argue that the process is influenced by multiple actors with
diverse interest (Discussed in section 5).For instance, few studies have investigated whether individuals
approve ABC in order to justify and legitimize decisions (Burchell et al., 1980). As the ideological rational
person includes as much information as possible (Feldman & March, 1981), the choice of adopting and
implementing ABC might not be a rational choice but an attempt to create a justification tool (Burchell et
al., 1980). Therefore, research should focus on the underlying motivation for the adoption of ABC as it
could be a justification tool against/to support institutional pressures (Hopper & Major, 2007). Another
aspect of the adoption and implementation process of ABC is related to power. As Major & Hopper (2005)
already observed, shifts in power authority due to ABC and the power struggle among departments
during the implementation process should also gather more attention. As Burchell et al. (1980) argue that
accounting practices are rarely linked to the pursuit of economic efficiency, ABC might be an attempt to
either oppress/control or redirect power to other individuals in the organization (Markus & Pfeffer, 1983).
Therefore, additional research should be conducted to enlighten how power and politics affect the
implementation process, since the current research, related to adoption and implementation of ABC, is
limited.

5.2. Limitations
There are several limitations that should be addressed in the systematic literature review. First of all, only
one database, namely ABI Inform Global, has been used to find literature. However, other databases
such as Business Source Complete (EBSCO) and Science Direct should be included to increase the
probability of including all relevant articles. Additionally, other literature sources, such as working papers
and books, could have contributed to the results of the paper. Optimally, all sources of literature should
be included to gain an even more thorough picture of the change process. More importantly, the search
process only included articles that are directly related to ABC. The specific focus on ABC has lead to the
dismissal of articles within the field of accounting change (Lukka & Granlund, 2002). Within the field of
accounting change, articles revolve around several management accounting innovations such as the
Balance Scorecard, TQM, or just management accounting innovations in general. Thus, the contributions
on accounting change are neglected. Moreover, the decision to group studies in different categories to
simplify the contributions of the articles invites the risk of neglecting certain aspects of the studies that the
authors find important. Furthermore, authors might protest to the labeling of their study as a contingency
theory or factor study because the studies emphasize how different configurations affect organizational
behavior leading to the obsolescence of the contingency concept (Otley, 2016). However, to illustrate the
general trend of ABC literature, the grouping was deemed necessary.

6. CONCLUSION

The systematic literature review has treated the adoption and implementation of activity-based costing.
The search process found 2,770 articles mentioning ABC in which 27 of the articles treated the adoption
and implementation process of ABC. First of all, the review has proven that the majority of the studies are
"factor studies" that identify technical, organizational, behavioral and other contextual factors that
increase the probability of adoption or increase the success of implementation. Only few studies question
the idealistic and well-behaved adoption and implementation process of factor studies and argue that the
process is characterized by actors trying to influence the process to fit their own interests. Therefore, a
future research agenda is proposed. Currently, studies are mainly conducted in large manufacturing
organizations in developed countries. As a result, studies in developing countries and in SMEs are
needed, even though national culture in developing countries could lead to different challenges regarding
ABC implementation. Moreover, specific factors might have different importance in SMEs compared to
large organizations due to their business size.

Secondly, the current factor studies do not agree on specific factors that influence the adoption and
implementation process. The only factors agreed upon are top management support and to a lesser
extent internal agents, implementation training, involvement of staff including non-accounting ownership
and business size. The lack of common factors in factor studies leads to an inability to generalize the
results and create cumulative research. As a result, a common framework should be developed in order
to define common factors and guidelines to be investigated in new factor studies. Additionally, the

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framework should also include considerations towards activity management levels and the definition of
success in the implementation process.

Thirdly, the research agenda calls for additional research within alternative management accounting
research perspectives in order to illustrate the complex adoption and implementation process of an ABC
system. The process has shown to be a product of individuals' and entities' diverse interests including
legitimization issues, power struggles, institutional pressures and organizational cultures. Therefore,
research should focus on power struggles and legitimization issues in the adoption and implementation
process as it is far more complex than what are assumed by factor studies.

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Schoute, M. 2011, "The relationship between product diversity, usage of advanced manufacturing
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pp. 120-134.

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Sisaye, S. & Birnberg, J.G. 2010, "Organizational development and transformational learning approaches
in process innovations", Review of Accounting & Finance, vol. 9, no. 4, pp. 337-362.

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Sohal, A.S. & Walter W.C. Chung 1998, "Activity based costing in manufacturing: two case studies on
implementation", Integrated Manufacturing Systems, vol. 9, no. 3, pp. 137-147.

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Swenson, D. 1995, "The benefits of activity-based cost management to the manufacturing industry",
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Van der Stede, A ., Young, M., & Chen, C., 2007, "Doing Management Accounting Survey Research" in
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Wessels, S. & Shotter, M. 2000, "Organisational problems in respect of the implementation of activity-
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 IJSM, Volume 17, Number 2, 2017 ISSN: 1555-2411

SMAC-ING ADVANTAGE IN STRATEGIC RETAIL LOYALTY PROGRAM – A CASE STUDY IN

INDIAN PHARMACEUTICAL INDUSTRY

Arabinda Bhandari, School of Management, Presidency University, Bangalore, India

[Link]/10.18374/IJSM-17-2.2

ABSTRACT

Research Summary:
Today’s complexity of modern business is helping managers to innovate new strategy to retain the
customer in competitive environment. To maintain a long lasting relationship, organizations are offering
certain sales promotional activities to attract the customer. As the pharmaceutical industry has highly
knowledge based product, high Intensity of product information, employee are younger in age and
organization has geographically-distributed business, so SMAC track melting point may well be near.
Technology is reshaping the retail landscape of Indian pharmaceutical business. The new technology has
been introduced to get the advantage of new way of business through mobile app, social media and cloud
computing. In future it will be the only choice for the corporate to engage the retail customer and for the
final consumer. As the shop window has moved online with POP technology, it is now very important for
the organization to use this technology to provide the enriching experience to the final customer.

Managerial Summary:
This paper will attempt to provide a conceptual overview of SMAC Strategic loyalty program in
pharmaceutical retail sector in India. It will also throw a light on customer expectation and perception
about retail loyalty program and how the loyalty program will be use to grab the opportunity in
Pharmaceutical retail outlet in India with the help of Social media, Mobile, Analytics and Cloud.
This study has conducted on more than 3000 retail out let in India and has found that Loyalty program
can be a strategic competitive edge of an organization in a red ocean area. This loyalty model can be
also used for the benefit of common man if it is linked with the SMAC technology.

Keywords: SMAC, Strategic Loyalty Matrix, TPDT Loyalty Matrix, Dead Loyalty, Trap Loyalty.

1. REVIEW OF LITERATURE:

Loyalty programs have mushroom across retail, travel, financial services and other economic sectors
across the globe. The average U.S. household participates in 29 different loyalty programs of different
industry, as per Colloquy Loyalty Census, 2015. The result is a process of point systems earned by the
targeted customer with a redemption option, with a logical processes for exchanging points of gift with the
program partners. Loyalty programs are ripe for some kind of disruptive innovation that would make them
easier to use [Dan Kowalewski]

As per opinion of Center for Retail Management at Northwestern University, some retailers find that
maximum sales go to program partner organization because of good relation of long association.
[Investor presentation of Shopper Stop’] In a study in USA, it has found that less than 15% of customers
are loyal to a single retailer, but that small proportion of the customer generate more than half of
company sales, Indian retailers also have realized the benefit of associated with loyalty programs. They
are deriving huge proportion of sales from this loyal customer and the sales of the organization is growing
year after year. In Shoppers’ Stop, 65% of its sales derived from its just over 1 million members in 2008. It
derived 73% of the sales from its just over 2 million members and generated a total profit of 7,518 lacs in
2011[[Link] By the ‘Inner Circle’ program
of Lifestyle [[Link] 50% of its annual
revenue is generated from about 2 million loyal customers. Many other retail organizations across the
globe are also generating significant proportion of revenues from their loyal customers. In association with
payback, Future group’s Green Card loyalty program, able to generate 55% of sales

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[[Link] while Westside retail chain of Tata

Group generating 50% sales from its eight lacs members of Club West loyalty program. While Indian retail
industry is getting benefitted out of strategic loyalty program, some of the Indian pharmaceutical
organizations are trying to implement this concept with the help of high end technology to get a
competitive advantage.

Although the retail loyalty program is adding sales in total revenue of the organization in all across the
world, still there is a question in Indian corporate world, whether this loyalty is true loyalty for Indian
organization or not?

2. E BUSINESS ROAD MAP:

It was a challenge for the Indian corporate world to make a customer a delight customer or loyal customer
for that organization, because every organization is playing with the same weapon of price, product, place
and promotion. In this battle neither customer nor organization is happy. With the help of SMAC,
customer will get delighted by the organization and organization will get a loyal customer.

Procedure: Every retail out let should be registered with a primary mobile number.( Primary mobile
number is a number by which retail owner will redeem the gift). Whenever the retail outlet will purchase
any product, they have to scan the code on the box of the products with the smart phone and have to
send the data to the main server. Here point of the products will depend upon the price of the product
(PTR). The retailer has to divide into three tier (may be Platinum, Gold, Silver). Based on the point they
have earned in last 6 months or particular time frame they can go the loyalty app and they can redeem
the gift any time. If they satisfied with the gift or services they can share their experience in social media.
They can also order the product through app. So they can reduce the transit time of the product and also
can reduced the human capital. At the same time field executive also can get the real time data base
regarding the customers and they can formulate a customized communication which will help them in the
sales and distribution process.

Analytics: It was a great challenge for Pharmaceutical industry in India to know the customer and
customer prescription habit. No retailer wants to share the actual data base with the pharmaceutical
executive because of certain reason.

Now with this technology, every purchase details of the retail out let will be capture and as it is a CRM
activity whenever the executive will visit the retail out let (generally free time) they will get more attention
and more valid data from the retail outlet. Apart from this so many data base can be made as per the
requirement of the hours.

The below diagram will help to understand the whole business model.

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Success story:
Based on the concept (SMAC), one study has conducted in 937 retail outlet in a city in India, the total
sales out come from the pharmaceutical retail store are like given below(Red line trends are % of retail
loyalty sales in a sample market).

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The above study shows that (Number of customer =937, Time: 8 Months, Place: state capitol, India),
14.83% Sales has been achieved by the loyal customer. However the percentage of the sales also
depends upon certain other factor like PLC of the products and seasonality if any, annual target of the
respective market and market growth rate of the respective area.

3. DATA BASE MANAGEMENT AND ITS SIGNIFICANCE

Database generated through any loyalty program gives a perfect reflection of consumer buying behavior.
After purchasing the product, when a customer sends loyalty code information to a particular mobile
number which is registered with a server, the customer purchasing habit database is stored for future
reference. Analysis of these database will give valuable insights about consumer shopping frequency,
reactions to a particular marketing campaign and will help to predict the long term sales forecast. It also
helps the organization to analyze which customer has taken how many SKUs. Based on purchased sales
value (may be a month/ year), all customer can be segmented into three groups like silver, gold &
platinum.

Based on this analysis individual customer advertisement can be formulated or narrowcasting

advertisement concept can be applied. By getting the information, which customer is purchasing what will
enables to design a appropriate reward and customized communication strategies for that individual
customer. New product launch availability and performance of the new products impact also can be seen
through this data base.

Data gathered through loyalty program can helps to take a decision in STP, brand management,
merchandising, promotional activity of product, direct marketing and inventory management. Through
proper data base management of the customer, organization can plan an e - CRM activity which will help
them to ensure a real loyal customer for the future. This data base also can help the organization to
identify the real time consumer, which was a challenge for so many organizations since long. This data
base management also can help the organization to push the product to particular retail outlet. This retail
loyalty program also can help in neuro - marketing subject to understand the customer buying behavior
that could be another branch of research in management in near future.

Strategy for change: After implementing the loyalty program in more than 3000 medical retail out let
(Time: More than one year) in a sample market in India. The sample states outperform when compare to
India sales (Organization name: ABC).

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Comparative study of state A Vs All India sales in a sample organization, after implementing the
loyalty program in Q3’14.

This result can be replicate in other industry also but the result will be depends upon the nature of
industry and the mindset of the executive who will be directly driving this loyalty program and top
management involvement of the project.

Initial Challenges: You can convince the customer regarding your loyalty program, but it will be difficult
when you are going to implement this simple concept of the program. Initially so many problems like
owner’s approval for this program will not be there. Many times you have to convince your customer for a
final call of approval. You may have to provide two alternative mobile numbers (one which could be
primary by which you can redeem the gift and another alter native mobile number from which they can
earn the points for their purchase). If delivery of the redeem gift in the stipulated time (may be 15-20
days) unable to reached to the customer on time, customer will lose the faith in this program. Initial days
whenever sales executives will visit the retails out let they will not get the response as per expectation.
So, sales executive has to follow certain relationship making tricks, like calling the owner with their name
could be a winning formula. If the executive are able to breaks this barrier, retail out let may not be in a
position to send the code in server number. Initial day retail staff will forget to send this data to the server.
So executive has to visit this retail out let again and again, some time guidance about the procedure is
very much needed. After getting some points customer should redeem the gift so that they will able to
judge the program reality which is very much important from the organization point of view as it will be an
initial experience.

Sales Executive Registered

Name Active Retail Retail % Activation
A 151 245 61.63%
B 126 249 50.60%
C 112 299 37.46%
D 62 245 25.31%
E 69 244 28.28%
F 71 178 39.89%
G 64 240 26.67%
 Active Retail = has purchased at least one SKU in a 3 months.

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Activation of Registered retail out let in last 3 months.

The above table will support the discussion regarding the initial challenges in Strategic Loyalty program in
a sample market.

4. STRATEGIC LOYALTY SUCCESS FACTORS:

Engagement: To get a good outcome from the loyalty program, organization needs to engage the retail
outlet continuously, so that they will feel that this organization doing something for themselves.
Organization can plan some theme related activity, festival offer or sales promotion activity with them.
With this activity organization can also cross sell the products, so that overall return from the targeted
retail will increase significantly.

Organization also can do some emotional attachment activity with the retail out let like DOB (Date of birth)
or DOA (Date of marriage anniversary) celebration through digital media and can offer an extra point or
small token of appreciation in kinds.

Recognition: Based on the purchase value of the retail outlet, organization can divide retail outlet
customer into 3 to 4 categories, like silver, gold or platinum. Silver is base level, so whenever they will
purchase the product they will get basic point (Suppose: 40), after certain level they can go up to gold
level, here they can get 20% extra bonus point and in platinum level they may get 35% bonus points.

Reward: The retail out let who will be purchasing the products from the organization, will accumulate the
points for a certain time, depend upon the program life cycle, they can redeem the gift according to the
loyalty program. To engage the customers this reward point can be use judicially as when required.
Selection of retail royalty gift is also very much important as deliver of that gift through courier may create
some problem because of logistic issue. So e - gift or voucher can be plan for the customer thus total
logistic cost of the organization also gets reduced.

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Strategic Loyalty Success factors

Pharmaceutical Retail Loyalty Matrix

Based on the relationship with the customer and Business outcome weight age, the below matrix (TPDT
Loyalty Matrix) will help you to take a decision which type of customer you should approach for this
loyalty program.

True - Loyalty: When the relationship with the customer is very strong and business outcome is also
strong, if you are able to approach this type of customer and able to make them participate in your loyalty
program, they will be loyal customer for you for a longer time.

Pro - Loyalty: If the relationship with the customer is high but the business outcome is low, if are able to
make them participate in your loyalty program, they will be pro loyal customer for your organization. If you
are able to mould this customer according to your loyalty program, they will help your organization to
grow fast.

Dead Loyalty: With this type of customer, there is no relationship as well as there is no business
opportunity. Here we should not invest our valuable energy or recourses here.

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Trap Loyalty: This type of customer has very high business outcome but relationship with the
organization is less. If you are approaching this type of customer, initially you may get trapped with term
and condition. Some time they may offer you an alternative of your loyalty program. Organization should
deal this type of customer very judiciously in the initial stage of loyalty program, but after sometimes if
they likes loyalty program and relationship with the organization increases, they could be a true loyal
customer for the organization.

5. CONCLUSION

After the discussion, it can be summaries that loyalty program has turned into a regular marketing
activities of many organization worldwide and the outcomes of this program has guided so many
organization in relation to analytical model, formation of campaign. Initially the success of this program is
depends upon the commitment & seriousness of the management executive. May be in initial days
organization will face some small problem regarding the execution of the program or customer may don’t
understand the technical know - how of the program (SMAC). On those days trust regarding this program
will play a critical role for success of the program.

This loyalty program will help pharmaceutical organization to create a competitive advantage; it will create
a long lasting loyal customer who will give a more business to the organization. Research data shows
that the organization who are using the loyalty program are getting benefit from the customer and
percentage of sales increments from loyalty program is totally depend upon the ownership of the
executive who are implementing this program in the field. Here incentives related to month wise number
of active retail out let can motivate the executive, which will increase the engagement of the retail outlet
with this program. Loyalty programs will also help to reduce the supply of substitute products of an
organization.

Till date we have ignored the true potentiality of pharmaceutical retail out let in a business model. There is
a huge potentiality of business out come with loyal pharmaceutical retail out let. There may be so many
questions related to the loyalty program like whether loyalty program is really loyal or not? Whether it has
a strategic nature or not? What are the outcomes of the loyalty and many more but at the end we can
conclude that pharmaceutical organization that are seriously following this program with individual
emotional touch are going to get the competitive edge in near future with less of amount investment
because of technological advancement. It could be a winning strategic formula of many pharmaceutical
organizations in years to come.

REFERENCES:

Dan Kowalewski, Jessica Mc Laughlin & Alex [Link], Blockchain will Transform Customer Loyalty
Program, Harvard Business Review, [Link]
loyalty-programs, last accessed on 26/5/2017

Investor presentation of Shopper Stop’, December 2011, as viewed on March 30, 2012.

[Link]

[Link] last accessed on 26/5/2017

[Link] last accessed on 26/5/2017.

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COGNITIVE APTITUDE, EDUCATION AND WAGES: EVIDENCE FROM THE NLSY97 DATA

Diamando Afxentiou, New York Institute of Technology, Old Westbury, New York
Maya Kroumova, New York Institute of Technology, Old Westbury, New York
[Link]/10.18374/IJSM-17-2.3

ABSTRACT

Using cross-sectional data from 2013 for the NLSY97 cohort, we find that the largest wage differentials
between high school and college graduates were observed for youths who scored in the second and third
quartiles of the ASVAB reading and mathematical aptitude scales. Returns to cognitive aptitude were
positive and significant for the first and second ASVAB quartiles. These results suggest that youths who
scored in the low to middle range of the ASVAB benefit the most from investment in cognitive skill
development and higher education. Public policy that support such investments can improve individual
economic outcomes and social inequality.

Key words: Aptitude, achievement, education, wages, NLSY97

1. INTRODUCTION

The purpose of this paper is to investigate the relationship between education and wages within the
context of cognitive aptitude. Existing research has firmly established that educational attainment is
positively associated with earnings. According to the Bureau of Labor statistics, the median weekly
earnings of individuals with a bachelor’s degree or higher in 2014 were $1,193 compared to $668 per
week for high school graduates. Individuals with less than a high school education earned $488 per week.
However, the relationship between cognitive ability and educational attainment, and their joint effect on
wages warrant further investigation. This research attempts to find out if the well documented, positive
effect of education on wages is uniform across the full spectrum of cognitive aptitude.

In the United States, scores on cognitive aptitude tests affect an individual’s opportunity to pursue higher
education. Despite the recent surge in test-optional admission policies, many colleges still use tests such
as the ACT or SAT to inform their admission decisions. Some scholars argue that tests such as the SAT
are poor predictors of academic performance and mostly reflect socio-economic status. Nonetheless,
individuals who score highly on cognitive aptitude tests are more likely to seek and complete a college
degree, and benefit from the higher wages and lifetime earnings associated with higher education. But
what about those who score in the low to middle range of cognitive aptitude tests? Getting into college
may be more challenging for them, due to existing admission policies. Are the economic benefits of a
college degree high enough to compensate them for the higher levels of effort they will need to expend to
get into and graduate from college?

