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Journal of Management Policy and Practice

North American Business Press Atlanta – Seattle – South Florida - Toronto

Journal of Management Policy and Practice

Editor Dr. Daniel Goldsmith

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Dr. William Johnson

Editor-In-Chief Dr. David Smith

NABP EDITORIAL ADVISORY BOARD

Dr. Nusrate Aziz - MULTIMEDIA UNIVERSITY, MALAYSIA Dr. Andy Bertsch - MINOT STATE UNIVERSITY Dr. Jacob Bikker - UTRECHT UNIVERSITY, NETHERLANDS Dr. Bill Bommer - CALIFORNIA STATE UNIVERSITY, FRESNO Dr. Michael Bond - UNIVERSITY OF ARIZONA Dr. Charles Butler - COLORADO STATE UNIVERSITY Dr. Jon Carrick - STETSON UNIVERSITY Dr. Min Carter – TROY UNIVERSITY Dr. Mondher Cherif - REIMS, FRANCE Dr. Daniel Condon - DOMINICAN UNIVERSITY, CHICAGO Dr. Bahram Dadgostar - LAKEHEAD UNIVERSITY, CANADA Dr. Deborah Erdos-Knapp - KENT STATE UNIVERSITY Dr. Bruce Forster - UNIVERSITY OF NEBRASKA, KEARNEY Dr. Nancy Furlow - MARYMOUNT UNIVERSITY Dr. Mark Gershon - TEMPLE UNIVERSITY Dr. Philippe Gregoire - UNIVERSITY OF LAVAL, CANADA Dr. Donald Grunewald - IONA COLLEGE Dr. Samanthala Hettihewa - UNIVERSITY OF BALLARAT, AUSTRALIA Dr. Russell Kashian - UNIVERSITY OF WISCONSIN, WHITEWATER Dr. Jeffrey Kennedy - PALM BEACH ATLANTIC UNIVERSITY Dr. Dean Koutramanis - UNIVERSITY OF TAMPA Dr. Malek Lashgari - UNIVERSITY OF HARTFORD Dr. Priscilla Liang - CALIFORNIA STATE UNIVERSITY, CHANNEL ISLANDS Dr. Tony Matias - MATIAS AND ASSOCIATES Dr. Patti Meglich - UNIVERSITY OF NEBRASKA, OMAHA Dr. Robert Metts - UNIVERSITY OF NEVADA, RENO Dr. Adil Mouhammed - UNIVERSITY OF ILLINOIS, SPRINGFIELD Dr. Shiva Nadavulakere – SAGINAW VALLEY STATE UNIVERSITY Dr. Roy Pearson - COLLEGE OF WILLIAM AND MARY Dr. Veena Prabhu - CALIFORNIA STATE UNIVERSITY, LOS ANGELES Dr. Sergiy Rakhmayil - RYERSON UNIVERSITY, CANADA Dr. Fabrizio Rossi - UNIVERSITY OF CASSINO, ITALY Dr. Robert Scherer – UNIVERSITY OF DALLAS Dr. Ira Sohn - MONTCLAIR STATE UNIVERSITY Dr. Reginal Sheppard - UNIVERSITY OF NEW BRUNSWICK, CANADA Dr. Carlos Spaht - LOUISIANA STATE UNIVERSITY, SHREVEPORT Dr. Ken Thorpe - EMORY UNIVERSITY Dr. Robert Tian – SHANTOU UNIVERSITY, CHINA Dr. Calin Valsan - BISHOP'S UNIVERSITY, CANADA Dr. Anne Walsh - LA SALLE UNIVERSITY Dr. Thomas Verney - SHIPPENSBURG STATE UNIVERSITY Dr. Christopher Wright - UNIVERSITY OF ADELAIDE, AUSTRALIA