We use cross-sectional data from the National Longitudinal Survey Youth 1997 (NLSY97) to find out if the
size of the wage differential between high school and college graduates is the same across various levels
of cognitive aptitude test scores. We believe this question has important implications for public policy. If
college education builds higher skills and productivity and results in better earnings mostly for those with
high aptitude scores, social inequality will increase over time. This is because people with better
educated, wealthier parents tend to score higher on cognitive aptitude tests and are also more likely to
graduate from college. But if college education can substantially increase the productivity and earnings of
those scoring in the middle range of cognitive ability, who tend to come from less privileged backgrounds,
providing financial and non-monetary incentives to encourage those individuals to go to college may be
beneficial to the economy and can reduce social inequality over time.

The organization of the rest of the paper is as follows: section 2 provides a literature review, section 3
describes the data, section 4 presents the results, and section 5 discusses conclusions and
recommendations.

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2. LITERATURE REVIEW

Economists have used two different models to explain the observed positive relationship between
educational attainment and earnings – human capital theory and signaling theory. Human capital theory
(Becker,1962) posits that investments in education, training, healthcare, etc. represent “human” capital
and have a real impact on worker productivity. Education is arguably one of the most important
components of human capital. It allows individuals to build up their stock of knowledge, develop useful
skills, and contribute more value to the products they create and the services they provide.
Signaling/screening theory (Spence, 1973) proposes that education serves as a signal of unobserved
ability. Employers screen job applicants and set wages based on educational attainment as a proxy for
unobserved worker ability. Therefore, more education does not always indicate higher human capital.
Some individuals “overeducate” to take advantage of the higher wages offered to college graduates,
without substantially increasing their knowledge and skills.

Empirical research provides support to both theories, although human capital theory seems to have better
explanatory power when analyzing wage growth over time. Becker (1975) found that between the 1940s
and the 1960s, males with college degrees earned significantly more than their counterparts who only
had a high school degree; although in the 1970s the average wage differential between these two groups
declined, it rose markedly again during the 1980s (Murphy and Welch, 1989; Goldin and Katz, 2007). The
rise in the returns to education was found to be concentrated mostly among those with high ability
(Blackburn and Neumark, 1993; Murnane, Levy and Willett, 1995). More recently, Abel and Deitz (2014)
confirmed the sustainability of this pattern; both the wage differential and the return on college education
continued to increase over the 1970 – 2013 period. They also found that the internal rate of return (IRR)
for a bachelor’s degree rose from 9 percent in the 1970s to 16 percent in the 1980s and 1990s, and
remained stable at 14 to 15 percent from 2001 to 2013. These results support both human capital and
signaling theory, as it is difficult to distinguish between the two theories without including other measures
of human capital/ability, in addition to education. Signaling theory provides a good approximation of wage
gaps observed shortly after graduation (e.g. see Lange, 2007).

Although the empirical findings about the effect of education on wages are very consistent, research into
the effects of ability is less conclusive. Cognitive ability and educational attainment are highly correlated,
and it is difficult to estimate their separate effects on wages. Most of the empirical researched available is
based on the NLSY79 cohort, and uses the Armed Services Vocational Aptitude Battery (ASVAB) test
scores as a measure of cognitive ability. Bishop (1991), using data for the NLSY79 cohort, found positive
cross-sectional returns to ability in the 1980s, but reported mixed results from panel data analysis.
Several studies have attempted to assess the interaction between education and cognitive aptitude.
Arcidiacono, Bayer and Hizmo (2010) found that the returns to ability are large for college graduates
immediately upon entering the labor market and are not significantly affected by experience. Returns to
ability for high school graduates are close to zero when initially entering the labor market and rise sharply
with experience. Heckman and Vytlacil (2000) found that ability and schooling were highly correlated, and
concluded that the wage premium for white male college graduates rose in the mid-1980s, but only for
those who scored in the highest quartile of cognitive aptitude. More recently, Castex and Dechter (2014)
used data for 1980 – 1991 and 1999 – 2008 for both the NLSY79 and NLSY97 cohorts to evaluate the
effects of schooling and ability on wages over time. They found that the return to cognitive ability declined
by 30 to 50 percent between these two time periods, whereas the return to schooling increased.

Overall, the literature suggests that the wage gap between high school and college graduates has
remained positive, and is growing over the last decades. Also, cognitive aptitude is strongly and
consistently correlated with educational attainment. The findings about the unique effects of cognitive
ability and education on earnings are less conclusive. Extant research uses different measures of
cognitive ability and different methodologies, which may explain the lack of consensus. There is some
evidence that the rising returns to schooling are not related to rising returns to ability; however, some
studies suggest that education and cognitive ability have a positive interaction effect on wages, but only
for high ability individuals.

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3. DATA AND MEASURES

Sample: The NLSY97 follows a nationally representative sample of 8,984 youths over time. They were 12
to 16 years old as of December 31, 1996. Our final sample consists of 3,972 individuals who provided
sufficient data for our analysis.

Wages: we used NLSY97 wage data from 2013 or 2011 (if 2013 data was missing). The dependent
variable used is the natural logarithm of annual wages. If total wages were missing for 2013, data from
2011 was used; if that was also missing, we used estimated wages for either year. Estimated wages were
coded as a categorical variable; we used the midpoint of the wage category chosen by the respondent.
Cognitive aptitude: Most participants took the computer-adaptive version of the Armed Services
Vocational Aptitude Battery (ASVAB) test in 1999. The test has multiple batteries; we use a composite
reading and mathematical reasoning measure created by the NLS (CAT_ASVAB). The measure converts
raw ASVAB scores to percentile rankings within age cohorts. For details about the composite ASVAB
score used here, see Appendix 10 of the NLSY97 codebook. The composite measure is based on 4
ASVAB subscales - Mathematical Knowledge (MK), Arithmetic Reasoning (AR), Word Knowledge (WK),
and Paragraph Comprehension (PC).

Education: Four categories were created based on the highest degree respondents completed – LTHS
(less than high school), GEDHS (GED or high school), ASBS (associate’s or bachelor’s degree), and
MSPHD (graduate or professional degree). The educational level of these individuals was extracted from
the 2013 survey year, the latest year for which data is available.

Control variables: demographic factors included in this analysis are gender, race, age, marital status, and
household income in 1997. The baseline group for the regression analysis in table 3 is: male, white,
single, high school graduate.

TABLES 1A and 1B: DESCRIPTIVE STATISTICS, FULL SAMPLE

Demographic
Mean Std Dev Variables
Wages $36,641 $30,773 Female 49%
Ln(Wages) 10.12 1.06 White 63%
ASVAB 48.33 29.19 Black 25%
Age 30.99 1.44 Native Amer. 1%
Ln(Income97) 10.43 1.08 Asian 2%
Education Other 10%
LTHS 6% Married 44%
GEDHS 53% N 3,972
ASBS 32%
MSPHD 9%
N 3,972

The typical individual in our sample is 31 years old, white, single, high school graduate, earning $36,641
annually, with a household income of $50,242 in 1997 (not adjusted for inflation). Descriptive statistics for
the full sample are shown in tables 1a and 1b.

To gain a better understanding of the relationship between aptitude, education and wages, we divided the
sample into four groups based on their ASVAB percentile scores. Because these scores represent

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percentile rankings within age group, we used 25, 50, and 75 as cut-offs to create four aptitude quartiles.
Table 2 reports average wages and educational attainment within each quartile.

As expected, average wages increase with cognitive aptitude, and so does educational attainment. For
example, 78% of the respondents who did not complete high school are concentrated in the first quartile
of aptitude, as compared to only 1% in the fourth quartile. Conversely, only 11% of people with college
degrees are in the first quartile of aptitude, compared to 38% in the fourth one.

TABLE 2: WAGES AND EDUCATIONAL ATTAINMENT BY APTITUDE QUARTILES IN 2013

ASVAB
Quartile
<=25 26 to 50 51 to 75 >75 N
Wages $24,613.57 $33,893.20 $40,887.58 $49,503.94
Std Dev 22296.99 26315.56 28976.79 38613.73
Education
LTHS 78% 16% 5% 1% 240
GEDHS 37% 31% 21% 12% 2089
ASBS 11% 21% 29% 38% 1277
MSPHD 3% 11% 28% 58% 366
N 1108 995 926 943 3972

4. METHODS AND RESULTS

We ran a cross-sectional OLS regression with the natural logarithm of wages as a dependent variable
and aptitude and education as independent variables, controlling for gender, race, marital status, age,
and household income (in 1997) for the full sample and within each aptitude quartile. This empirical
approach allows us to explore non-linearity in the relationship of education and aptitude with wages.

The results for the full sample show that both ability and education are positively associated with wages
(see table 3). Specifically, a 1 point increase in the ASVAB percentile score was associated with a 0.4%
increase in wages. The average wage of subjects with a college degree was 51% higher compared to
high school graduates, controlling for aptitude and demographic factors; the average wage of those with
post-graduate degrees was 76% higher.

The same OLS model was used within each ASVAB quartile. As seen in table 3, holding education
constant, cognitive aptitude has a positive and significant relationship with wages only within the first and
second ASVAB quartiles. While the relationship is still positive in the third and fourth quartiles, it does not
reach statistical significance. The highest regression coefficient for cognitive aptitude is the one estimated
for the first quartile – a unit increase in the ASVAB score is associated with a 2.1% increase in wages.
Within the second ASVAB quartile, the estimated coefficient for a unit increase in the ASVAB score is
1.4%. In the third and fourth ASVAB quartiles, the coefficient for cognitive aptitude drops to 0.2% and
0.1% respectively, and is no longer statistically significant.

The relationship between education and wages also varies across ASVAB quartiles. The wage differential
between high school and college graduates is highest in the third quartile of aptitude (64%), followed by
the second quartile (51%). The smallest differential was observed in the fourth quartile (39%). Further
inspection of the data showed that the small differential in the top ASVAB quartile was due to the high
average wage earned by those with a high school degree only. See table 3 for the full regression results.

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TABLE 3: REGRESSION RESULTS

ASVAB ASVAB
Full Quartile Quartile
Sample 1 2
Variable Coeff StD t Coeff StD t Coeff StD t
ASVAB 0.004 0 6.19 0.021 0.005 4.5 0.014 0 3.51
Education
LTHS -0.388 0.07 -5.85 -0.298 0.085 -3.5 -0.514 0.14 -3.6
ASBS 0.415 0.04 11.21 0.38 0.095 3.98 0.411 0.06 6.48
MSPHD 0.564 0.06 9.55 0.991 0.341 2.91 0.583 0.14 4.17
Female -0.392 0.03 -12.9 -0.527 0.063 -8.4 -0.461 0.06 -8.4
Race
Black -0.1 0.04 -2.51 -0.281 0.07 -4 -0.079 0.07 -1.2
Nat. Amer. 0.115 0.18 0.65 0.201 0.3 0.67 0.09 0.31 0.29
Asian 0.231 0.12 1.88 -0.582 0.435 -1.3 0.046 0.25 0.18
Other 0.11 0.05 2.07 -0.036 0.097 -0.4 0.004 0.09 0.04
Married 0.271 0.03 8.67 0.289 0.066 4.39 0.362 0.06 6.36
Age 0.029 0.01 2.73 0.047 0.021 2.19 0.034 0.02 1.78
ln
0.09 0.02 5.83 0.09 0.028 3.26 0.028 0.03 1.1
income97
constant 8.015 0.36 22.36 7.348 0.706 10.4 8.211 0.65 12.6

R2 0.1996 0.1769 0.1885

F 82.26 19.61 19
p>F 0 0 0
N 3,972 1,108 995

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TABLE 3 CONTINUED: REGRESSION RESULTS

ASVAB ASVAB
Quartile
Quartile 3
4
Variable Coeff StD t Coeff StD t
ASVAB 0.002 0 0.37 0.001 0 0.22
Education
LTHS -0.264 0.28 -0.94 0.587 0.67 0.88
ASBS 0.497 0.07 7.35 0.329 0.08 4.38
MSPHD 0.545 0.1 5.25 0.538 0.09 5.79
Female -0.287 0.06 -4.62 -0.298 0.06 -4.8
Race
Black 0.113 0.09 1.3 0.143 0.13 1.09
Nat. Amer. -0.332 0.41 -0.8 0.079 0.47 0.17
Asian 0.437 0.23 1.92 0.375 0.19 2.01
Other 0.23 0.11 2.05 0.274 0.14 2.02
Married 0.135 0.06 2.14 0.281 0.06 4.46
Age 0.033 0.02 1.6 -0.002 0.02 -0.1
ln income97 0.113 0.04 3.1 0.146 0.04 3.72
constant 7.765 0.81 9.64 8.521 0.87 9.83

R2 0.1205 0.1017
F 10.42 8.77
p>F 0 0
N 926 943

The results for household income in 1997, when the respondents took the ASVAB, are also supportive of
prior research. Household income is strongly and positively associated with wages in 2013, except within
the second ASVAB quartile.

As for the other control variables, consistent with prior research, we find that women earn less than men,
controlling for other demographic characteristics. The gender wage gap was statistically significant in all
four quartiles of cognitive aptitude. Notably, the largest gender wage gap was observed in the first and
second ASVAB quartiles – 41% and 37% respectively. In the third and fourth quartiles, the gender wage
gap was much smaller, at approximately 25%. The coefficients for race and marital status also replicate
prior research. However, it is worth noting that the negative difference in wages between black and white
respondents was large (-24%) and statistically significant only in the first ASVAB quartile. Married
respondents had higher wages across all ASVAB quartiles.

5. DISCUSSION

Cognitive ability, operationalized as percentile ranking within one’s age cohort on verbal and math
aptitude, is positively associated with wages. However, when the sample is broken down into cognitive
aptitude quartiles, the effects of education and aptitude follow different patterns. Within the first and
second quartiles of cognitive aptitude, a unit increase in aptitude ranking is associated with an increase in
wages. There is no linear relationship between ability and wages in the third and fourth quartiles of
cognitive aptitude. A possible explanation for these results is that more than two thirds of all respondents

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in the first and second ASVAB quartiles are high school graduates (69% and 65% respectively).
Therefore, both education and cognitive ability appear matter in the labor market – employers may be
using cognitive ability to differentiate between workers with the same level of education. This result
supports human capital theory – higher returns accrue to those with higher cognitive skills. In the third
and fourth ASVAB quartiles, 47% and 26% respectively have only a high school degree. Most people in
these groups are college educated, especially in the fourth ASVAB quartile. Here, employers seem to use
education as a proxy for human capital; differences in cognitive ability do not seem to matter. Perhaps
college acts as an equalizer – it provides young adults with a comparable stock of knowledge and skills,
thus resulting in relatively similar levels of human capital. Alternatively, as signaling theory would suggest,
employers set base wages to reflect post-secondary education, without any regard to individual
differences in cognitive ability. This result supports both human capital and signaling theory.

Overall, higher education continues to be associated with a positive wage differential as documented by
prior research. The largest wage differentials between high school and college graduates were observed
in the third and second ASVAB quartiles, the smallest were in the fourth and first. All else being equal, ten
to fifteen years after graduating from high school, higher education seems to bring the most economic
benefits to those who scored in the mid-range of the ASVAB reading and math scales in their
adolescence.

It is worth noting that socio-economic status, captured by family income in 1997, was positively
associated with wages in adulthood. The only exception was within the second ASVAB quartile. These
results indicate that social inequality is still persistent today. Gender and racial wage differentials are also
present in our sample, although they are mostly not statistically significant in the upper two ASVAB
quartiles. Furthermore, cognitive aptitude and demographic variables are not significant predictors of
wages in these two top quartiles; education seems to be the most significant differentiator.

There are limitations to this study that need to be acknowledged. Some of the independent variables we
used are range-restricted, which makes OLS estimates less accurate. We do not control for occupational
differences that may influence wages beyond aptitude and education. We used age as a proxy for work
experience, which may lead to misattribution of experience related variance. Further research is needed
to address these methodological issues.

6. CONCLUSION

The current education system encourages those who score highly on aptitude tests to continue their
education beyond high school. These individuals are more likely to obtain a college degree and earn
higher wages and lifetime earnings. Our research suggests that individuals who scored in the mid-range
of cognitive aptitude in their adolescence and later obtained a college degree have higher wage gains
compared to their peers who only completed high school. We believe that these results have important
implications for public policy. Making higher education more accessible through policies such as test-
optional admissions, need-based scholarships, lower tuition, etc. can help a broad segment of young
adults to increase their human capital and improve their earnings.

REFERENCES:

Abel, J. R., & Deitz, R., "Do the Benefits of College Still Outweigh the Costs?", Federal Reserve Bank of
New York: Current Issues in Economics and Finance, Volume 20, Number 3, Pages 1-9, 2014.

Arcidiacono, P., Bayer, P. & Hizmo, A., “Beyond Signaling and Human Capital: Education and the
Revelation of Ability”, American Economic Journal: Applied Economics, Volume 2, Pages 76-104,
2010.

Becker, G. S. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education,
New York: National Bureau of Economic Research, 1975.

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Becker, G. S., "Investment in Human Capital: A Theoretical Analysis", Journal of Political Economy,
Volume 70, Number 9, Pages 9-49, 1962.

Bishop, J. H., “Achievement, Test Scores, and Relative Wages”, In Workers and their Wages: Changing
Patterns in the United States, ed. Marvin H. Kosters. Washington DC: American Enterprise
Institute Press, 1991.

Blackburn, M. L., & Neumark, D., “Omitted-Ability Bias and the Increase in the Return to Schooling”,
Journal of Labor Economics, Volume 11, Number 3, Pages 521-544, 1993.

Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, More education still means
more pay in 2014 on the Internet at [Link]
[Link] , visited April 15, 2016.

Castex, G. & Kogan Dechter, E., “The Changing Roles of Education and Ability in Wage Determination”,
Journal of Labor Economics, Volume 32, Number 4, Pages 685-710, 2014.

Heckman, J., & Vytlacil, E., “Identifying the Role of Cognitive Ability in Explaining the Level of and
Change in the Return to Schooling”, National Bureau of Economic Research, Working Paper no.
7820, 2000.

Goldin, C. & Katz L.F., “The Race Between Education and Technology: The Evolution of U.S. Educational
Wage Differentials, 1890 to 2005”, National Bureau of Economic Research, Working Paper no.
12984, 2007.

Lange, F., “The Speed of Employer Learning”, Journal of Labor Economics, Volume 25, Number 1, Pages
1–35, 2007.

Mincer, J., Schooling, Experience, and Earnings. New York: Columbia University Press, 1974.

Murnane, R., Willett, J. & Levy, F., “The Growing Importance of Cognitive Skills in Wage Determination”,
Review of Economics and Statistics, Volume 77, Number 2, Pages 251-266, 1995.

Murphy, K. M. & Welch, F., "Wage Premiums for College Graduates: Recent Growth and Possible
Explanations", Educational Researcher, Volume 18, Pages 17-27, 1989.

Spence, A. M., “Job Market Signaling”, Quarterly Journal of Economics, Volume 87, Number 3, Pages
355–374, 1973.

AUTHOR PROFILES:

Dr. Diamando Afxentiou is a Professor of Economics in the School of Management, New York Institute
of Technology. She holds a Ph.D. degree from West Virginia University with specialization in Labor
Economics. She received her M.A. degree in economics from The New School for Social Research. Her
research in the areas of Teenage Pregnancy, Wage Polarization, and Public Housing has appeared in
scholarly journals such as the Journal of Family and Economic Issues, Journal of Business and Economic
Studies, Journal of Business and Economics Research, and the NY Economic Review.

Dr. Maya Kroumova is an Associate Professor in the School of Management, New York Institute of
Technology. Her research has focused on the effect of HR practices on employee and organizational
performance. Specifically, she has explored the links between broad based incentive compensation and
firm performance, as well as the impact of work-life balance practices on employee motivation and
performance.

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THE FACTORS AFFECTING THE SURVIVAL OF FAMILY BUSINESSES IN LEBANON

- AN ORGANIZATIONAL BEHAVIOR PERSPECTIVE

Cherine Jneid, AZM University, Lebanon

Samer Francois Nakhle, AZM University, Lebanon
[Link]/10.18374/IJSM-17-2.4

ABSTRACT

Since 1975, Lebanon’s economy has been disrupted by many political and security challenges as civil
war, sectarian tensions, etc. The socioeconomic environment at this country encourages mainly the family
business. The outmoded labor law, the slightly diversified financial sector and the difficulty to obtain
business licenses undermine the development of the market to limit the investment opportunities of
international companies. Lebanon actively supports the family business as job creators to overcome the
high rate of unemployment and brain drain at the country.
Most of the Lebanese owners at the family business are wondering now if their way of managing their
business is up to the increased challenges of the market from the sophisticated consumer behavior to the
necessity of differentiation. In addition, the ownership succession planning becomes an urgent matter for
them since most of family business companies are now at their second or third lifetime stage.
We assess at this paper the factors that are explored at the literature review and that may be influencing
the family firms in Lebanon as the relationships issue, the gender issues, and the ownership and
management transfers. We demonstrate that family businesses in Lebanon struggle with the challenges
explained at the literature review but no sufficient plans are adopted to ensure survival and successful
continuity. The transfer of ownership of family business in Lebanon becomes one of the most important
challenges of the owners at a work environment where the only constant is the change. The decision is
more complicated than a simple practice of passing on property. It needs a strategic management of a
well prepared plan to facilitate the transfer to the successors who are the most able to sustain the
success of this sector which constitutes 85% of the economic force in Lebanon.

Keywords: change, succession, transfer of ownership, strategic management.

1. INTRODUCTION

Family businesses are the engine that drives socioeconomic development and wealth creation around the
world, and entrepreneurship is a key driver of family businesses. The ability to build and keep the
business running over generations is a major element of family business continuity and is influential in
strategic execution, innovation, and growth. Entrepreneurial family businesses are a primary source of job
creation in market economies where resources are allocated via supply and demand. In Lebanon, family
businesses constitute 85% of the private sector, accounting for 1.05 million of 1.24 million jobs. The
family unit is usually the only intact institution capable of sustaining entrepreneurial activities in Lebanon
following civil war. Lebanon provides a unique experiment where to explore entrepreneurship, family
business, and small and medium enterprise development. Lebanese firms went through years of war and
survived the massive destruction. Given the instability in the country in recent decades, it comes as no
surprise that Lebanon has low scores when it comes to economic performance. Accordingly, researchers
have a chance to spot, survey, and analyze the personality of new Lebanese entrepreneurs, the
enterprises they are building, and family network involvement.

This research includes a literature review in order to define the family business, its lifecycle and the
challenges related to each stage as well as the leadership role at the succession management at these
businesses. A practical study using both quantitative and qualitative methods will follow to assess the
Lebanese family firms’ challenges and what actions are taken to assure a successful succession. Finally,
we find out how the family firms in Lebanon face the challenges and issues explained at the literature

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review and recommend adopting the proper governance management to overcome conflicts and ensure
long term survival.

2. LITERATURE REVIEW

2.1 Definition of family business

‘Family business group’, ‘family enterprise’, ‘entrepreneurial family’ are concepts that definitions have
increased since the late of 1970s. Many handbooks were published assembling the different definitions
and all of these references reflect the debates about the problems that face the researcher when
discussing a type of enterprise whose ownership structure and typology have varied immensely in order
to adapt to the changes in the legal, technological and market environments, not to mention the changes
on families themselves. All these factors contribute to the complexity in defining the term “family
business”.

Various scholars have reviewed existing definitions to consolidate the thoughts, and conceptualized
another definition of family firms (for example, Chua and al., 2003; Handler and al., 1988; Litz, 1995).
The focus of most of these efforts has been on defining family firms so that they will be differentiated from
non-family firms.

Investigators appear to have developed definitions appropriate for their own research needs. Jurgen
Kocka (1971) defines a family firm as jointly presenting kin (as defined within a particular cultural
framework), property (the ownership of a significant fraction of the enterprise’s capital) and control
(authority over the strategic management of the company).

Holland (1981) considers the family business as an organization in which family members, involved at the
management of the firm or on the board, influence major operating decisions and plans for leadership
succession. This definition indicates actual family contribution in the business, although these family
members are not necessarily in line for succession. Generational transfer also can be a criterion for
classification as a family business. Holland (1981) says that at least two generations of family members
must be involved in the business and influence the company to benefit family interests.

Ibrahim (1994) defines a family business as one in which the family owns controlling interest and at least
one family member (including in-laws) is employed or is supposed to be employed by the business.
Ibrahim (1994) also states that the family must have a controlling interest, or that the majority of family
members is involved in the management team.

Chua and al. (1999) define family business as “ a business governed and/or managed with the intention
to shape and/or pursue the vision of the business held by a dominant coalition controlled by members of
the same family or a small number of families in a manner that is potentially sustainable across
generations of the family or families”. Chua (2003) has identified four ways in which academics define
family business: degree of ownership and/or management by family members, degree of family
involvement, potential for generational transfer, or multiple criteria. Many theorists have focused on the
importance of ownership and management by family members as criteria for a family business.

Holland al. (2008) consider that a family business must be owned and managed by at least two or more
members of the same family, be as a major source of family income, and employ no more than 50
people. Thus, those definitions can go from simple, single criterion definitions, to various criteria systems.
What is important to note at this level is the huge difference reflected in statistical findings when different
definitions are used (Hall, 2008). Hall (2008) showed that just by modifying a broad definition (some
degree of family control) to include multiple criteria (multiple generations involved, direct family
involvement in strategic decisions, numerous family members handling managerial responsibilities), the
estimated number of family businesses in the United States dropped from 92% to 19%. The family
business will be defined as being owned in vast majority by members of the same family (more than 60%

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of shares), managed by at least two or more family members and having a culture that prefers a
generational transfer.

The size of the company is another factor but it is not considered as the most determinant issue (Elsbach,
1999).

Elsbach (1999) pointed out that 30% of the family firms last into a second generation, 12% are viable into
a third, and 3% operate into the fourth generation or beyond. Even those that do continue often see their
value decline meaningfully when power changes hands at the top.

The differences in the contexts are also another determinant issue when defining the family business.
Rose (1994) noted that the context will produce a different definition of family business in Brazil than USA
for example.

Mark Casson (1993) suggested also splitting the definition into two elements: family-owned and family –
controlled firms.

2.2 Difference between family and non-family business

The family business shows heterogeneity as for example size, age, nature of family involvement in the
business and the industry. This heterogeneity turns important the need to overview the various theories
related to important management topics (Melin and Nordqvist, 2007).

The classic agency theory of Berle (1932) and Jensen and Meckling (1976) suggests that ownership
concentration increases the conflict of interest between owners and managers. In particular, higher
managerial ownership should align the financial and non financial benefits of owners and managers, while
ownership concentration in the hands of outside holders should increase owners’ incentives to supervise
managers. Either way, the prediction is that corporate performance should be enhanced by the
concentration of ownership. This prediction applies to family owners, who often not just hold large stakes
in their companies but also occupy top management positions in them. Based on this theory, the family
business is expected to perform better than non-family business.

Shleifer and Vishny (1997) argue that a new agency problem might be considered because of high
degrees of ownership concentration in the hands of outside block-holders. This issue is mainly between
large (controlling) shareholders and small (minority) shareholders. Either way, ownership concentration
facilitates the appropriation of what Grossman and Hart (1986) label “private benefits of control” by
managers or large shareholders, at the detriment of minority shareholders, and can lead to decreased
firm value.

Another influential theory is the Behavioral Theory of the firm was introduced by Cyert and March (1963)
for predicting and explaining the organizational goals, aspirations and the factors influencing
organizational strategic behavior towards risk taking. This theory provided considerable insights into how
different family businesses set their objectives, conclude their expectations and find solutions to low
performance problems (Chrisman and Patel, 2014). According to Cyert and March (1963), the process of
decision making in organizations may be analyzed in terms of “the variables that affect organizational
goals, the variables that affect organizational expectations and the variables that affect the organizational
choice”.

Wiseman (1998) built on both the agency and the behavioral theories to construct the Behavioral Agency
model to analyze the goal deviations between owners and managers and its influence on executives’ risk-
taking behavior. In this logic, strategic decision making is led by decision makers’ contingency –based
views with varied preferences depending in the context.

Chrisman et al (2005 a) indicate that the resource-based view is another theoretical perspective that is
useful in explaining the difference between family and non-family businesses. This theory considers that
family involvement allows the firm to accumulate exclusive resources and capabilities that enable them to

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develop family-based competitive advantages. Family firms benefit from long term relationships with
external stakeholders and using these external relationships enhances the performance of family firms
(Carney, 2005, Chrisman 2009).

In addition, De Massis and al. (2008) suggest that family and non-family firms have other differences
related to strategic behaviors, such the response to the increased competition or strategic flexibility, and
such differences create deviations in firm performance.

2.3 Different stages of family business

Stafford (1999) showed the interactions between owners and managers than between the family and the
business as a whole by the three-circle model (figure 1).

Figure 1: Three -circle model

Source: Stafford (1999)

The outside sectors- 1, 2 or 3 represent a person who has only one connection to the firm.

The overlapping sectors, which fall in two or three of the circles at the same time, correspond to
individuals who have more than one connection to the business.

An owner who is also a family member and at the same time an employee will be in sector 7.

A family member who is employed at the firm is in sector 6.

An owner who is a family member is in sector 4.

The model is a very useful tool for understanding the source of interpersonal conflicts, role dilemmas,
priorities, and boundaries in family firms. (Stafford, 1999)

Several models have been developed to describe and analyze the different stages that family businesses
go through during their existence:

(i) the Founder(s) Stage;

(ii) the Sibling Partnership Stage;
(iii) the Cousin Confederation.

The evolution of ownership and management within most family businesses follow these three stages:

Stage 1: The Founder(s) (Controlling Ow ner(s))

Here is the primary phase of the family business’ existence. At this stage, both the control and ownership
of the company are still in the hands of the same person(s): the founder(s) who is/are driven by a strong
commitment to the success of the firm. The business has relatively simple governance structure but at the
same time limited corporate governance issues compared to the next two stages. The most important

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issue that will need to be addressed during the life of the founder(s) is succession planning. (Stafford,
1999)

Stage 2: The Sibling Partnership

This is the stage where management and ownership have been transferred to the children of the
founder(s). The governance issues at this part of the family business lifecycle are described as more
complex comparing to the precedent stage. The main reason behind this is the increase on the number of
family members involved at business. Siblings at these stages have a lot of worries as maintaining
siblings’ coherence, implementing business processes and procedures and creating efficient
communication channels between family members. In family business firms, founders consider the son or
daughter as an immediate successor. (Stafford, 1999)

Stage 3: The Cousin Confederation (Cousin Consortium or Family Dynasty)

At this stage, different generations and different branches of the family are involved at the family including
children of the siblings, cousins, and in-laws. This diversity will impose a certain difficulty on how to
manage the firm and how to take decisions concerning family member employment; family shareholding
rights; shareholding liquidity; dividend policy; family member role in the business; family conflict
resolution; and family vision and mission. The business’ governance becomes more complicated and
resolving conflicts become one of the common challenges at this step of the family business. (Stafford,
1999)

Table 1: Key Corporate Governance Issues – During the Development Cycle of Family Businesses
Ownership Stage Dominant Shareholder Issues

Stage 1: The Founder(s) - Leadership transition

- Succession
- Estate planning

Stage 2: The Sibling Partnership - Maintaining teamwork and harmony

- Sustaining family ownership
- Succession
Stage 3: The Cousin Confederation - Allocation of corporate capital: dividends,
debt, and profit levels
- Shareholder liquidity
- Family conflict resolution
- Family participation and role
- Family vision and mission
- Family linkage with the business

Source: (Stafford, 1999)

We can conclude that each stage of the family businesses lifetime has its challenges to be properly
managed to ensure the survival and growth of the family business. Succession Management appears to
be the most important determinant to succeed on maintaining family firms more than third or fourth
generations.

2.4 Factors that influence the family business

In a trial to understand the particular productivity enhancers and obstacles at family firms, we will state
the strengths and the weaknesses of these companies.

Starting with the strong points, family business demonstrates:

 Family members benefit from their family relationships to transfer deep firm-specific knowledge
(Horton, 1986);

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 Family culture and strong identification, commitment, motivation continuity in leadership

performance (Donnelly, 1964);
 A competitive advantage is demonstrated by the early involvement of children in family firms
(Lane and Lubatkin, 1998);
 Family members accumulate experience through being introduced to all activities at the firm
and through on the job mentoring and training which will add value to their knowledge gained through
formal education (Hitt and al., 2001).

While we can list some weaknesses as:

 Organizational structure characterized by a not well defined division of tasks;

 “Nepotism is a given in the family business” as stated by Sharma and al. (1997). Nepotism to
favor family members over non-family employees is inevitable in family firms.
 Syndrome of “spoiled child” commonly described at family business literature, where children
have guaranteed employment in the firm despite the competencies and knowledge and the incompetent
among them create serious succession issues (Le Breton-Miller and al., 2004);
 Family conflicts are at the core of family business (Levinson, 1971) and are transferable to the
company;
 Resistance towards change (Handler and al, 1988);

In addition, the increased interest on understanding the ownership of family business and their control
systems resides on the impact of these two factors on how these firms are managed to ensure their
continuity. According to Deal and Kennedy (1982), the values at the family firms play an informal control
system. The values define “how” to proceed in order to achieve the mission and the vision of the
company. The role of leadership to head towards reaching the mission and the vision of the firm is crucial.
As Daily and Dollinger (1991) noted, the family and the business systems are not necessarily
harmonious, their interaction can be thought of as a built in Achilles heel.

Many researches point out that possible conflict in family businesses may arise when managerial
decisions are influenced by feelings about, and responsibilities towards, relatives in the business, when
favoritism exerts a negative influence. Conflict also arises when a company is run out more to honor a
family folklore more than for its own purposes and needs.

Kaslow (1993) also describes conflicts amongst family members within a family business as circular and
lasting over a long period of time because of the interaction between relationships in the workplace. A
family conflict can impact a subsequent business decision that, in turn, creates new sources of
differences within the family.

A sectoral criterion does not function adequately. In fact, efficient family firms are found not only in the
craft based, traditional and labor intensive industries but also in scale intensive industries and especially
in specialized customer oriented industries. This means that a clear cut sectoral division is impossible,
even that research evidence activities show that technology and capital intensity growth coincide with a
decline in the role of family firms (Yasuoka, 1984b). However (Cassis, 1997) considered that we can find
examples of family firms committed to innovation and technological research with considerable capital
intensity at the same level as managerial corporations. In the case of France, Emmanuel Chadeau has
demonstrated the enduring presence of family firms and family managed large firms in capital intensive
advanced industries from the first industrial revolution till time.

Melin, and Nordqvist (2007) realized after studying the family firms rise and fall at the different locations of
Latin America that the rise and fall of family businesses has been affected enormously by the
heterogeneity of the country of location and did not recommend making sweeping generalizations. Family
business must be examined within the culture contexts in which they are bred, nourished and grown.
According to Chrisman, Chua and Steier (2002) note that family firms bring together so starkly the
economic and non economic realities of organizational life.

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We believe that once these factors are well identified, one can proceed to the effective management of
governance for family business, to ensure that these entities can ensure their vitality and increase their
contribution to the economy.

2.5 Leadership at family business

As Fiedler (1996) stated “Leadership is important for business success”. This importance can be
explained through three reasons. First, family firms may prioritize family interests on goals of growth and
profitability which are, at many times, overcome for the benefit of employing family members (Chrisman
and al., 2002). Second, family businesses are more exposed to long-term conflicts, if compared to non-
family firms (Morris and al., 1997). And finally, the importance of leadership succession is greater for
family businesses than for the non-family ones, cause of tenacious connection to the firm survival.

2.6 Succession Management in the family business

The leadership process involves interaction between leaders and followers which highly influences the
family business succession.

Succession means the substitution of the incumbent management (Chua and al., 2003). Handler (1990)
noted that the succession process at family business consists on a mutual role adjustment between the
members of the incumbent and those of successor generations. The growth and development of a
successor leader in family business is one of the major objectives of the founder and follow a series of
steps and milestones (Longenecker and al., 2000).

The purpose of the succession process in family firms is to ensure a competent family leadership across
generations (Le Breton Miller and al, 2004). The process includes changes both at managerial level
(Alcorn, 1982) which involve the CEO and the top management succession and at the ownership level
(Barry, 1975).

For the success of the process, important changes are needed to involve the management decision for
authority transfer which concerns power structures and interactions among family business decision team
members.

The process of family business succession cannot be reduced to one single event but consists in a series
of event that occur over a long time (Handler, 1994).

2.6.1 Succession, Leadership and relationships issues

The desire of the founder to transfer the business to the next generation leads the incumbent leader to
take responsibility of the continuity of the family business (Barnes and Hershon, 1976). The entire family
is supposed to encourage a positive relationship between the successor and the incumbent in the
business which is truly important even before the successor enters the family firm (Handler 1990).

Disputes are normal but it is essential that a good working relationship takes place during the transfer
phase between the predecessor and the successor (Cabrera-Suarez, 2001). The incumbent must be
willing to leave the reins of the business (Dyer, 1986) and he must delegate responsibilities and allow the
successor to make decisions and mistakes (Handler, 1990).

Morris and al. (1997) described some incumbents as just envious of their children so they turn to the type
of undermining behavior and refuse train their successors properly. Even more, Lansberg (1988) noticed
that some founders only try to discover faults in their successors in order to exclude them from the
management of the family firms.

Levinson (1971) and Davis and Harveston (2000) described the “generational shadow” issue cast by the
founder who maintains an important role in the business, even when he should set apart, after handing
over the firm to his successor. The previous role will have surely an important role of advising and

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intervening for the best of the firm, but the concept of “generational shadow” is limited to the harmful
intervention only. In their research, Davis and Harveston (2000) concluded that the generational shadow
of the founder is an important reason of increase of conflict at the second stage of family firms lifecycle
comparing to the first stage.

2.6.2 Succession, Leadership and gender issues

Other than the issue between the founder and the successor, scholars have begun recently the study of
gender issue at the family succession management.

The literature states how founders / parents often doubt their daughters’ ability or competence to take on
successor role (Keating and Little, 1997). Even, daughters and sons were socialized differently (Dumas,
1998), with the sons spending more time in the business. This explains the findings of Ahrens and al.
(2015) who find that in family firms with both genders among the predecessors’ children, a male family
predecessor is chosen in 82.1 of the cases, and the presence of sons increases the probability of family
succession. Bennedsen and al. (2015) similarly find that the founders are highly encouraged to think
about succession in family firms when the firstborn is a boy.

But many cases show also that predecessors choose also based between siblings based on their
preferred gendered (leadership) ability and style as opposed to biological sex. A gender lens may also
help us understand how predecessors choose between sons based on competence and personality
characteristics. Literature shows that on the cases where daughters did not become successors, the
women went on to pursue entrepreneurial careers in other domains in sectors that are more typically
considered as “feminine “sector.

In one of the few studies on management transfer from father to daughter, Dumas (1992) realized that
only after a crisis had happened daughters were regarded as managers. Overbeke and al. (2013) confirm
that and point out daughter’s own blindness to the ability of succession (resulting from automatically
activated gender norms), and find that daughters may not deliberately consider succession until a critical
event motivates them to do so. A traditional view of the role of women in family business is based on
observation that women are mostly distant and passive when companies are doing well but they start to
intervene in management when corporate performance begins to deteriorate and reaches an
unacceptable level. But recent studies have considered the introduction of daughter into the family
business and have revealed that work done by daughters is more active and comprehensive than the
traditional view suggests.

2.7 Survival and Growth: Succession planning

At the most basic level, issues of survival, growth and financial sustainability are paramount. The question
of survival and growth is a constant concern for the decision makers in family firms.

With regard to survival, Family business that has the support of the spouse or other family members are
able to withstand dips in sales or financial shortfalls that might pitch other firms into failure (Poza &
Messer, 2001). Families can also be an important source of financial and other resources that can extend
a family firm’s ability to survive during startups and difficult periods. For more mature family firms, the
availability of patient capital (Hitt and al., 2001) that is, investments that are made without expectations of
quick returns can bolster the family business’ chance of long term survival.

Beyond survival, the role of strategic management involves understanding why some firms outperform
more than others. Thus, managers of family firms need to determine how to compete in order to create
family competitive advantages that are lasting and inimitable. These concerns have led family business
researches to investigate two important elements of strategic management in family firms. The first
concern involves asking which business-level strategies are needed to maintain a competitive advantage.
Is it more suitable to maintain a low cost producer strategy or to be differentiated at the market?