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This Issue

Impact of SOX on Management Communication Behavior: An Examination of Selected Financial Firms ......................................................................................... 11 Oi Lin Cheung This paper investigates whether SOX has any impact on management communication behavior using Habermas’ norms of effective communicative action. In examining the MD&As of the annual reports from 1993 through 2012 (except 2002 and 2003) of 30 large companies in the financial sector, I find that SOX has a significant impact on management communication in their company disclosures with regard to all the Habermas’ norms except sincerity. SOX raises comprehensibility and truthfulness but lowers legitimacy as demonstrated by corporate management in their discussion and analysis of the firms’ operations. The results are significant even after controlling for the profitability, size and industry of the firms. The Role of Consultants in Organizational Learning ............................................................................ 29 Qing Hu, Pauline Found, Sharon Williams, Robert Mason This paper aims to find out how the OL processes (i.e. intuiting, interpreting, integrating and institutionalizing) are influenced by the roles of consultants. Through a longitudinal case study, it was found that based on the directive roles of consultants, the evidence of the direct use of intuition was weak but the processes of interpreting and integrating became the main constraints for lean knowledge to be learnt by managers and employees. The efficiency of institutionalizing was enhanced but its effectiveness was restrained by the processes of interpreting and integrating. Theoretical and practical implications of this study are provided in the conclusion. Is Team Based Tacit Knowledge Transferable? Players as Strategic Resources ................................ 40 Roy Heath Keller The transferability of tacit knowledge is a topic that is at the core of many leading theories of the firm. Using the National Basketball Association (NBA) as the unit of analysis, this paper addresses the following question: What effect does tacit knowledge held by a strategic bundle of resources (team) have on the market value of an individual resource (player)? Results indicate that player fit with other team members and strategic philosophy are significant predictors of market value. “Like” A Global Endorsement. How Clicking “Like” Influences Facebook Users Brand Recall and Future Purchasing Intentions ......................................................................... 51 Ronda Mariani, Derek Mohammed Social media particularly Facebook acts as a global force with over 100 billion connections worldwide. Each day Facebook users flaunt their activities, pictures, and likes. Many of these “likes” represent endorsements where users broadcast their favorite brands. This form of marketing engagement can be effectively measured. The purpose of this study is to conduct a quantitative survey among Facebook users to explore and analyze the impact of friends clicking “like”. This study will test brand recall, particularly global brands, and the impact a friend’s endorsement, “like” has on future purchasing decisions of global brands.

Assessing the Innovation Competence of a Third-Party Logistics Service Provider: A Survey Approach .................................................................................................... 64 Shong-Iee Ivan Su, Jian-yu Fisher Ke, Lianguang Cui Due to its nature as a complex service process with the intensive capital requirements, many firms outsource the logistics function to third-party logistics service providers (3PLs). How a 3PL firm innovates as an organization is still a white space in logistics research literature. This paper proposes a 3PL innovation competence model and designs a 23-item diagnostic instrument to assess the innovation competence of a 3PL firm. The model and the instrument allow managers and researchers to assess the degree of importance and the current status of six core innovation capabilities of a 3PL firm for further innovation efforts. The assessment results of two U.S. 3PL firms are analyzed and discussed. The findings from this study have provided insightful information on the nature of the innovation competence of 3PL firms. Seven Tips for Managing Generation Y ................................................................................................... 80 Jennifer Kilber, Allen Barclay, Douglas Ohmer A new generation, or group of like-minded employees composed of similar ages, arrives every twenty years into the workforce. Every time a new generation enters the workforce managers tend to struggle to understand the new group. As the next generation enters the workforce, managers must adjust their management techniques to get better results. The new generation is about understanding that everyone sees the world their own way, a concept that is crucial for managers to understand. Each generation has unique experiences that shape their behaviors and attitudes. Generation Y views the world much differently than the previous generations. The Case for Integrating Healthcare Management Courses into the Curricula of Selected Healthcare Providers ........................................................................................... 92 Peter G. Fitzpatrick, Marcy Butler, Chris Pitsikoulis, Kendolyn Smith, Latrina Walden The healthcare delivery system is becoming more complex in large part due to the new organizational structures and new reimbursement schemes. As such it is becoming increasingly more evident that healthcare practitioners must be well versed in these new complexities. Little evidence exists that this knowledge is being imparted by way of the curricula of selected healthcare providers. This paper presents this case by discussing these delivery changes and suggesting way to change this lack in the fundamental education of these providers. Decoupling as a Sustainable Firm Response to Pressures for Convergence and Divergence in Corporate Governance: The Case of Codes of Good Corporate Governance .................................. 103 Mario Krenn Whether corporate governance systems, policies, and practices are converging to the Anglo-American model is an intensely debated issue. This article addresses the convergence-divergence debate in corporate governance in the context of the diffusion of codes of good governance. Rather than joining the “either-or” debate, a model is being presented in which drivers of convergence and impediments to convergence are simultaneously considered as determinants of the depth of convergence outcomes. The notion of sustainable strategic decoupling is introduced to address these dynamics at the firm level of analysis and to highlight that firms can actively respond to conflicting institutional pressures for change and continuity by making strategic choices.