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Family business succession planning comprises both, the management succession process and the
ownership succession process. It is suggested that the management succession process is undertaken
first so that the ownership succession plan reflects and supports the management succession.

Senior generation leaders have to provide next – generation family members with experience and
decision making authority to help them gain leadership experience. Next – generation family members
interested in playing a leadership role in the family business should develop their own skills and social
intelligence competencies. If the senior generation refuses to delegate this responsibility, next –
generation leader may seek opportunities outside the family firm. So family enterprise owners should
focus on this issue and should work hardly to build positive family relationships. (Peterson, 2001)

Typically, as the family business moves along its generational timeline, more family members are
involved in the business and have an interest in the activities of the business. As family business are
evolving, many challenges emerge especially:

 Conflicting goals/values among family members, especially between generations

 Conflicting personalities can lead to sibling rivalries
 Expectations with respect to employment, management, ownership, compensation, work
assignments, training, use of business assets, etc. will differ among family members.
 Employment of family members:Will employment be based on what the families want) or what the
business needs?
 Compensation of family members

Our main objective by this research is to answer one major question: To what extent is succession
planning implemented in family businesses in Lebanon?

This research question reveals three hypotheses to defend:

1. H0: Poor relationship among family and business members doesn’t affect the survival of family
business firms.
H1: Poor relationship among family and business members negatively affects the survival of family
business firms.
2. H0: Absence of effective leadership and management doesn’t affect the survival of family
business firms.
H1: Absence of effective leadership and management negatively affects the survival of family business
firms.
3. H0: Complex relationships among family and non-family employees don’t affect the survival of
family business firms.
H1: Complex relationships among family and non-family employees negatively affect the survival of family
business firms.

3 PRACTICAL FRAMEWORK

3.1 Research methodology

This section aims to reach the desired objective of our research by using qualitative and quantitative
research methods to collect necessary data. One questionnaire was directed to 100 employees including
non-family employees, family employees, and younger family business employees. A small interview was
set with the manager. Questions were drawn from the different concepts that were tackled and reviewed
in the literature review.

Questions can be grouped in three main areas:

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 The first set of questions is directed to non-family employees to get a feedback regarding the
level of engagement of these employees into the organization, the level of satisfaction, and whether they
work according to job descriptions or not.
 The second and the third sets are directed to family employees only. In this section, we can study
the relationship among family employees and whether they are compensated according to their level of
education and experience or according to their relationship with the owner and to which generation they
belong. In addition to what is mentioned, we can also notice through their answers if they all collaborate in
taking the decisions and to which extent.
 The last part is directed to the owners with whom we used a qualitative research (Interview). The
questionnaire was administered to 45 companies’ different areas that operate in Lebanon. Moreover,
since the topic is a confidential, and in order to have unbiased and somehow accurate results, the survey
been kept anonymous and confidential, thus allowing respondents to have the freedom in responding and
to be honest and open.

The data collected through the questionnaire is analyzed using the Statistical Package for the Social
Sciences (SPSS) Version 18.

3.2 Data Analysis

This section intends to understand the challenges facing the family firms in Lebanon and the extent to
which they are planning for survival and growth of their companies.

3.2.1 Quantitative analysis

Our first hypothesis formulated as:

H0: Poor relationship among family and business members doesn’t affect the survival of family business
firms.

H1: Poor relationship among family and business members negatively affects the survival of family
business firms.

In order to assess this hypothesis, one question was asked to assess whether poor relationship leads to
the failure of the family business firms. The findings show a positive correlation between a strong
relationship lead to the prospering of the family business.

Dependent Variable: Survival of Family Business

Independent Variable: Poor Relationship

In order to analyze table 2 we have to follow a sequence of steps to reach a conclusion and see whether
the null or the research hypothesis is supported or rejected.

First of all we must choose which column to look at

 Equal variances assumed or

 Equal variances not assumed

To know which one to choose we must look at the Sig value. If it’s less than 0.05 then the variances are
not assumed to be equal. In our case this can be applied so we go to the bottom line. While doing the
SPSS results we set the alpha is equal to 0.05 and here we know that the t value is equal to 2.164 and
the p value for that t-test is equal to 0.006 which is less than the alpha value so we can conclude that our
t test value had fall into the rejection region. So our research hypothesis is actually supported.

Our second hypothesis was formulated as follows:

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H0: Absence of effective leadership and management don’t affect the survival of family business firms.

H1: Absence of effective leadership and management negatively affects the survival of family business
firms.

Dependent Variable: Survival of family business

Independent Variable: Effective Leadership

In order to analyze table 3 we have to follow a sequence of steps to reach a conclusion and see whether
the null or the research hypothesis is supported or rejected.

First of all we must choose which column to look at

 Equal variances assumed or

 Equal variances not assumed

To know which one to choose we must look at the Sig value. If it’s less than 0.05 then the variances are
not assumed to be equal. So we choose the bottom line. In our case this term is applied and we go the
bottom line. While doing the SPSS results we set the alpha is equal to 0.05 and here we know that the t
value is equal to -8.708 and the p value for that t-test is equal to 0.000 which is less than the alpha value
so we can conclude that our t test value had fall into the rejection region. So our Null hypothesis is
actually rejected and the research hypothesis is supported.

Our third was the following:

H0: Complex relationship among family and non-family employees don’t affect the survival of family
business firms.

H1: Complex relationship among family and non-family employees negatively affects the survival of family
business firms.

In order to analyze table 4 we have to follow a sequence of steps to reach a conclusion and see whether
the null or the research hypothesis is supported or rejected.

First of all we must choose which column to look at

 Equal variances assumed or

 Equal variances not assumed

To know which one to choose we must look at the Sig value. If it’s less than 0.05 then the variances are
not assumed to be equal. So we choose the bottom line. In our case this term is applied and we go the
bottom line. While doing the SPSS results we set the alpha is equal to 0.05 and here we know that the t
value is equal to 1.695 and the p value for that t-test is equal to 0.119 which is greater than the alpha
value so we can conclude that our t test value had fall into the accepted region. So our research
hypothesis is actually rejected.

We will use different statics methods to understand more the current status of the family businesses in
Lebanon.

3.2. 1.1. Multiple Regression Analysis

The model at figure 2 shows how effective leadership, relationship between employees and managers,
and complex relationships among family and non-family employees affect the business family firm
survival and also see if the regression result is confounded with that of the first hypothesis testing.

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Figure 2: Model

Before we write the regression equation we should see whether the variables are correlated or not. We
start by the poor relationship and survival of business family firms using Pearson correlation.

Table 6 shows that the two variables are correlated by a value of 0.316 and the correlation is negatively
thus as the poor relationship increase the survival of the business will. The next step is to determine the
regression equation using the SPSS we can generate the following equation:

Y= -0.316X+ 2.290 where Y is the dependent variable (Survival of business firm) and X is the extent to
which managers manage their firms (table 7).

If we want to use the R square value we can see that the poor relationship variable contribute (affect) with
a value of -0.316 or -31.6% to the dependent variable

We start by the Complex relation among family and non- family members is tested now and how it affect
the survival of family business using Pearson correlation (table 8).

Correlation table 9 shows that the two variables are not correlated and this support the hypothesis testing
since using the T test analysis showed the null hypothesis is supported thus no effect for relationship
between family and non-family business on the survival of the firm. So if we want to write the regression
equation it will look the following one: Y= 0.043X+ 1.931.

If we consider the work environment variable it has an R square value of only 0.002. This means its effect
of the independent variable is very small only 2 % on the survival of the business firm (table 10).

The third independent variable is the effective leadership on the survival of the family business firm
Table 11 shows that the two variables are strongly correlated with a value of correlation equals to 0.868.
Using the regression analysis we can consider the correlation equation: Y= 0.368X+3.965

Thus the effective leadership variable has an R square value of 0.868 or 86.8% which has a large effect
on the dependent variable (Tables 12-13).

[Link]. Reliability Analysis:

Cronbach's alpha is the most common measure of internal consistency ("reliability"). It is most commonly
used when you have multiple Likert questions in a questionnaire that form a scale and you wish to
determine if the scale is reliable.

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The alpha coefficient for the 33 items is .887, which means that 88.7% of the variance in that score will be
considered as true score variance or internally consistent reliable variance. We can conclude that the
different items of the first questionnaire have relatively high internal consistency (Table 14).

Table 14 shows that the most of the employees that are satisfied by the way that managers manage the
forms are satisfied and willing to stay after 3 years. This result support that effective leadership helps
retain employees and thus make the family business prosper.

We can conclude from table 15 that we don’t have separation of duties in business family. This has many
draw backs, since employees should have the appropriate skills so they can do multi-skill task. This will
make the employees overloaded and thus the productivity will be affected.

Table 16 shows that face to face communication is the most popular channel and usually it’s the most
effective among the other options; the traditional way.

Table 17 demonstrated that almost all family business firms assign titles and responsibilities based on the
degree of relationship with the manager. This is a negative point which affects directly the lifespan of the
business firm because the responsibilities are assigned not based on the skills which might contribute to
the success of individuals but on the degree to which they are close to the manager of the business firm.

3.2. Qualitative analysis:

15 interviews were conducted with the founders of the targeted family firms. Our question the future
ownership of the company has one similar answer among the owners considering that the ownership will
be transferred surely to the children since they have family business.

It was clear that the gender of the children plays a significant role in the succession planning since the
traditions of the Lebanese people in general give more rights to the male children.

Continuity of the family is done through inheriting male children the company. Most of the companies
were at their second stage only three were at their third stage. One company at the third stage is
preparing for separation. The mother company is going to be divided into 3 companies where every
sibling will be the owner. In the small companies only the father takes the decision. The children may
negotiate the subject, but the final decision goes to the father. Most of the children lack expertise and the
required knowledge therefore they are unaware on how to solve the problem especially most of them are
under the age of 35. In large companies a manager has the right to impose his point of view to a certain
point but still at the end if the owner is not convinced he will act upon his will.

Only five firms between the targeted companies are recruiting external advisors and consultants aiming
the needed support to transfer the business to their children and confirming the absence of intention to
transfer the management to external managers other than family members.

4. CONCLUSION

Our findings match the literature review at many facts. First, this research demonstrates that poor
relationship among family and business members negatively affects the survival of family business firms.
Second, it was clear absence of effective leadership and management negatively affects the survival of
family business firms. Third, complex relationships among family and non-family employees negatively
affect the survival of family business firms.

In addition, the gender issue is predominant when planning for the succession at family firms in Lebanon.
The founders intend to transfer the business to their sons despite the knowledge and the capacities of
these children. The society beliefs are the most important reason behind this fact (Bennedsen and al.
2015).

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Finally, the family firms in Lebanon are far away from adopting the right governance system allowing
them more vitality and profitability. Founders or owners have the responsibility to mentor the children and
involve them in the business to facilitate the succession of the business. At many cases, they reserve the
right of decision making to them even at the transition period which may create tensions between
generations (Davis and Harveston, 2000).

We believe that the family businesses, at ownership transfer phase, reach a size and complexity that are
unsuitable for informal and unstructured management style. For this important reason, the governance
processes become a necessity to improve business performance and satisfy the expectations of all family
members.

There are best practices of good governance as launching and sustaining systematic communication
channels through meetings and family councils, adhering to problem solving and decision making
scientific processes to minimize conflicts, inserting external advisors and consultants and establishing
transparent ownership criteria.

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LIST OF TABLES

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AUTHORS’ PROFILES:

[Link] Jneid holds a Ph.D in human resource management. She is currently an assistant professor
at AZM University in Lebanon. [Link] is a researcher in the field of human resource management and
organizational behavior.

[Link] Francois Nakhle earned his Ph.D. at the University of Fribourg, Switzerland in 2011.
Currently, he is the dean of the faculty of business administration at AZM University in Lebanon and an
active researcher in the fields of international human resource management and cross-cultural
management.

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AGILE PROJECT MANAGEMENT AS A GENERATOR OF STRESS RELIEF AND EFFICIENCY?

Stefan Sauer, Institute for Social Science Research, Munich, Germany

[Link]/10.18374/IJSM-17-2.5

ABSTRACT:

Projects are regarded as a typical post-taylorist form of work. However, they often show contradictions
between claims of creativity and bureaucratic reality. This is one of the reasons why agile project
management has gained importance since the Agile Manifesto (2001), both within the IT sector, where it
was developed, and increasingly in other industries and activities. The core ideas of agile project
management franeworks, as Scrum, include a reduction of documentation, a far-reaching self-
organization of teams, and an orientation to quick work results and to coordination processes with
customers. This paper presents outlines of the concept of agile project management and empirical
research of stress factors and relief factors in agile procject management. It goes on to show how agile
processes, e.g. sprint plannings, can be used in practice to reduce stress and to boost innovation and
efficiency.

Keywords: agile project management, project management, scrum, sociology of work, empowerment,
cooperation, teamwork, collaboration, software development

1. INTRODUCTION

This paper first presents an overview of project management in general and agile project management in
particular, especially referring to its meaning and importance and the typical stress forms of project work.
Subsequently, the research question is developed whether agile frameworks as sprints, sprint plannings
and daily meetings can be used to reduce stress and to boost innovation capacities and efficiency, and if
so, in which way and degree and under which structural and personal conditions. This question is
answered drawing on empirical research and analytic reflections. Since the focus of this paper is rather
the investigation of concrete social practices than comprehensive representativity, a qualitative research
design is applied. The basis is formed by the research activities and results in two projects funded by the
German Ministry of Education and Research (BMBF), viz. ‘diGAP – Good Agile Project Work In a
Digitized World’ (duration 2017 to 2020) and ‘LerndA – Learning Through Work’ (duration 2014 to 2017).
Both projects are explicitly conceptualized to combine scientific research and practice in economic
organizations. To fulfill this task, a reflexive and experience-based participatory research design was
chosen (Huchler and Sauer, 2015). The empirical foundation consists of 39 qualitative interviews and six
group discussions with project workers, project leaders, product owners and scrum masters (the latter two
categories being roles within the agile project management framework Scrum), which I conducted and
analyzed myself by means of a qualitative content analysis. The core subjects of the interviews were
working and learning in and through projects as well as the stress caused by project work. Interviews and
group dicussions had an average length of about 90 minutes. In our context, projects were understood as
a specific practice (Blomquist et al., 2010) and as work (Barley and Kunda, 2001). The interviewees were
high-skilled workers in development and planning positions in three German large-scale enterprises of
different industries (automotive industry, communication).

2. PROJECT MANAGEMENT AS A POST-TAYLORIST FORM OF WORK

In this section, projects are introduced as post-taylorists form of work, with their inherent contradictions
between innovativity and flexibility on one hand and (frequently) bureaucratic and control-oriented
implementation forms on the other hand. Moreover, the stress factors resulting from these contradictions
are demonstrated. Subsequently, agile approaches are presented as possible solutions of these

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problems–solutions, however, that imply their own peculiar problems and demand a number of specific
conditions and requirements.

2.1 Manifestations, stress factors and contradictions of project management

Since a considerable time, projects have been understood as an instance of ideal-typical post-taylorist
work forms. Terms that have been used in this context include “project-intensive economy” (Ekstedt et al.,
1999) and, more recently, “project society” (Lundin et al., 2015; Wenell et al., 2017) or “projectification”
(Jensen et al., 2016). The innovativity, flexibility and preliminarity expressed in the project form has been
considered as typical for a “new spirit of capitalism” (Boltanski and Chiapello, 2007). A striking feature is
that a high stress level is usually seen as a nearly invariable consequence of project work. A typical
description is that project work is “frenetic, fast-paced, and dynamic” (Pinto et al., 2014: 578). Besides
dynamics, innovativity, and speed, another stressor is frequently identified: contradictory requirements
within the project and on the part of the management. In the respective research literature, descriptions of
bureaucratic project management as a phenomenon of overly rigid “organizational standardization”
(Pfeiffer et al., 2012), changes of the roles of project managers “from a manager of creativity […] to a
manager of paper and forms” (Geraldi et al., 2008: 588) and thoughts about improving planning
processes (Mukerji, 2013) abound. The “rationalist façade” of project management seems to hinder
project team members and leaders to live a “decent life” (Cimil et al., 2009: 79). Thus, project-based work
often is related with role ambiguity and role conflict, which both proved to be stressors, whereas affective
commitment acts as a buffer against stress, burnout and its antecedents (King and Sethi, 1997). Another
study describes the relations between project management practices, control appraisals and dispositional
coping strategies by project managers when dealing with stressful situations (Aitken and Crawford, 2007).
Since there seems to be a well-established link of contradictory requirements (creativity vs. bureaucracy),
the question should be raised whether alternative forms of project management may be suitable to
reduce stress and emphasize innovation and creativity, and under which conditions they could prove to
be successful.

2.2 Agile project management and stress

After previous reflections dating back to the end of the 1980s in Japan, in 2001 the Agile Manifesto
appeared. It has been translated into many languages and is still considered as a groundbreaking text for
agile approaches ([Link]). The Agile Manifesto, signed by 17 persons, comprises four
guiding rules intended as a summary of the central idea of agility: “Individuals and interactions over
processes and tools; working software over comprehensive documentation; customer collaboration over
contract negotiation; responding to change over following a plan“ (ibid.). It can be understood as an
attempt to liberate software development from bureaucratic obstacles, for instance excessive
documentation requirements and treaty provisions, overly detailed and thus unrealistic plannings and
patronization (Sauer and Pfeiffer, 2012). It should, however, be noted that the values on the right side are
by no means considered obsolete but simply less important than those on the left side.

Since the Agile Manifesto, agile approaches have been successful not only in software development, but
meanwhile also more and more in creative and innovative project outside the realm of IT. Agility has even
been described as a management fashion (Cram and Newell, 2016). Scrum is considered the agile
approach most in use (West et al., 2010). According to the latest State of Agile Surveys, 58 per cent of
the users of agile management make use of scrum, and another 18 per cent apply hybrid methods with
Scrum (Version One, 2016). The Scrum approach consists of three roles and four meetings (see
Schwaber and Beedle, 2002; Sims and Johnson, 2011; Sutherland, 2015). The three roles are Product
Owner, Scrum Master and Team, the four meetings are Sprint Planning, Saily Scrum, Sprint review and
Retrospective. The product owner is the main responsible person for the product, the team practises far-
reaching self-organization of their own work processes, with the support of the scrum master. The core of
the agile project management process with scrum consists of the following steps:

 The product owner develops a product version, in close cooperation with the customer, which
broadly defines the functionalities required from the customer perspective and prioritizes them.
 Product owner and team jointly reformulate these requirements as individual working tasks, so-
called User Stories, and file them in a so-called Product Backlog.

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 The project is temporally divided into so-called Sprints. The time span of a sprint can be defined
freely, but a duration of two or threeweeks is usual. Each sprint produces a complete increment.
 At the Sprint Planning Meeting, the team decides which tasks are to be and can be completed
during the next sprint. To that end, the tasks to be done are defined, estimated as to the time they
will consume, compared with the available working time and prioritized.
 During the sprint, the team organizes its work autonomously. The central tool is the Daily Scrum
where the momentary status of the work is shortly discussed and team coordination takes place.
Most teams make use of visualizing elements to make the work status visible.
 Two meetings follow at the end of the sprint: Review and Retrospective. The review serves to
discuss the completed increment with the product owner and, if appropriate, the customer; at the
retrospective, the team refelcts its own work process.

This process repeats from sprint to sprint, until the overall project has been executed successfully. There
are thus four dimensions in the scrum process model that suggest a stress-reducing potential: The team
develops largely in self-organized fashion, it decides how much work can be done during a sprint, it
receives feedback about its own work quickly and directly from the application area and does so with
reduced communication and planning efforts. Research to date has answered in a contradictory manner if
this is realizable empirically. On one hand, the research body shows that agile methods prove themselves
in handling the side effects of planning-driven project management (Dönmez et al., 2011), that product
quality from the user’s standpoint rises (Sfetsos and Stamelos, 2010) and that formal and informal
communication improves (Pikkarainen et al., 2008). On the other hand, agile structures demand that team
members establish a permanent balance between freedom and responsibility under the time pressure of
short iterations (Hoda et al., 2012).

Further empirical investigations focus on obstacles of implementation (Lindkvist et al., 2016), especially in
a non-agile environment (Gregory et al., 2016), or on methods to improve the effective knowledge
exchange (Ghobadi and Mathiasen, 2016) and the cooperation between customer and developers
(Dingsoyr and Lasseenius, 2016). There are also indications that the performance of agile teams not only
depends on external factors but rather on the team interaction itself, shared valus within the team, etc.
(Fagerholm et al., 2015). In the following section, I shall discuss the concrete design and shaping of team
meetings as well as external and internal factors of possible stress reduction in agile teams.

3. STRESS REDUCTION IN AGILE PRACTICE – EMPIRICAL RESULTS

In our empirical research indicated in section 1 of this paper, an important focus was the question
whether and how agile processes are apt to contribute to stress reduction and innovativity. Our theoretical
and conceptual approach draws on the concepts of subjectivating work action (Böhle et al., 2011) and
subectivating cooperation action (Böhle and Bolte, 2002). These approaches are suitable to investigate
the employees’ implicit knowledge in practical action (Collins, 2010; Polanyi, 2009) and the knowledge
transfer and exchange processes within the team (Porschen, 2006; Sternberg and Horvath, 1999). Our
thesis is that the high degree of self-organization in agile processes can help the employees to plan their
work by using implicit knowledge, to share their experiences, and thus to reduce stress and to find
recognition for their implicit knowledge (Sauer, 2017). This is by no means a negation of the stress factors
described in section 2.2. Rather, the idea is a detailed investigation how agile frameworks could support
the teams and help them to cope with stress and possibly reduce it.

3.1 Sprint Planning as an empowering form of self-organization

At the sprint planning meeting, the team members deal with the tasks to be done (user stories). They
estimate them on the basis of the effort needed to fulfill them and their complexity. Then they prioritize
them till the estimated time resp. the story points do not any longer exceed the amount of work that can
reasonably coped with in the time span of the sprint. Especially if the estimations differ greatly within the
team, minimal and maximal estimations will be explained and justified by the estimators and then
discussed within the whole team. After that, the estimation process begins again. In our research, the
teams attributed a high relevance to their autonomous estimation, meaning that the team can give its own

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estimation without being influenced from outside. Very important was also that they act “as a team”, so
that all members’ estimations and opinions are heard and negotiated. Every team member has to get the
chance to introduce their own experience and knowledge. In this context interviewees describe a kind of
balancing act: hearing and discussing all opinions but at the same time complying to the “time boxing”
and avoiding unproductive overlength of the meeting.

Autonomous team-based planning creates a commitment that is described as very motivating and stress-
reducing: the team is not a recipient of commands but a self-organizing body. Self-organization runs the
risk, however, of an over-commitment, both the team as a whole and its members as individuals may try
to outdo themselves. The teams deemed it highly relevant to learn to avoid this risk and to orient
themselves by a practicable avaerage stress level. They also have to consider that in spite of all
experience of the team members, imponderabilities will occur that require resources. In order to be able
to assess this need, experience is indispensable–experience with estimation processes, with the work
process that have to be estimated, and with the technical conditions. As soon as the sprint planning is
completed, the implementation of the sprint begins.

3.2 Sprint as a protective space

By the book, a completely planned sprint is untouchable. The team has committed itself to the tasks laid
down in the sprint backlog, so new requirements, on the part of management or the customer, should not
be added on top. This aspect is seen as highly relevant in practice. For this reason, the sprint serves as a
protective space, preventing the addition of new tasks and thus limiting the stress level of the team. It also
rules out a sudden higher prioritization of certain tasks without the commitment of the team, a problem
that is said to have arisen frequently in top-down organized “waterfall projects”. As far as it is technically
possible and sensible, the team also disposes of a certain flexibility within the sprint as to the
chronological order and sequence in which the tasks are handled. For instance, it is possible to focus
particularly on the utilization of synergy effects. Another variation we observed in empiry is that some
teams plan, in exceptional cases, two different estimated values for one user story, one for experienced
workers and one for less experienced ones (in relation to the task). This is linked to a kind of qualification
initiative: less experienced workers should get the chance to learn and become more experienced,
without too much time pressure that could prevent learning in the process of work. During the sprint, daily
coordination meetings are scheduled.

3.3 Daily Scrum as a coordination platform

The daily scrum is meeting limited to 15 minutes a day. During this meeting, the team reflects the current
state of work and documents it by means of the sprint backlog. The interviewed teams again pointed out
that it is highly relevant that the meeting should be organized and designed in a cooperative way. The
topic of the meeting is not only the current state of work, and by no means should the high transparency
be used for faultfinding. Rather, the discovery and exploitation of possible synergy effects should be
focused, as well as mutual help. Emerging problems and suggestions for solutions can be addressed and
shortly discussed. If necessary, a number of team members may arrange to meet again at the workplace
after the scrum meeting in order to discuss the problem and its solution. All in all, it is deemed highly
relevant that problems are not kept under wraps but can be openly addressed. There is a twofold
advantage to this: first, problems can be solved effectively with the help of skilled colleagues; second, you
need not disturb colleagues at their work but you can use the existing meeting to ask them. This permits
to avoid both lengthy error tracking processes of individuals and frequent interruptions particularly of
experts at their work. Here, again, a balancing act is to be coped with: the daily scrum should allow for
coordination and reflection of the common work status of the team without geeting out of hand and
becoming unproductive. By no means should the daily scrum be reduced to a bureaucratic executing of
tools resp. tool logics. If handled well, it is a means to ensure a quick and situationally adequate
information and coordination process within the team, thus reducing stress and promoting innovative and
cooperative work.

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3.4 Collaboration as a structural and personal precondition

The detailed descriptions of the agile frameworks show that agile methods are vitally dependent of team
cooperation and a cooperative design of agility. Conversely, agile frameworks are apt to support team
cooperation by framing the cooperation processes and setting a productive path for them. They also help
to empower team decision processes and, if well applied, to lend them a certain legitimacy and validity.
However, agile methods are not able to induce cooperation processes by themselves, they have to rely
on the cooperation ability and willingness of the team. The ability and willingness of the team, again,
depends on certain structural and personal preconditions. Concerning the personal preconditions, it is
vital that the project members know each other, both as persons and with respect to their skills.
Especially in projects across several locations, this is often a trouble spot. Knowing each other means
that there has to be opportunity to become acquainted with the colleagues, in terms of their specific skills,
their special ‘informal expertise’ and their way to handle team processes. This is an important
precondition for the ability to interpret hints and advice of colleagues and to compare them with one’s own
assessments.

Highly relevant is also a shared interest in the topic which binds the team together on a subject-specific
level. The creation of a shared ‘team language’ is also important since the team must agree on the
technical terms used, but also on common etiquette and rituals. In agile frameworks, the role of the scrum
master is an important support in this task. He/she has to support the process of getting acquainted to
each otherm and the genesis of common subject-specific perspectives. He/she also has to ensure that no
team member remains an outsider and that the pressure from outside doesn’t get too high beacuse that
could disturb the process of team building.

Besides team and scrum master, structural conditions are also highly relevant. In the short run, this
means that the team must be enabled to handle these processes without being hindered or disturbed
from outside. In the longer run, an authentic productive error culture and a temporal perspective for the
teams are crucial. Open talk about estimations, delays, problems, etc. is hardly possible if the company
has no fault tolerance. Dealing productively with errors and imponderabilities should be an element of the
overall company culture; it is not practicable to postulate this one-sidedly from a single team. Moreover,
for the open exchange of experience and knowledge within a team and the common process of problem
solution it is structurally necessary that employees can define themselves as a team members on a
certain basis. Competitive relationships on a short-term basis should not be structurally promoted, since
otherwise implicit knoledge might mutate too easily into a power mechanism.

4. CONCLUSIONS

This paper showed that agile processes can offer possibilities for stress reduction in the work of
developer teams, using an empirical example from the agile framework scrum. The core of this framework
is the team’s self-organization by means of the team members’ tacit knowledge, including the informal
transfer of this knowledge in the framework of agile processes. However, there are vital personal and
organizational preconditions for this advantage of agile processes, since on one hand they are apt to
support cooperation processes within the team and the exchange of tacit knowledge, but on the other
hand they cannot induce cooperation processes by themselves. Rather, they have to rely on the ability
and willingness of the team to cooperate. Against the backdrop of digitization (Rogers, 2016) and
increase of work in teams across the boundaries of locations and companies (Schilcher et al., 2011), a
critical question is to create the necessary structural and organizational preconditions for a successful
cooperative agile project work.

REFERENCES:

Agile Manifesto, [Link], 2001;

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Aitiken, Alicia and Crawford, Lynn, “Coping with stress: Dispositional coping strategies of project
managers”, International Journal of Project Management, Volume 25, Pages 666–673, 2007.

Barley, Stephen R. and Kunda, Gideon, “Bringing Work Back In”, Organization Science, Volume 12,
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Cicmil, Svetlana, Hodgson, Damian, Lindgren, Monika and Packendorff, Johann, “Project Management
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Collins, Harry, Tacit and Explicit Knowledge, University of Chicago Press, Chicago, 2010.

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Dönmez, Denis and Grote, Gudela, “Managing Uncertainty in Software Development Projects: An
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Fagerholm, Fabian, Ikonen, Marko, Kettunen, Petri, Münch, Jürgen, Roto, Vipri and Abrahamsson Pekka,
“Performance Alignment Work: How software developers experience the continuous adaptation of
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Volume 64, Pages 132–147, 2015.

Geraldi, Joana, Turner, Rodney, Maylor, Harvey, Söderholm, Anders, Hobday, Mike, and Brady Tim,
“Innovation in project management: voices of researchers”, International Journal of Project
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Ghobadi, Shahla and Mathiasen Lars, “Perceived barriers to effective knowledge sharing in agile software
teams”, Information Systems Journal, 2016.

Gregory, Peggy, Barroca, Leonor, Sharp, Helen, Desphande, Advait and Taylor, Kaitie, “The challenges
that challenge: Engaging with agile practitioners’ concerns”, Information and Software
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Hoda, Rashina, Noble, James and Marshall, Stuart, “Developing a grounded theory to explain the
practices of self-organizing Agile teams”, Empirical Software Engineering, Volume 17, Number 6,
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Huchler, Norbert and Sauer, Stefan, “Reflexive and experience-based trust and participatory research:
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Jensen, A, Thuesen, C and Geraldi, J, “The Projectification of Everything: Projects as a Human

Condition”, Project Management Journal, Volume 47, Number 3, Pages 21–34, 2016.

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Organizational Paradoxes of Scrum and Stage-Gate, Helsinki, 2012.

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communication in software development”, Empirical Software Engineering Volume 13, Number 3,
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Sfetsos, Panagiotis and Stamelos, Ioannis, Empirical Studies on Quality in Agile Practices: A Systematic
Literature Review, 2010.

Sims, Chris, Johnson, Hillary Louise, The Elements of Scrum. Dymaxicon, 2011.

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AUTHOR PROFILE:

Dr. Stefan Sauer earned his Ph.D. at the university in Nurnberg/Erlangen. Currently he is senior research
fellow and project manager at the Institute for Social Science Research in Munich, Germany.

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ASSET RESOURCE STRATEGIES – AN INTEGRATED FRAMEWORK TO ORCHESTRATE LONG

TERM COMPETITIVE ADVANTAGE

Charles McMillan, Schulich School of Business, Canada

[Link]/10.18374/IJSM-17-2.6

ABSTRACT:

As a field of study, organization strategy faces growing fragmentation, abstract theorizing, and lack of
integration within academic disciplines. This paper offers an integrated framework for corporate strategy
based on strategic capacity of the organization, flowing from asset endowments - tangible and intangible
– which both define and constrain strategic choices. Asset positioning strategies flow from judicious
appreciation of alignment of strategic goals, capabilities that flow from asset organizational endowments,
and opportunities that frame organizational plans based on real costs and revenue potential. While the
strategic capacities to exploit and monetize asset value are enhanced when organizational capabilities
and competences activities are aligned, internal dysfunctions and executive myopias may activate
decision inertia and explain why organizations slowly lesson and then lose their competitive advantage.
However, given the enormous competitive and technological changes globally, and new disruptions from
an Internet and digital world, it is vital to align assets, capabilities, and tools of execution for term term
competitive advantage.

Keywords: Strategic Positioning, Corporate Assets, Unassailable Competitive Advantage, Knowledge

Diffusion, Habits of Attention

“In business, I look for economic castles protected by unbreachable ‘moats’.”

- Warren Buffet

1. INTRODUCTION

Corporate strategy focuses on the firm as an organizational entity, usually in a contested industry or
groups of industries. As an academic subject, corporate strategy, or more generally, strategic
management, embraces many theories, disciplines, and methodologies, borrowing from organizational
theory (e.g. March and Simon, 1958), industrial organization in economics (e.g. Caves, 1980; Porter,
1979), military tracts (e.g. von Clausewitz, 1832), stakeholder and agency theorists (Winter, 2003), the
greatly expanding consulting field (e.g. Kiechel, 2010) and political science (e.g. Allison, 1971). The huge
literature on corporate strategy written in articles, handbooks, textbooks and professional association
conferences like the Strategic Management Society (Carton et al., 2017) seems impressive, but the field,
at best, remains a work in progress (Durand et al., 2016). To quote 19th century Prussian general Carl von
Clausewitz, “everything in strategy is very simple, but not everything in strategy is very easy”.

Historically, the starting point in the study of strategic management remains the neo-classical theory of
the firm, the invisible hand of the market determining the quantity, quality, and pricing of goods and
services under assumptions of perfect knowledge and profit maximizing goals of decision-makers (Cohen
and Cyert, 1965). Classical economists like Adam Smith, Jean Baptiste Say and even Karl Marx
recognized the role of this conversion process of accumulated, fixed physical assets in firms to active
capital, where money is the great ‘wheel of circulation’ that facilitates productive potential and value. As
deSoto (2000) argues, it requires a means “… to go beyond looking at our assets as they are to actively
thinking about them as they could be. It requires a process for fixing an asset’s potential into a form that
can be used to initiate additional production…’ (p. 45). The easy availability of the ‘factors’ of production,
such as parts and components, raw materials, skills, organizational attributes and work routines are taken
as decision assumptions but, in the scathing comments of Herbert Simon (1991), the existing literature on
organizations and related approaches are “acts of faith, or perhaps piety” (p. 191). By contrast, the
corporate strategy literature puts primacy on exogenous conditions, such as new technologies, weather

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conditions, competitive market dynamics, public policy, and unforeseen events that impact organizational
performance, hence the need to study the organization as an open system (Thompson, 1967).

However, much of the progress in the strategy field has stalled, with numerous and competing
frameworks, concepts that remain vague and at times contradictory, and misleading focus of analysis -
the industry, the firm, a business unit, key decision-makers. This fragmentation is widespread, reinforced
by disciplinary and epistemological agendas, abstract theorizing and confusion and uncertainty about
causal relations (March & Sutton, 2009). What is accepted as settled truths stifles cumulative theory-
building from on past studies, both theoretic and empirical. Scientific theories, a product of informed
imagination, based on steady and preoccupation with path dependent refinement, require an integration
of ideas and concepts that impact strategy as a field of study and a paradigmatic model of strategy.

Examples of competing strategic frameworks include competitive positioning and the five forces
framework of Michael Porter (1979), the resource-based (RBV) frameworks of internal resources and
capabilities (Barney, 1991), a more eclectic framework that may include entrepreneurial flare, network
knowledge, and a bundle of ‘dynamic capabilities’ (Teece & Pisano, 2016), blue ocean strategies to
reposition organizational assets in uncontested markets (Kim & Mauborne, 2015), and behavioural
models of the firm as an attention allocation system with multiple and conflicting goal preferences (March
and Simon, 1958). Unfortunately, there is a growing gap between abstract and normative models that
apply to all circumstances in a theoretical sense, and detract from the practical world where strategy is
applied in firms, government agencies, and the world of real organizations (Simon, 1991).

Current approaches and fragmentary models, where strategy is isolated from execution, or decision-
making bias, cognitive limitations, and goal constraints are ignored, thwart the necessity to improve
existing paradigms, and gradual accumulation of core concepts, idea generation, and appreciation of
causal relations in the real world. Empirical studies might add or subtracting ideas as powerful, trivial or
inconsequential based on cleverly design research programs and hypothesis testing, but allow a gradual
integration that added to both predictive attributes and practical use (Carton and Mouricou, 2017).

This paper focuses on the portfolio of assets in the organization and provides an integrated model of
corporate strategy, based on the perspective of the decision-makers. Asset resource strategies start from
the premise that organizational assets define and constrain the decision choices, mediated by the
characteristics of their tangible and intelligible features that create value. The strategic choice of assets,
and the potential opportunities based on performance outcomes, are largely determined by the assets
themselves, which create decision constraints on decision-makers. Over time, strategies to invest and
reinvest in assets – tangible or intangible – impose obligations on performance outcomes. In contrast with
other approaches, including the resource-based view (RBV), asset positioning starts from the strategic
choices faced by decision-makers, in two respects. The first is the role of the firm as a bundle of tangible
and intangible assets that define and constrain decision routines and activities. Asset strategies, although
influenced by market rivalry and competitors’ response, as well as endogenous factors like skills, dynamic
capabilities, and routines, focus on the constraints of existing assets, what asset choices lead to
capability options and the processes that define indispensible needs and those than can be discarded to
assure high outcomes (Durand et al., 2016; Thoenig & Paradeise, 2016).

2. CORPORATE STRATEGY – FROM FRAGMENTATION TO INTEGRATION

In the real world, decision-makers are action oriented, and place inordinate demands on how external
conditions inflict demands that are unpredictable and uncontrollable, and why feedback loops help or
hinder how future states might ought to be and how it will be. Decisions on asset allocation – where to
compete, how to compete – directs strategy-making orientation to the future. To orchestrate
organizational goals and plans, decision-makers mobilize internal endowments of tangible and intangible
assets, and by judicious appreciation of asset deployment achieve sustained competitive advantage.
However, new forms of competition from an Internet and digital world require agility to address not only
continuous incremental change but increasingly more transformative renewal. As one study noted, “ …
leaders have to reach much deeper, to the firm’s identity, and determine whether it is an asset they can

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leverage to bring about change … or a liability they must address to avoid being obliterated by new
competitors” (Bouchikhi and Kimberley, 2008, p. 15).

Early formulations of asset resources in strategic management include six types: financial, physical,
human, technology, reputation, and organizational (Hofer and Schendel, 1978). Economists employ terms
like factors of production. Physical assets include land, buildings, machinery, easily measured on the
balance sheet in financial statements1. The inexorable shift to a digital world, sometimes referred to as
the fourth industrial revolution (Schwab, 2015) may transform organizational design, placing a premium
on intangible assets, the rise of platform systems and novel forms of eco-system organizations. For
instance, the initial decisions to invest in an oil refinery and not a shipyard or a pizza franchise may be a
function of economic opportunity when competitive forces offer monopoly or oligopoly advantages, but the
nature of the asset investment itself largely determines the performance outcomes. In their blue ocean
model, Kim and Mauborne (2015) put emphasis on value innovation: “The focus on innovating at value,
not positioning against competitors, drives companies to challenge all the factors an industry competes
on and to not assume that just because the competition is doing something means it is connected to
buyer value” (p. xiii).

Clearly models of corporate strategy other than competitive positioning are at play, as depicted in Figure
1. Accepted orthodox strategy frameworks need to incorporate both exogenous events and event cycles,
as well as internal organization strategic capacities to exploit assets, either proactively, or defensively. As
Bungay (2011) emphasizes, “while many best-known strategy development tools – Porter’s five forces,
value chain models, BCG matrices for competitive position, market segmentation - … focus attention to
the essentials of the situation, internal or external, … they do not produce strategies” (p.103). Further,
“strategy and operations become a distinction without a difference” (p. 97).

Figure 1.
Strategy And Competitive Advantage

Herbert Simon:
Barney-Teese:
Bounded Rationality
Resources &
• authority systems Capabilities
• incent ives/integration Strategic
• decision premises Choices • superiour resources
• mult iple goals • imperfect mobility
• action as program design • dynamic capabilities
• docility & learning • Product-markets • coordination routines
• Novelty - Imitation
• Time Horizon
• Structural design

Programs of
Ansoff-Porter: Activities Schumpeter:
Rivalry • goal commitment
Creative Destruction
•
• Power of suppliers,
•
resource conversion
firm boundaries • Institutional Routines
• Power of customers •
• decision processes Technology frontier
• Life cycles & Substitutes •
• intelligence/expertise Path dependencies
• Entry Barriers •
• sensing, probing, act Continuity/discontinuity
• Managing innovation • Contagion & tipping points
• Expansion -diversification

1
An organization’s balance sheet in its accounting statements is a starting point to determine assets and liabilities,
but they can be vastly misleading, in part because accountants feel comfortable mainly with tangible assets where
costs are known and easily verified. Pricing, costing, and valuations of intelligible assets are another matter, and
dependent on judgment and sundry assumptions. However, given the presence of foreign exchange transactions, tax
treatment that may vary widely by country, and the value of intelligible assets like patents and other forms of
intellectual property, the study of assets and asset positioning is as much an art as a science. For background on the
issues and the need for international harmonization with such bodies as the Financial Accounting Standards Board,
see Stolowy and Cazavan (2001).

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While the economic theory of the firm has a path dependent fixation in strategy models, Herbert Simon, a
Nobel Laureate, whose book, Adminstrative Behaviour, first published in 1947, was a wholesale attack on
the classical paradigm and postulates of rationality, opened a new stream of theorizing about the firm as
a complicated set of sub-systems, and realistic models of decision-making. Individuals face cognitive
limitations, requiring sequential and limited search processes, where multiple goals and tasks face
internal conflict and cleavage, so decision programs and repertoires that guide behaviour offer
organizational stability based on ‘sunk costs’ and ‘sunk assets’. A succession of empirical studies and
comparative approaches to business firms, universities, and voluntary sectors have shown how task
complexity influenced patterns of interaction, tools of coordination, and flows of information and material
resources (Thompson, 1967) which impact both strategy and execution. This research also introduced a
new vocabulary – memory, uncertainty absorption, slack, habits of attention, sense-making, speed and
temp, and aspiration levels – that impact both organizational processes and performance outcomes.
Participants at various levels seek out organizational identification, involving the “absorption of strategic
plans into the minds of organizational members where they can have direct effect upon the entire
decision-making process” (Simon, 1993, p. 141).

These decision theories are largely ignored in Porter’s (1985) framework, because the five forces model
(Porter, 1979) owe their origin to the industrial organization paradigm where market (industry) structure
(concentrated or dispersed) determines corporate strategy and performance (Caves, 1980). While this
model is a mainstay for courses on strategic management, often replacing the earlier studies on
corporate strategy by Igor Ansoff (1965). His text, Corporate Strategy, written as much for practitioners as
an academic audience, introduced the complexity of corporate evolution as firms diversified, and adapt by
searching for new growth opportunities, but the evolutional process can vary. Diversification strategies –
either as vertical integration, or related or unrelated diversification involving synergistic reinforcement of
products or markets or both - amplify operating and financial advantages. In the extreme, firms adopted
conglomerate diversification, where individual businesses have no synergy advantages except common
ownership.

While Ansoff (1965) focuses on adaptive organizational design to address competition, Porter (1985)
focuses on competitive industry forces, and – consistent with economic models – how rivalry can come
both within a large national market or global sectors (like smart phones, autos, or retailing). The
widespread acceptance of the industry positioning framework at the business level shows it is an effective
means to study the transformation of many industries, including their innovative capacity as firms absorb
new ideas, processes, and organizational systems from suppliers and customers, where much innovation
actually takes place (Von Hipple, 1988). In addition, it is a logical and coherent tool to analyze
comparative positioning of firms within a sector, useful to practitioners to assess strategic choices, such
as preventive measures to cope with new substitutes (e.g. Toyota’s Prius as an innovative hybrid car) or
threats of new entrants, such as Amazon or Alibaba, whose business model by-passes the traditional
bricks and mortar order and delivery system with an e-commerce platform of direct selling over the
Internet. With lax anti-trust enforcement, firms can adopt product differentiating strategies that can be
immensely profitable, especially in oligopoly sectors, and lucrative for senior executives and a low risk
model without onerous investments to address competitive threats. As the Oracle of Omaha, Warren
Buffet has put it, “in business, I look for economic castles protected by unbreachable ‘moats’.”

However, there are many limitations of this Porter (1979) framework, and three stand out. It isn’t terribly
useful or enlightening to explain huge variations in profit performance among firms within a single industry
(Rumelt, 1991). What issues confront managers within the firm that explains different performance levels
over time within a single sector? Further, it has no bearing on strategies for start-up companies, which by
definition operate in uncontested markets, shown in frameworks like Blue Ocean Strategies developed at
INSEAD (Kim and Mauborne, 2015). The five forces model does not apply well to organizations operating
with lean production, where firms like Toyota incorporate their suppliers and customers into an eco-
system structure that allows innovation through intense, deep collaboration (McMillan and Stalk, 2016)
and allows benchmark performance to change and improve dramatically. Further, it largely removes any
consideration of personal competences of senior managers, their personality, measures of smugness and
hubris that influence the executive mindset, and patterns of decision-making, habits of attention, or tools

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of sense-making (McMillan, 2016). And it doesn’t apply well to service organizations that rely on internal
skill sets, decision structures and processes, and organizational capabilities like data analytics and
precision engineering, for instance, to create sustained competitive advantage (Cusomano, 2010).

This lacunae in corporate strategy – linking the mindset, competences, and orientation of senior
management, the adaptive requirements of external constraints and orchestrating internal assets –
requires more integrative frameworks, as depicted in Figure 1. In a world of disruptive change,
Schumpeter’s (1942) emphasis on creative destruction put far less emphasis on price competition in the
decision model of classic economics, and more on novel entrepreneurial innovation – technology, supply,
organization – “strikes not at the margins of the profits and the outputs of the existing firms but at their
foundations and their lives” (p. 4). The stress on entrepreneurial innovation offers the carrot of
spectacular reward, noticeable in certain winner-take-all sectors led by firms like Apple, Facebook,
Google, and Amazon, or the stick of destitution, noticeable in sectors where once leading firms like
Westinghouse or British Leyland failed to adapt. It reinforces the strategic emphasis on decision-makers,
their understanding both of competitive response and the time horizons for success or failure. It also
confirms the vital need of adaptive processes within the firm, such as the strategic focus of senior
managers, redefining their structures and habits of attention, so well documented by Alfred Chandler
(1962), and consistent with evolutionary economics, where decision makers via “joint action of search
and selection, the firms evolve over time, with the condition of the industry in each period bearing the
seeds of its condition in the following period” (Nelson & Winter, 1962, p. 19).

In business school parlance, strategic frameworks address the threats and opportunities side of SWOT
analysis without defining explicitly the strengths and weaknesses within the organization, including the
entrepreneurial mindset of managers and their capacity to lollygag through inaction, inertia, and drift.
Empirical research and case studies show a tendency for huge differences in firm performance within the
same industry – Toyota vs. GM in autos, Kodak vs. Fuji in cameras, Barclays vs. Goldman Sachs in
investment banking. Management and organization play a huge role (McGahan and Porter, 1997; Rumult,
1991), but so do other factors – psychologically, technologically, and political. Firms vary, showing
alternative design models of resource allocation, ecosystems networks, and even mundane activities that
constrain existing forms of asset configuration. Many firms invest in multiple industries simultaneously, so
their product portfolio may lack a growth-profitability balance (Armstrong et al., 2016). Moreover, as
organizations with very complex internal systems adapt to very complex environments, new tools applying
data analytics, algorithms and computational architecture allow deep search processes, superior
feedback, and problem-solving architectures (Moldovenu, 2016). In addition, in the digital world of
software, algorithms, AI, cloud computing, and data analytics, conventional assets, including stand-alone
physical assets, can be inter-connected as networked platforms. Daily and hourly performance allows
novel forms of sense-making, performance monitoring, and machine-learning, a world of ‘big data’, data
as a strategic asset, and new forms of real time decision-making (McAfee & Brikbrynjolfsson, 2012).

3. ORGANIZATIONAL ASSETS: A CONTINUUM OF TANGIBLE TO INTANGIBLE

Organizational assets may represent a huge opportunity to redesign business models to create customer
value. Colloquially, organizations are called labour-intensive, capital-intensive, energy-intensive, and
knowledge-intensive, implying that certain inputs like labour or energy represent the majority costs of the
investment or annual operating costs. Past attempts at classifications - primary, secondary, or tertiary
sectors for societies at large, or craft, mass and process production (Woodward, 1958) - give a flavour of
the mix of assets, but ignore the knowledge component, the information requirements, and the skillsets
and occupational mix of asset utilization (Drucker, 1977; Bloom and Van Reenan, 2010). Further, assets
may be vastly undervalued, to the cost of organizational stakeholders. Capital-intensive firms, for
example, like petrochemical plants, or shipbuilding plants, contrast with plants where labour costs
represent a disproportionate share of incurred costs. The assets themselves determine the mix of
organizational resources and knowledge capabilities to exploit their use, and often determine market
structures over time. For instance, capital-intensive firms like shipbuilding are subject to intensive price
competition, excess capacity, and low returns as rivals easily replicate or imitate investments, and in time,
lower financial returns, compared to labour-intensive sectors (Hassan, 2008).

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Misunderstanding the nature of corporate assets can be costly. For instance, the misjudgment and
careless specifying of measurement and valuation by the lead accounting firm were shown by the Nortel
Networks bankruptcy, a Canadian-based telecommunications firm that went into liquidation in 2009. This
case study is instructive: the financial statements issued by the accountants became the basis of payouts
to creditors, but did not admit 6000 patents and intellectual property that in June 2011 sold to a group of
companies like Apple, Microsoft and Sony for over $4.5 billon, outbidding Google, which then purchased
Motorola Mobile and its 17,000 patents for $12,500. The Nortel liquidation process became a seven-year
legal process over the payout of assets to various creditors, including pensioners, banks, bondholders,
trade accounts, and foreign shareholders. The accountants’ initial error would have penalized pensioners
by misstating the true value of intangible assets in the distribution of payments. Indeed, there is a
continuum in various kinds of assets in organizations, from tangible physical assets like property and
machinery to intangible intellectual property, such as a song sheet, a film score, a patent or a brand or
trademark, as depicted in Figure 2.

Figure 2

Portfolio of Organizational Assets

Tangible
Physical Assets – portfolio of land, buildings,
Infrastructure, machinery, equipment, natural resources;

Financial Assets – portfolio of cash, stocks, bonds,

options, shares, gold, foreign holdings;

Human Capital – portfolio of human skills, education,

experience, specialized training;

Knowledge Assets – portfolio of intellectual property:

patents, licenses, trademarks, copyright;
Organizational Capability Assets – portfolio of creative
routines, network alliances, specialized competencies and
learning, shared values and tools of collaboration;
Intangible Assets – portfolio of intellectual property,
software systems, archival data and libraries,
brand equity and goodwill.
Intangible

The corporate world is steadily allocating more investments towards intangible assets, shifting over forty
years from tangible to intangible (13 per cent in 1975, to less than ten per cent in 2014), as shown in
Figure 3. In the US, more than $8 trillion has been invested in intangible assets, more than half the
market capitalization ($17.9 trillion) of the S&P 500 index, but often recorded on a system called ‘19th
century accounting’ (Monga, 2016)2. The sharing economy, where activities to obtain, share, or access

2
Most national statistical bureaus and think tanks like the OECD now calculate intangible assets as part of their
assessments of science policy, economic forecasts, and productivity. Classifications of intangibles vary by country,
but include investments in scientific and engineering R&D, mineral exploration, architectural and engineering
design, and a bundle of economic competencies like advertising, firm-specific human capital formation, purchased
and own-account organizational capital (including investments in workplace practices) and, more recently,

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goods and services are fostered by the Internet and digital platforms, so physical assets are recalibrated
as shared services (Marchi & Parakh, 2015).

The disruptive impact of the sharing economy, where both supply of products/services and demand
become more transparent, elastic, and mobile, has the power to unlock underutilized assets and create
significant value. The expression “let’s Uber” goes well beyond a startup firm now worth $70 billion (The
Economist, 2016) – the phrase attests to novel forms of networked organization with dissimilar business
models for corporate strategy, where asset costs are cheap and tangible, asset ownership is irrelevant,
and customer collaboration addresses a pay only model for asset access, not property ownership per se
(Sundarararajen, 2016). From the auto sector to clothing, this novel sharing business model is profoundly
consequential, where organizations with aging assets and an ossified managerial mindset face decline,
decay, and failure. GE is the only US firm left in the 1912 list of Fortune Top 500 companies. Today, the
age of companies on the S&P 500 is only 18 years, compared to 35 in 1980. By some estimates, in the
next decade, by 2027, three quarters of the S&P 500 companies may be removed from the index – a
testimony to the shift of knowledge and intelligible assets as a source of competitive advantage.

Figure 3

Comparing Trends in Corporate Investments:

Tangible and Intangible Assets as % of US GNP

Despite the importance of knowledge and intangible assets, simple labels and indicators are misleading,
illustrated by two examples not usually addressed in the corporate strategy literature: physical assets and
financial assets. For many organizations, physical assets are central to their corporate strategies in
sectors like pulp and paper, mining, other primary industries such as wheat farming and forestry to oil and
gas sectors. The natural resources literature (e.g. Dasgupta & Heal, 1979) sets out the impact of assets
like land (virgin forests vs. well cultivated forestry) with irrigation, drainage, roads, and sustainable forest
practices (Samuelson, 1976). Extractive industries can be sub-divided into two types, namely truly
exhaustive (oil and mining) and potentially renewable when combined with knowledge and capabilities,
such as optimal rotation and sustainable yield.

management capital. For background on conceptual and measurement issues, see Baldwin et al. (2012) and Van Ark
et al. (2008). On valuation measures of intellectual property, see Rivette et al. (2000).

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Decision-makers may misjudge or mis-specify realistic measures of cost, performance, or desired

outcomes. Just as successful outcomes may lead to past actions being repeated, unsuccessful outcomes
may lead to novel adaptive processes. Repositioning of physical assets allows organizations to unlock
wasted or unused assets, such as high-rise buildings operating with a wasted asset, their rooftops, which
can be repositioned with telecommunications towers as a revenue-producing asset. The slogan, Reduce,
Reuse, and Recycle, encourages high asset value. Toyota’s lean production system is a testimony to
product recycling and reuse, but similar approaches are found worldwide. In Canada, a standardized
345ml brown beer bottle is reused 23-24 times. In many countries, recycled tires become the feedstock
for highway construction materials, and the global market for discarded or recycled steel and other metals
to make specialized products is endless. A dramatic example, focusing on research expenditures, is the
case of IBM, which changed the conventional R&D expenditure mold by carefully assessing what was
absolutely core to its business model, what was surplus, and selling or licensing its intellectual property,
thus exploiting a stream of earnings, initially of $100m free cash flow, by adopting the latter approach. As
a general rule, high slack resources in companies suggest high waste, and a plausible opportunity for
asset repositioning for value creation.

4. ORCHESTRATING ASSET POSITIONING: A FIVE FORCES FRAMEWORK

The digital world of the Internet best exemplifies asset positioning, represented by Airbnb, Uber and
similar high growth firms that take an existing asset, like a room or car, and monetizes the value into a
stream of annual earnings. Some contrasts are stark: the largest media firm has no content (Facebook),
the largest taxi firm owns no taxies (Uber), the largest telecom has no telecoms (Skpe, WeChat), and the
largest cinema firm has no cinemas (Netflex). Airbnb, with a market capitalization of $70b, exceeds that of
Marriott ($17.2b), Hilton ($21.5b), and InterContinental ($9b) and can add up to 2700 new rooms per day,
compared to the three hotel chains adding 200 rooms over 2-3 years (Winkley, 2015). Many cities have
huge unused landholdings, with limited strategic capacity to assess and mobilize an action plan to
reposition for better use. However, the global environmental movement has forced a change in the
mindset of traditional production systems that emit enormous waste - energy, water, timing delays, and
redundancy of effort – plus their carbon footprint. In short, organizations may possess a portfolio of
assets, both tangible and intangible, that are not recognized or appreciated as valuable: assets are
locked in to the cost structure as fixed, and create no value, income, and often are underutilized to create
value. The shared economy (or gig economy, as in a singer playing a one-off performance) is
transformative, allowing individuals to use their skills as sub-contractors, freelancers, and consultants to
contract out their tangible and intangible assets as a monetized income stream. Figure 4 depicts differing
kinds of organizational assets that energize strategic choices to be ‘unlocked’ to create value.

Figure 4

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Organizations may possess only one real asset and many will have all four. Managers and stakeholders
may take a passive stance to their asset base, or be proactive to know, understand, and assess options
that ‘unlock’ sluggish, inert, or dormant yield to mobilize real value. It may be a truism that the most
valuable assets in any organization are human capital, but orchestrating asset values require a
management commitment to elevate internal strategic capacities to achieve real value. This potential
misalignment is especially destructive because people skills and outlooks are often central to take
intangible assets linked to physical assets into a new organizational configuration or ‘combinative
capabilities’ for new products (Kogut and Zander, 1992). Consider four unlocked assets in organizational
life that potentially can create value.

5. PHYSICAL ASSETS

Physical assets typically represent the core design of a production conversion flow and the center of the
firm’s value chain - from idea design, engineering tasks and output, to distribution and customer delivery.
As such, physical assets have engineering design activities which constrain decision options and impose
sunk costs. Conventional engineering production systems operate as an optimization problem: equipment
is designed in a linear, step-by-step sequential flow, with standardized parts and components with tight
tolerances for minimal quality variations and falling costs, subject to performance constraints. Despite
massive advances in engineering design, most production systems align physical assets according to
principles of standardization (interchangeable parts and components), modularity (sequencing of
subtasks and processes), and specialization (job functions and role tasks). Such investment commitments
may also impose a tradeoff, between production flexibility but at a higher cost (which can become
stranded assets), or inflexible engineering process flows but with longer production runs and lower unit
cost (Baum & Viok, 2013). These conflicting choices impose decision constraints, as between general
and specific kinds of production assets, and tools of continuity or novelty.

Production assets represent sunk costs and frame decisions between “preferred treatment to alternatives
that represent continuity of present programs” (March & Simon, 1958), because engineering and scientific
design places constraints (e.g. cost, time, bottlenecks, energy, safety) on the conversion process to
transform raw material inputs and information to yield desired outputs (Baum & Viok, 2013). Physical
assets produce an optimal efficiency test for decision-making via programs of activities, time scheduling,
and coordinating interdependencies among subunits, i.e. knowing the set of criteria that serve as decision
constraints and choosing a course that meets or exceeds the constraints. As Simon puts it, “to
paraphrase a familiar epigram: ‘If you allow me to choose the constraints, I don’t care who selects the
optimization criterion’ ” (Simon, 1964, p. 6).

The financial valuations of physical assets - machinery, buildings, and land - are generally transparent,
where market signals provide timely information. By contrast, intangible assets like patents, copy rights,
trade marks, and other assets based on people skills and processes are difficult to valuate and measure
concretely, because market appraisal may depend on the customer base, industry rivalry, or even a
bundle of related patents. Simplistic views about whether assets are valuable, rare, and perfectly mobile
or substitutable, at least seen by management, and the social interactions between physical assets and
human activities, are often misplaced. In many industries, like the global airline sector, petrochemicals,
advanced materials, and nuclear power stations, design engineering of the physical assets places great
constraints on changes to the decision activity programs, thus limiting managerial discretion. These
production assets are tightly coupled and prescribe exacting application of engineering repertoires and
technical prowess, such as capacity planning, asset utilization, line balancing and design adaptability as a
substitute for planned obsolescence (Guiltinan, 2008; Waldman, 1993).

Physical assets, in short, symbolize strategic commitment to existing decision programs and routines,
imposing constrains by specific criteria and obligations. Physical assets, at times depicted as hard assets
because their value is an inflation hedge, are feasible to valuate, based on actual costs. In practice,
physical assets serve specific product-market choices and organizational commitment for program
continuity and predictability (March and Simon, 1958). Moreover, physical assets may represent exit

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barriers3, because they become sunk costs, or even stranded assets. The antique sector illustrates how
the valuation of physical assets can vary tremendously – paintings, sculptures, letters, autographs -
depending on their history and provenance. The same issues apply to land, where location, refurbishing,
and new uses can add value. Companies vary in how they position their physical assets, and product-
market specific assets may represent entry-deterring commitments by firms, i.e. entry barriers, but also
exit barriers, because past commitments may represent mental rigidities and entrapment to existing
activities, a capability trap that prevents experimentation to meet new technologies and knowledge in a
changing environment (Staw, 1981).

Physical assets impact both strategic choices and decision processes. Physical assets in the technical
core have a finite production function, a dominant design logic 4 based on non-rival inputs that constrain
the technical and knowledge production possibilities to convert inputs to outputs. Joan Woodward (1958),
studying these issues decades ago, makes the following link: “Each production system has its particular
application and limitation … different technologies imposed different kinds of demands on individuals and
organizations, and that these demands had to be met through appropriate forms of organizations” (pp.
14). Design issues thus circumscribe routines and programs of action to coordinate customer needs,
including expertise, asset utilization, maintenance and requirements for production forecasting and
systematic feedback to prevent bottlenecks and waste (Spearman, 1997). As organizations deploy more
complex machines and their data feedback capabilities and competences in precision engineering and
reliability principles are fundamental both to assure life cycle cost-based design, and advanced skills and
techniques by suppliers for output reliability and dependability assurance (McMillan, 1985).

Steady advances in knowledge and technology applications are accelerating changes to physical assets,
by encompassing software, digital add-ons, and artificial intelligence. Some physical assets remain static
and dumb, with little or no capability to convey information or learning via feedback, like a typewriter.
Land and soil characteristics suitable to grow bulbs and flowers contrast to land appropriate for wheat or
corn or the location advantages of plentiful sun and rain to produce superb grapes. Some physical assets
are enabling, where outputs produce information and production output signals, such as robots, weather
maps, MRI equipment, or GPS devices. Some physical assets are instrumental, where outputs allow
agents to address problem-solving activities, such as computers, cameras, or sundry smart scientific
equipment. Physical assets, in short, may deter novelty and experimentation. Simon (1964) illustrates the
role of assets as decision constraints: “A river valley development plan that aims at the generation of
electrical power, subject to appropriate provision for irrigation, flood control, and recreation will generally
look quite different from a plan that aims at flood control, subject to appropriate provisions for the other
goals… it is almost certain that quite different plans will be devised and proposed …” (p. 9).

6. INTELLECTUAL PROPERTY ASSETS

Corporate spending on R&D demonstrates how intellectual property – patents, trademarks, copyrights -
have altered the organizational asset configuration and the potential to create an income stream when
managed judiciously. Only a generation ago, physical assets – foundries, mills, factories, and machinery -
accounted for an estimated 62 per cent of the market value of US manufacturing, according to the
Brookings Institution – today it is less than 30 percent. Paradoxically, the market for ideas, patents, and

3
Physical assets and associated inherent programmed activities can represent a form of exit barriers, and where
existing commitments constrain many strategic options, both under conditions of monopoly and competitive
industries, e.g. coal-fired electricity generators, or buildings with heat-resistant asbestos. For background, see
Caves & Porter (1980) and Eaton & Lipsey (1980).
4
For background on dominant design issues, see Utterback & Abernathy (1975), Anderson and Tushman (1990),
Cusumo (1990) and Murmann & Frenken (2006). Many scholars attempt to categorize products as part of a
dominate design category, based on product features and customer perceptions, without focusing on how physical
assets impose a dominate design that are difficult to reverse or change. As Suaraz et al. (2015) stress, “…once a firm
decides to invest and progress along a specific trajectory, technological ‘path dependence’ imposes strong
restrictions on what can be done and undone in the design” (p. 440).

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other intangible assets is inefficient and represents a form of market failure, with high search costs for
both owners and sellers (Gans and Stern, 2010).

Intellectual property encompasses a legal perspective which now allows a temporary monopoly, legally
sanctioned, often up to 20 years, depending on national jurisdictions and the nature of the application.
Two industries – pharmaceuticals and the creative sector - show dramatically the impacts of intellectual
property. Budgets that range from 5-22% of annual sales are common in the pharmaceutical sector,
perhaps 20 per cent of total industrial R&D in the US. The strategy of investing profits in the portfolio of
existing drugs to fundamental research in new products is complicated by the time period of patent laws5.
Pfizer’s Lipitor, for example - a block buster drug for cardiovascular disease, the best-selling drug ever -
was introduced in 1996 and in 15 years reached $125 billion in sales. However, the intellectual property
of Lipitor is now generic with an expired patent, and faces new product rivals like Pravahol and Zocor,
costing only a tiny fraction of Lipitor as a product. As a consequence, patents are a means to create a
temporary monopoly and a strategy to retain commercial secrets, as shown in Table 1.

Table 1
Patent vs. Trade Secret
Patent Trade secret Regulatory exclusivities
Cost to obtain $10,000–$30,000 Free Millions of dollars
Cost to maintain $3,150–$12,600 Free
$1,000 to tens of thousands

Ease of obtaining Medium Easy Hard

Duration 20 years from date of filing Potentially forever 3–12 years

Likelihood of loss Medium High Low

Medium to high Low to medium Low
Breadth of protection

Cost of enforceability $500,000–$10 million $100,000–$2 million Free

Ease of provingMedium Difficult Easy

infringement
Source: Sherkow (2016)

Strategic options become defined by the length of time for FDA approval, the time of the patent remaining
in force, and the patent breath – does the drug patent cover an entire class of particular treatments or
only a narrow niche? For instance, Avava, a drug sold for treatment of rheumatoid arthritis – first patented
in the 1970s as a new form of agricultural pesticides but having apossible use in transplantation based on
rat experiments, later entered clinical trials for arthritis. \it was estimated to have annual sales exceeding
$800 million. Patent protection, in short, influences strategic innovation by the time period of legal

5
Patent protection, now seen as a legal right in advanced countries, is embedded in the American constitution and
numerous laws, including the Copyright Term Extension Act (1998), often known as the Mickey Mouse Protection
Act, referring to how proximate a rival product is to the original, and the time period in years for legal protection
from rival firms. Intellectual property issues coexist with incentives for innovation, acquisition and divestment
strategies. Johnston (1970) outlines the issues: “the dilemma arises from the fact that the creation or development of
new productive knowledge requires an investment of resources which must be recompensed if there is to be an
incentive for private investment in the knowledge creation, but that once new knowledge has been created, it has the
character of a public good, in the sense that use of such knowledge by one person does not preclude use of it by
another, so that optimality requires that it be made available to all potential users without charge. …private
production of commercially useful knowledge is encouraged by granting or allowing its producers temporary
monopoly in the use of it”.

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protection and breathe, i.e. how the patent is narrowly cast or covers the class of products that are
potentially close substitutes (Gilchrist, 2016). For commercialization of ideas in many sectors, patent
protection is both an incentive for R&D investments and a mechanism in strategy-making to create first
mover advantages by forestall competitive threats from existing firms and new start-ups (Hirshleifer,
1971).

While many sectors recognize the shift from a bricks and mortar asset mix, as in retailing or newspaper
and magazine publishing, the general transformation has been slow and halting, such as in universities,
schools and colleges, with new advances in MOOCs and on-line learning. The creative industries, a vast
and growing and interactive sector, ranging from publishing to radio, TV, and other forms of artistic
endeavors (e.g. opera and singing, Broadway plays and firms like Cirque du Soleil, whose performances
combine ballet, circus acts, gymnastics, and unique dancing with musical narratives) all combine a
financial royalty stream. Such royalties go to the artists and may include book publishing, licensing of
songs of creative writers, and trademarks and licensing sales of merchandize, including sportswear of
leading professional sports teams like Manchester United and the New York Yankees.

Conglomerate firms like Disney, with huge strengths in storytelling and franchise management, leverage
the value of intellectual assets across their global eco-system. This capacity is enhanced by their
ownership of ABC broadcasting and ESPN, a sports network with global cable coverage. Disney’s
platform models cross-subsidize their product brands in its library and archives, with blockbuster shows
like Star Wars, Pixar films and Disney animation hits like Star Wars, the Marvel Cinematic Universe, and
Disney Animation hits like Frozen and Zootopia, enhanced by a treasure trove of animated classics.
Strengthening Disney’s global expansion is the firm’s entertainment property assets, such as theme parks
and international resorts. Other organizations such as religious groups, universities, and public
broadcasters are slowing learning to cultivate their intellectual assets for value creation.
Commercialization of research, especially in hospitals or universities, is a real challenge, often because
the skill sets required to know and understand the full range of issues are weak or non-existent. Decision
makers may lack the scarce characteristics of a ‘learn by doing’ experience, when early mistakes can be
immensely costly (Christenson, 1997).

7. SOCIAL CAPITAL ASSETS

Vast increases in knowledge creation and easy knowledge diffusion via smart phones and the Internet
have raised anew the importance of social capital as a key organizational asset. Social capital, 6 defined
by Robert Putnam (1996) as “features of social life – networks, norms, and trust – than enables
participants to act together more effectively to pursue shared objectives” has parallels with a collective
vision of an organization, a broad but simple expression of organizational purpose that encompasses
creativity, discipline, and collaboration. Social capital assets embody a bundle of human capital skills,

6
Social capital assets facilitate advice-seeking and advice-giving behaviour and enhance capabilities, recognized in
selected social networks like the College of Cardinals in the Catholic Church and the invisible college in the
academic world (Crane, 1972). Such assets offer a process of knowledge diffusion through informal
communications channels. In the post-industrial, Internet world, SNS, the ‘social network service’ is the most
comprehensive, integrated online interpersonal platform, including social networks to make friends and display
personal information but also to display synchronous and asynchronous communications. Facebook has over a
billion accounts and is the largest SNS in the world (Mazman & Usluel, 2010). Starting with the PC and extending
to smart phones, technology provides word processors, spreadsheets, and many applications leading to Internet-
enabled search engines - e-commerce, e-mail and messaging, social networking, and SaaS business applications.
Smart phones now enabled mobile messaging, mobile social networking, and on-demand services like Uber. For
recent perspectives on dynamic capabilities, see Teece and Leih (2016).

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technical knowledge, information and organizational competences, enriched by investments in

recruitment, training, decision programs and repeated social interactions (Glaeser et al., 2002).

While definitions of social capital vary by disciplines and levels of analysis (individual, group,
communities), it encompasses social engagement, trust, and shared interaction, and shared identities
(Winter, 1987; Nahapiet and Ghoshal, 1998) that augments economic outcomes. The huge literature on
resourced-based theories (Barney, 1991) encompasses the internal configuration of resources such as
management and technical skills, reputation, capabilities, competences and culture. Often depicted in
business school journals as ‘dynamic capabilities’ (Teece and Pisano, 2007), these characteristics in real
life consist of management practices, decision styles, and organizational processes that impact asset
deployment, both tangible and intangible. In approaching these issues as strategic assets, Winter (1987)
notes the complexity of voluntary and involuntary transfers of knowledge, their location in the
organization, and maintenance of control: “one obvious strategic implication of this diversity is that
lessons derived from one industry may be very misleading guides to knowledge-related strategic choices
in another” (p. 180).

Social capital – depicted as invisible assets by some authors (Itami, 1987) – is both an input and output
that enhance organizational performance and innovation. Human capital includes the stock of knowledge
of employees, in-house training, docility mechanisms and team building around goals and benchmarks,
using tools like coaching, mentoring, team work and deep collaboration (McMillan, 2016). Organizational
process capital embodies the stock of interpersonal relations, shared information, and cooperative
systems that strengthen and cultivate institutional communications networks, and direct and indirect forms
of feedback. Firms that invest heavily in social capital, such as Toyota, spend millions of dollars on a
variety of training tools, such as on-the-job training, relentless quality improvement systems, and learning
processes, including deep collaboration and benchmarking with parts and components suppliers (Iyer al,
2009; McMillan & Stalk, 2016).

Social capital assets now extend to corporate eco-systems design, where internal corporate activities are
intimately linked to an ‘extended enterprise’ or what Teece and Pisano (2007) call the “community of
organizations, institutions, and individuals that impact the enterprise and the enterprise’s customers and
suppliers”. In sectors where intangible assets predominate, social capital assets may become
paradigmatic, where hyper-competition through disruptive knowledge and technological platforms require
alternative design models. Demands in dynamic environments for intense social interaction and iterative
sense-making to address strategic contingencies require clear deliberation of the interplay of coping with
uncertainty, centrality, and interdependencies (Hickson et al. 1971).

Stalk et al. (1992) provide another rationale: “Competencies and capabilities represent two different but
complementary dimensions of an emerging paradigm of corporate strategy. Both concepts emphasize
‘behavioural’ aspects of strategy in a contrast to the traditional structure model. But whereas core
competences emphasize technical and production expertise, at specific points along the value chain,
capabilities are more broadly based, encompassing the entire value chain. In this respect, capabilities are
visible to the customer in a way that core competences rarely are.” Capability assets are especially
important in strategies to expand operations to new markets, join with other firms via partnerships,
acquisitions, and joint ventures, and assess the potential success or failure by absorbing new
technologies and organizational processes.

8. SHARED ASSETS

Shared assets in organizations, defined as judicious recombination of existing assets – physical, social,
and intellectual that confer absorptive knowledge capacities - come from a variety of design tools and
processes. Schumpeter (1934) addressed this issue in talking about discovery and innovation: “To
produce other things or the same things by a different method means to combine these materials or
forces differently… development in our sense is then defined by the carrying out of new combinations”
(pp. 65-66). Edith Penrose (1959) made forceful arguments about shared assets, highlighting the

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importance of resource manipulation to reconfigure assets, via new combinations, acquisitions,

divestures, and startups that augment growth and learning.

Globally, the escalation of share asset strategies, in the form of corporate mergers and acquisitions, now
30,000 a year, are equal to three per cent of global GNP output, even more within advanced economies.
Such impact competitive edge, with business models and strategic intent allowing size and scope
advantages, often by imposing entry barriers that sustain higher margins, with deleterious tradeoffs for
consumer value. Asset specificity, a term denoting a narrow or single purpose, impacts financing options
(debt or equity) to avoid ‘sunk costs’. Increasingly, such traditional strategic processes of sharing assets
allow high market share to go in tandem with swelling profits and rising share values in public companies
(Wooldridge, 2016).

Research on new business combinations, including mergers and acquisitions, product development, and
process improvement (making the same product or service but from different technological and
engineering processes) emphasize financial incentives to create value advantages through shared
assets – the so called ‘synergy’ advantage (Ansoff, 1965). Research on direct foreign investment also
provides evidence of shared asset advantages – a mixture of knowledge assets, location-specific assets
including experience and privileged-access to specific resources, e.g. ore bodies, government subsidies -
by combining the existing firm knowledge and capabilities in a firm with market opportunity advantages
through partnerships in foreign markets – or what Verbeke (2009) calls ‘recombinant advantages’ or what
Hennart (2009) calls ‘bundling’ for firm-specific assets of national firms.

Traditionally, shared asset strategies impact managerial incentives to acquire assets via hostile
takeovers, mergers, and managerial buyouts. This literature encompasses legal, economic, and
managerial perspectives (Jensen, 1984) and often justifies these transactions as a superior, market
clearing allocation of assets – both tangible and intelligible – for greater corporate performance. However,
skeptical views of such approaches cite managerial actions that document a different perspective. The
transfer of assets from stakeholders such as suppliers and customers to shareholders redistribute firm
assets (including a bundle of contracted obligations to be breached), resulting in a loss of value for both
tangible and intangible asset valuations (Scheifer & Summers, 1997).

Empirical studies of failed mergers, perhaps as high as sixty per cent of M&A activities, undertaken by
both academics (Christensen et al., 2011) and consultants (Kengelback et al., 2015), show that
profitability and revenue growth are the main drivers. Post-merger impacts such as decision complexity,
culture and organizational integration are subordinated to short term financial and accounting metrics.
Novel forms of asset sharing have robust architectural structures and configurations such as modular
design and platform business models, placing connectivity and interactivity as core design capabilities.
Examples come from firms like Amazon, YouTube, Wikipedia, Apple’s iPhone, Twitter, Instagram, and
Pinterest, to cite early adopters, but copied and extended by firms like China’s Alibaba, Airbnb, Uber, and
Facebook. The Alibaba Group, the diversified Chinese e-commerce firm providing C2C, B2C, and B2B
sales through Internet portals, employs a strategy to exploit underutilized assets within its supply chain,
by contracting with suppliers, shippers, and logistics firms, thus creating a new, networked ecosystem that
converts traditional fixed costs to a variable cost (Clark, 2016; Sundararajen, 2016).

The traditional linear, sequential value chain gives way to data-based systems and customized platforms
that allow network scale to link novel feedback loops to suppliers and customers, especially for certain
peak demand periods, like Singles Day, a copy of Black Friday in the US, with daily sales of about $16
billion for a company like Alibaba. Platform models aren’t the only design configuration for knowledge
and asset sharing. The Internet, computer technology, and the growth of data analytics and artificial
intelligence software allow new forms of modular organizational systems (Sanchez & Mahoney, 1996).
Traditional asset sharing strategies, involving acquisitions, takeovers, mergers, or other forms of
recombination (e.g. merging departments, establishing startups within a business) often appraised mainly
with financial benchmarks, ignore the complexity of organizations as hierarchical, decomposable sub-
systems, with varying forms of social interactions, depending on time periods and design principles for
coordination and integration (Simon, 1965). Unfortunately, despite prescriptive admonitions about
examining resources as valuable, hard to imitate, rare, and opportunistic, often products and services are

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embedded in a complex system, such as a plane, with four million parts, or an ecosystem knowledge
network, or a complicated, multi-country supply chain. Even worse, strategy in many organizations comes
from standard products and components whose unit price declines with volumes but when repackaged
and assembled, that itself creates competitive advantage.

Smallwood and Ulrich (2004) identify eleven metrics that attempt to calculate organizational processes:
talent, speed, shared mind-set, accountability, collaboration, learning, leadership, customer connectivity,
strategic unity, innovation, and efficiency. These measures impact both internal assessment and
stimulate managerial investments. Paradoxically, few companies compile, let alone measure, their non-
physical assets, or initiate internal audits to address possible improvement and realign future
investments. However, in their study of some 5800 firms in 17 countries, Stanford economists like Bloom
and Van Reenan (2010) conclude as follows: “the patterns within our large sample of management data
across firms and countries have led us to believe that one important explanation for the large differences
in productivity between firms and countries – differences that cannot be readily explained by other factors
– is variation in management practices.” Management, in short, does matter!

9. DISCUSSION AND CONCLUSIONS

An old saying on Wall Street, in the context of the decline of Sears Roebuck, is that the real non-
performing assets of a firm are its Board of Directors. In military strategy, there are three fundamentals –
force, time, and space. The same fundamentals apply to organizational strategy – mission (goal
structures), execution (resources and ends-means), and duration (time horizons and feedback
mechanisms). Academic theorizing about strategy making as a dynamic roadmap requires these
fundamentals, but often ignores at least one. Such received frameworks also downplay the constraints of
the decision-makers, their cognitive limitations and the constraints imposed by existing assets. These
models often have more advantages as a tool to interpret past decisions than a tool to predict future
outcomes.

Strategy is more than a competitive chessboard, often overstating economic advantages of market
structure, competitive barriers, and market power isolated from internal configurations of assets. Such
approaches, lacking a historical context, rarely reveal how some organizations make do with less,
overcome facile barriers often seen as impregnable, and succeed spectacularly by intense commitment,
steady but informed incremental adjustments, and allow tempo and persistence to mobilize learning tools.

As depicted in Figure 5, strategic capabilities reflect creative and deep thinking about an alignment of
organization assets, resources, and activities to create value. Competition and rivalry are important, but
so too are internal decision cultures and organizational identity and ignores lessons how many strategies
migrate in time from sustained relative competitive advantage to unassailable competitive advantage.
Organizations are purposeful, goal oriented institutions that reflect top management and key
stakeholders, so competitive advantage is mostly relative, not absolute, and reflects the balance and time
compression of asset deployment.

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Figure 5

The rise of novel tools of strategic management, led in part from leading companies, from the consulting
sector, or strategic insights from the political, military, or cultural world, illustrate the need for a more
inclusive framework, including the role of collaborative decision systems and personalities that drive
aggressive paths to growth and innovation with multiple time horizons. Strategic intent is an ongoing
alignment of assets incorporating internal organizational capabilities, experience and routines, but
incorporating competences and learning tools from suppliers and customers. An asset utilization
framework is much closer to prescriptive models like ‘strategic capacity’ put forward by Thoenig &
Paradeise (2016). In their view, strategic capacity outlines how organizations and internal subunits –
departments, functional units, profit centers – “… shape its identity, define its priorities, approve its
positions, prepare the way for general agreement to be adopted on its roadmap and provide a framework
for the decisions and acts of all its components” (p. 299).

Indeed, the fragmentation of strategic management by discipline, by level of analysis, and artificial
distinctions between strategy and execution detract from the tests of realism and purpose. In a complex
environment, strategy-making demands knowing and appreciating existing assets and vital to strategic
choices and execution, for firms, governments, and other types of organizations. All organizations face
creative tensions and cleavages, about goals, means ends analysis, and testing the boundaries of new
combinations. The clever and judicious balance between existing routines and programs of activities and
harnessing novel streams of innovations – in products, customers, and processes – is a testimony to
creating high value outcomes or value destruction. The steady improvement of new tools like algorithms
software, artificial intelligence, data analytics, voice recognition and cognitive computing can unlock the
power of organizational assets to serve customer needs, in governments and private firms.

The litany of failed products and failing firms points to an inward culture of benign neglect and corrosive
pathologies, often accompanied by managerial hubris, allowing senior management time in the search for
a fruitless discovery of the hidden gems that unlock the source of sustained, competitive advantage. In
reality, the hidden jewel often rests in the portfolio of organizational resources and assets, including the
brainpower of the work force that unlocks future strategic combinations with risk-adjusted returns.
Strategic intent requires a steady, dynamic realignment of asset positioning.

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How organizations cultivate their strategic capacity to position tangible and intangible assets with intense
collaboration with competences and skills of suppliers and customers increasing defines relative
competitive advantages.

The strategy world is too complicated to apply one-size-fits-all prescriptive frameworks. Harnessing
strategies for existing assets is an intellectual exercise, often assisted by sundry tools like scenario
analysis, creative thinking, and ‘outside the box’ approaches unencumbered by hierarchical status and
formal rules. In rare cases, organizations have knowledge systems to encourage ‘creative tensions’ to
augment different points of view.

If history is a guide, one might consider Winston Churchill’s lament after the fall of Singapore, “I ought to
have known. My advisors ought to have known and I ought to have been told, and I ought to have asked”.

ACKNOWLEDGEMENT

The author is grateful and acknowledges the valuable comments and insights of Guillaume
Carton, Ikujiro Nonaka, Jeff Overall, and George Stalk on earlier drafts and discussions of its
subject matter.

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THE ROAD TOWARD AACSB ACCREDITATION: THE CASE OF A MIDDLE EASTERN UNIVERSITY

Abrar T. Rizq, Faculty of Economics and Administration, King Abdulaziz University, Jeddah, Saudi Arabia.
Robert P. Singh, Earl G. Graves School of Business and Management, Morgan State University, U.S.A.
[Link]/10.18374/IJSM-17-2.7

ABSTRACT

A College of Business at a large University in the Middle East had been trying to attain accreditation of the
Association for the Advancement of Collegiate Schools of Business (AACSB) for its business programs
for years without success. The verdict of a visiting team of AACSB mentors was very discouraging,
identifying several quality gaps especially in the area of faculty qualifications and the implementation of
assurance of learning standards. A new internal accreditation team was formed for the purpose of dealing
with the challenge to overcome the quality gaps identified. After much hard work, patience and
perseverance the college was able to receive the AACSB accreditation, the second educational institution
in the country of 29 universities to attain that prestigious recognition.

Keywords: AACSB Accreditation, Faculty Qualification, Assurance of Learning, Mentoring

1. INTRODUCTION

It has been a long journey for the college. In 2009, after having been reassured by the Association for the
Advancement of Collegiate Schools of Business (AACSB), of its eligibility to restart efforts towards gaining
the AACSB accreditation, the accreditation preparation team set to work on its standards alignment plan
(SAP). The SAP outlined how the college planned to meet the standards required for all its eligible
programs by the AACSB.

Standards below those stated AACSB requirements were defined as ‘gaps’, which must be resolved
before an institution is granted accreditation. Two major ‘gaps’ for the college at that time were related to
the qualification of its teaching staff and the assurance of learning of its academic business programs.
Today, the college celebrates its success as the second AACSB accredited school of 29 business
colleges. Resilience, hard work and dedication were necessary to achieve this goal.

The focus on quality education was not a new one to the college. Over the years and prior to the
development of its SAP for AACSB accreditation, the college experienced a number of unsuccessful
accreditation attempts at improving academic quality. In 2009, AACSB appointed new mentors to guide
the college in pursuing its effort towards achieving accreditation. In the meantime, the president of the
University had appointed a new dean to the college.

Upon his appointment, a young, ambitious and goal oriented person, the dean provided vision, support
and commitment to faculty, curriculum and research development. His contribution went beyond financial
support to include the moral support and encouragement for every member of the college no matter how
small his/her contribution was. With the support of his Associate Dean for Development, the college took
another bold step in its bid to become AACSB accredited.

The college appointed a new Director of Accreditation and hired an accreditation consultant. This team
provided a sense of common purpose and was able to unite every member of the college around it. The
team was determined to make a difference by leading the accreditation team of the college to close
specific gaps identified, especially with regard to improving the qualifications of the faculty of FEA and
their knowledge of the implementation of the Assurance of Learning (AOL) process. In 2013, a new dean
was appointed to continue the great progress achieved by the former dean who was appointed to a senior
post in the government.

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2. THE ROAD TOWARD ACCREDITATION

The University

The university is one of the largest public universities in the country. Established in 1967 and is one of 29
state-owned universities in the country. The university comprises 24 schools with a full time student
population of about 45,000 who are served by 4,000 faculty and 5,000 administrative staff and an annual
budget of around US$1.6 billion dollars. It is governed by a board, which is responsible for managing its
administrative and academic affairs. The board has given the president considerable discretion in
managing the affairs of the university within the context of clearly defined performance objectives and
performance based individual employment agreements.

The College of Business

The college was established the same year as the university. It has 10 academic departments: Business
Administration, Accounting, Marketing, Human Resource, Finance, Management Information System,
Political Science, Public Administration, Health Services & Hospital Administration and Economics. The
college is one of the largest schools at the university with a student population of about 5,000 full time
undergraduate students, and over 700 full-time graduate students.

The College’s Accreditation Journey

According to the Director of Accreditation, the college was one of the first schools which offered business
education in country. Prior to seeking AACSB accreditation, it had attained two international accreditations
i.e. AMBA, the Association of MBAs and EFMD, the European Foundation for Management Development.
AMBA is a prestigious body based in London, UK which has accredited programs in 53 countries world-
wide. The EFMD is based in Brussels, Belgium. It provides institutional accreditation (i.e. EQUIS) and
program accreditation (i.e. EPAS), and is recognized world-wide as one of the leading European
accreditation bodies. It was prestigious indeed for the college’s EMBA program to attain the EPAS
accreditation. The college received reaccreditation from both AMBA in 2015 and EFMD in 2016, evidence
that the programs offered are maintaining its high quality standards. However, the College’s crowning
effort will be the attainment of AACSB accredited, regarded as the benchmark for business education.
The journey toward the AACSB accreditation was both important and challenging, given the fact that only
one educational institution in country had the US-based AACSB accreditation.

The Mentors

In 2009, the college had already been working on the accreditation process for four years when two
deans were appointed by the AACSB to assess whether the school had the potential to achieve
accreditation. As mentors to the college, they were to provide interpretation and clarification of the
accreditation standards, to visit and offer advice, review and evaluate the college accreditation plans, and
to encourage the school in pursuing its accreditation by helping to define processes, activities and
outcomes. Both mentors had extensive experience in AACSB accreditation and served as successful
mentors to similar institutions.

After their first visit in 2009, they realized that the school had a very difficult journey ahead but then hoped
that the next few years would make the difference with the school working on its accreditation plan, its
implementation, the development of a Self-Evaluation Report, and finally the hosting of an accreditation
team. The primary changes implemented by the college as a result of the mentors’ recommendations are
described in the following section.

The AACSB Accreditation Challenge

The attainment of the standards required for AACSB accreditation can be a daunting task. It is one of
those tasks that occupied the thoughts of the college dean. He was convinced that accreditation was
necessary for the college, always saying that “For us securing the needed accreditation was the best way

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to improve our way of doing things. International accreditation will set us apart from many of the
universities springing up because it will literally force us to do things according to some set of standards.”

Two of the requirements which posed the most challenge to the college were explained by the Director of
Accreditation. These were the deficiencies in the qualifications of its faculty and the management of the
college’s assurance of learning.

The Director of Accreditation recalled his observation after the first review meeting with the mentors,
“What we found out after our assessment is that the staff qualification was a big issue we had to deal
with, especially in the area of research. Two things: one, some of the faculty had their degrees long ago
and therefore did not have the skills to conduct current research. Two, the research culture was just not
there. As you may know our people see public sector employment as a safe haven, and are reluctant to
develop new skills and improve themselves after getting into one. We all know about the fear of the
unseen. However, in our case, the methods were old and rigid and people were just not ready to welcome
any kind of change.”

In terms of faculty qualification, AACSB accreditation requires schools to have no less than 90% of its
faculty to be academically and/or professionally qualified. Academically qualified means that the faculty
member has a doctoral degree in business in his/her field of teaching and if his/her degree was granted
more than five years ago, is expected to have had two accepted or published research journal articles
within the past five years. Professionally qualified means that the faculty holds at least a master's degree
in business with a minimum of five years’ experience in executive positions. At the time of the mentors’
first visit in 2009, only 44% of the college faculty was considered academically and/or professionally
qualified. To encourage faculty to be research active several programs were offered: International Joint
Research Program, Summer Research Grants Program, Prominent Scholar Program, Research Training
and Refresher Skills Program, Research Award Program recognizing active researchers, Faculty
International Research Development Programs, and unconditional and full support for faculty attending
international conferences. In addition, a teaching load reduction program was established to give minimal
teaching assignments to research active faculty.

To the Director of Accreditation, it was a great privilege to be part of a team that surmounted all the initial
challenges the college faced based on the mentors’ report. He recollected how the university
administration had to put together a program dubbed “Visiting Professor Program” that allows faculty
members within the college and the university at large, to connect with internationally recognized scholars
by inviting them to visit the university and engage in teaching and research with the full time faculty for a
specific period of time. Not only that, there was also the “Prominent Scholar Program” which the Director
of Accreditation explains that the program allowed the contracting of internationally recognized faculty
who have achieved substantial recognition for their research. The visiting professors were tasked with
providing mentorship to the college faculty and to participate in in-house research seminars. In fact, some
have co-authored research papers with the college’s faculty members. Soon the faculty qualification rose
from 44% in 2009 to 96% in 2015. Finally, to encourage quality research, the college also set publication
targets for the faculty and introduced a rewarding scheme for publications in reputed journals.

According to the Director of Accreditation, there was also the need to “…improve the teaching skills of the
faculty by offering training programs which can help them to improve the curriculum coverage of:
communication skills, critical thinking, leadership skills, entrepreneurship, quantitative analysis, ethics,
globalization, information technology, and English and Arabic language skills.” One of the mentors saw
very little hope for the college and concluded that “…there are significant gaps in almost all the standards
partly because the university has very limited international appeal and significantly because it continues to
follow the tried and tested old methods of teaching and administration. Getting AACSB accreditation is an
uphill task for the college considering current trends. This can only be made possible if the college adapts
many changes quickly.” The Director of Accreditation knew that the mentor was right. However, the
college was determined to address the challenges for the betterment of the school and the country. He
knew that under this extreme challenge was hidden a plethora of opportunities.

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The first step that the Director of Accreditation took was to set up a Business Faculty Search Committee
(BFSC) that would look for highly qualified and motivated staff that would play an important role of not
only meeting the standard but will also work in tandem with the local faculty to develop the culture of
effective teaching and research. All existing master’s degree staff were encouraged to take advantage of
the tuition scholarships granted by the government and complete their doctoral studies in some of the
worlds’ premier institutions. Finding and recruiting the right faculty was a challenging assignment. Not
only did the new faculty have to come and join a lesser known institution, but also develop a new culture
of mentoring existing staff and sharing their knowledge. After lengthy rounds of discussions and
interviews trying to convince potential candidates of a bright future with the FEA, the school soon had the
kind of people they were looking for. But the task was not yet over. The college organized orientation
programs for the new faculty to explain its current position and plans for the future as well as faculty social
gatherings, as they needed to develop a bond between the new and existing faculty. Also, faculty were
sponsored to attend workshops to boost their skills and upon their return, share their learning experiences
through in-house peer workshops.

With respect to the assurance of learning process, it began taking shape at the college in 2010. After
laying the ground work for the AoL process in 2009, the faculty was able to establish mission, learning
goals and objectives for each of its undergraduate and graduate business programs. The college also
successfully completed the alignment of the curriculum of each program with its corresponding
established objectives. In 2010, after a series of training workshops for the faculty at large as well as for
each program, faculty created and approved rubrics and measurement for each learning objectives.
These rubrics were reviewed and approved by College Board in late spring of 2010. Since 2009, many
faculty members have attended international AoL workshops held by AACSB as well as International
consultants. After the training sessions, faculty along with the assessment consultant decided on the
assessment type, measurement instrument and the expected outcome for each learning objective. Direct
testing through standardized tests (i.e., Exit Test) and rubrics were discussed. In addition to these training
workshops, members of the college’s AoL committee and accreditation team have attended AoL seminars
and conferences offered by AACSB in the US.

The college requires that each faculty member sets learning objectives for courses taught as per the
program mission and learning goals, assesses the student learning experience against the stated
objectives, and suggests actions to help ensure improvement.

The actual assessment of learning took place each semester starting spring 2011. Each assessment
cycle spanned one semester. By the time the Peer Review Team visited in 2015, the college completed
four full cycles of assessments. Each cycle has several initiatives to close the loops related to each
learning goal. The initiatives were implemented in pursuit of continuous improvement, and with each
assessment cycle there were improvements in each of the learning goals of the assessed programs. The
process yielded positive and encouraging results and showed that students in the programs had
successfully reached or bypassed the learning goal expectations. A detailed report which was annually
submitted by the AoL committee addressed each of the assessed programs under the scope of
accreditation along their respective mission, learning goals, learning objectives, alignment of the
curriculum for each program with its established objectives, rubrics development process, the actual
assessment of learning plan, the results of the actual assessment from four full cycles as well as closing
the loops initiatives.

3. CONCLUSION

The college surmounted the difficult hurdles it faced. In 2015, the college achieved its third accreditation,
the desirable AACSB. The faculty has established itself within the league of prestigious institutions with
the enviable status of being AMBA-accredited, EFMD-accredited and AACSB-accredited. The college
achieved this Triple Crown accreditation with joyful celebration. It highly acknowledges its dedicated team
for their sincere commitment and hard work. Their names deserve to be engraved on its walls.

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4. DISCUSSION QUESTIONS

1. Identify the types of training programs available and used in the organization.
2. Describe the various needs that can be identified in the case and how they are impacting the
performance of the organization.
3. What are the advantages of the various training and development programs identified with the
respect to the circumstances presented in the case?
4. What is meant by mentoring? What are the mentoring situations identified in the case?
5. Distinguish between training and development. Explain from the case, how the college provided
both training and development to its employees
6. Describe the role of top management commitment on the success of training and development
efforts in the organization.

REFERENCES

Maxwell, J. R., Gilberti, A. F., & Mupinga, D. M. (2006). Use of Case Study Methods in Human Resource
Management, Development, and Training Courses: Strategies and Techniques. Online
Submission.

Mondy, R. W. (2014). Human Resource Management. Boston: Pearson

[Link]

INSTRUCTOR'S MANUAL:

THE ROAD TOWARD AACSB ACCREDITATION: THE CASE OF A MIDDLE EASTERN UNIVERSITY

1. Case Synopsis

A College of Business at a large University in the Middle East had been trying to attain accreditation of the
Association for the Advancement of Collegiate Schools of Business (AACSB) for its business programs
for years without success. The verdict of a visiting team of AACSB mentors was very discouraging,
identifying several quality gaps especially in the area of faculty qualifications and the implementation of
assurance of learning standards.

A new internal accreditation team was formed for the purpose of dealing with the challenge to overcome
the quality gaps identified. After much hard work, patience and perseverance the college was able to
receive the AACSB accreditation, the second educational institution in the country of 29 universities to
attain that prestigious recognition.

2. Case Learning Objectives

This case deals with some issues more related to human resource management such as training,
mentoring, change, performance, quality, leadership, motivation and development. It is more suitable for
undergraduate students in basic human resource management class. It will be good also to promote
education quality at business schools that are AACSB accredited or seeking accreditation.

The case aims to attain the following learning goals;

1. Demonstrate how complex non-profit organizations can benefit from training and development,
2. Assess the impact of motivation and leadership on performance in an educational setting.

3. Associated reading or assignments

Students should familiarize themselves with the AACSB accreditation process by exploring the website of
the AACSB: [Link]

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4. Discussion Questions

1. Identify the types of training programs available and used in the organization?
2. Describe the various needs that can be identified in the case and how they are impacting the
performance of the organization?
3. What are the advantages of the various training and development programs identified with the respect
to the circumstances presented in the case?
4. What is meant by mentoring? What are the mentoring situations identified in the case?
5. Distinguish between training and development. Explain from the case, how the college provided both
training and development to its employees?

5. Research Method

The data used in this case was based on in-depth interviews with the Associate Dean of the Business
College of this study as well as exploring the AACSB accreditation process. The first author works as a
lecturer in that school. Name of the university as well as the names of persons appeared in this case
were fully disguised.

6. Teaching with the Case

This case is more appropriate for class discussion related to the importance of change management,
leadership and mentoring in the human resource management or the change management courses. The
case can be given to students to read at home then discussed in the next class meeting when lecturing
about the related concepts.

7. Conceptual Analysis
Change management, leadership, motivation, training and development concepts are related to this case.

8. Possible Answers to Discussion Questions

Some suggested responses to the discussion questions:

1. Identify the types of training programs available and used in the organization?
According to Mondy (2012) the following are the various training and development methods: Instructor-
led, Virtual Reality, E-learning, Case study, Behavior modeling, Role playing, Business games, In-basket
training, On-the-job training Job rotation, Internships, Apprenticeship training
The case identified the following;
On the job training, Internship, Instructor-led, E-learning, Coaching, Orientation, Mentoring

2. Describe the various needs that can be identified in the case and how they are impacting the
performance of the organization?
The first need was faculty insufficiency in terms of quality. Also, embracing the change and moving from
old methods that were common and prevalent. The absence of any other institution in the area that could
be looked upto as an ideal was also a big problem. The college had to develop its own strategies and
make its own blue prints for execution. These problems were negatively affecting the organization and
were a stumbling block in its growth and development.

3. What are the advantages of the various training and development programs identified with the
respect to the circumstances presented in the case?
- The existing faculty was brought at par with the faculty of international standard
- The quality of teaching and research improved drastically
- Activities became clearer and meaningful
- Wastage of resources was reduced

4. What is meant by mentoring? What are the mentoring situations identified in the case?
Mentoring in this context of accreditation is the process in which a well experienced dean from an AACSB

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accredited schools helps or advises another school in its effort in pursing accreditation. Also, an
experienced faculty may be called a mentor when he/she offers help or advice to less experienced ones.
The mentoring situations identified in the case are:
- Appointment of mentors by the AACSB
- Collaboration with international faculty
- Highly cited programs

5. Distinguish between training and development. Explain from the case, how college provided both
training and development to its employees?

Training provides workers with the knowledge and skills needed for their present jobs. Development
prepares employees to keep pace with organization as it changes and grows. The college provided
training through internship, coaching and the on the job methods as mentioned in the answer above. By
ensuring that the quality of teaching and research output is improved, the college provided development.

9. Notes and References

Maxwell, J. R., Gilberti, A. F., & Mupinga, D. M. (2006). Use of Case Study Methods in Human Resource
Management, Development, and Training Courses: Strategies and Techniques. Online
Submission.

Mondy, R. W. (2014). Human Resource Management. Boston: Pearson

[Link]

103

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