Borealis Software Case Study ................................................................................................................ 118 Jay Ebben, Alec Johnson This case study details the potential acquisition of Borealis Software by two entrepreneurs. It is intended to be used as an in-class case study in an Entrepreneurial Finance course, after pro formas and valuation have been covered, to illustrate normalizing and projecting financial statements to arrive at an estimate of future firm value. Students are asked to use the financial information given to create their own financial projections for Borealis should the entrepreneurs make the acquisition. Students can then decide whether the company is worth purchasing for the $12 million asking price. Assessing the Impact of Vehicular Traffic on Energy Demand in the Accra Metropolis ................ 127 John Mensah, Jonathan Annan, Francis Andoh-Baidoo Traffic congestion is a great concern to many nations especially the developing ones. In this paper we examine the road traffic congestion construct. Mixed methods were used and analyzed using the Statistical Package for Social Scientists. Using the data from Ghana, we found that congestion has two main dimensions (i) narrowing of roads and (ii) artificial blockage of roads. From the analyzed data, it was established that, the congestions on our roads are being influenced by four-phase traffic theory, called BAM theory. This theory is the best used when dealing with intelligent traffic management systems.

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Impact of SOX on Management Communication Behavior: An Examination of Selected Financial Firms

Oi Lin Cheung

Indiana University East

This paper investigates whether SOX has any impact on management communication behavior using Habermas’ norms of effective communicative action. In examining the MD&As of the annual reports from 1993 through 2012 (except 2002 and 2003) of 30 large companies in the financial sector, I find that SOX has a significant impact on management communication in their company disclosures with regard to all the Habermas’ norms except sincerity. SOX raises comprehensibility and truthfulness but lowers legitimacy as demonstrated by corporate management in their discussion and analysis of the firms’ operations. The results are significant even after controlling for the profitability, size and industry of the firms. INTRODUCTION

Habermas (1984, 1987) developed a theory in which various practical reasons were employed to establish four principles of effective communicative action. In accordance with this theory, effective communicators are expected to demonstrate comprehensibility, truthfulness, sincerity, and legitimacy in their discourses. This study is an extension to Yuthas, Rogers, & Dillard (2002), with an attempt to further operationalize the Habermas’ principles as applied to the business communication setting. I investigate the communication behavior of corporate management in the disclosure of their firms’ operations using the four Habermas’ principles. In addition, the impact of the Sarbanes-Oxley Act (in short, SOX) on management communication behavior is evaluated at the same time.

To accomplish the above tasks, the rhetorical analysis software, Diction 6, was run on the MD&A sections (Item 7 only from 1993 through 2000 and both Item 7 and Item 7A thereafter) of the annual reports of the sample firms to generate the related individual variable and composite scores used for the Habermas’ principles. I calculate the new composite scores for the four Habermas’ norms according to Yuthas et al. (2002). Although SOX was passed and enacted in 2002, the major sections associated with company disclosures and financial reporting were not made effective until 2004. Thus, in this study, the pre-SOX period is defined as running from 1993 through 2001 whereas the post-SOX period from 2004 through 2012. There are nine years in both periods.

I find that SOX has a significant impact on management communication in the company disclosures with regard to all the Habermas’ norms except sincerity. SOX raises the comprehensibility and truthfulness but lowers the legitimacy demonstrated by corporate management in their discussion and analysis of the firms’ operations. The results are significant even after controlling for the profitability, size and industry within the financial sector of the firms.

Journal of Management Policy and Practice vol. 15(4) 2014 11

This paper is organized as follows. Section 2 provides a detailed account of the previous research on the impact of SOX on corporate disclosures and financial reporting. Section 3 presents the background of the study. Section 4 describes the sample formation and empirical testing. Section 5 discusses the findings, followed by the conclusions in Section 6. LITERATURE REVIEW

Since the passage and the subsequent enactment of SOX in 2002, there has been numerous research conducted to evaluate its effectiveness regarding, but are not limited to, company disclosures. Gordon, Loeb, Lucyshyn, & Sohail (2006) studied the voluntary disclosures of information security activities and found that SOX affects these disclosures (which received more focus) positively after its enactment. At the same time, Coates (2007) gave an account explicitly discussing the serious problems in estimating the impact of SOX, particularly Section 404. Although the primary objective of the act’s passage was to improve the quality and quantity of corporate disclosures through a variety of disclosure requirements and corporate governance mandates (Coates, 2007; Holmstrom & Kaplan, 2003; and Kroszner, 2004), the fact that the law was enforced in the midst of significant financial, economic and political changes added to the complication. Thus, no general consensus could be drawn relative to the effectiveness or value of SOX in those days. The lack of a control group of publicly traded firms also presented some difficulties in assessing the impact of SOX (Leuz, 2007; Hochberg, Sapienza, & Vissing-Jorgensen, 2009; and Wang, 2010). Despite the difficulty in assessing its impact, Section 404 of SOX does create powerful incentives for executives and auditors to disclose control system weakness (Coates, 2007) and have strong effects on financial reporting (Iliev, 2010).

In fact, it is still not very clear whether SOX has contributed to more informative overall disclosures. While Hammersley, Myers, & Shakespeare (2008) succeeded to illustrate that mandatory disclosures of weakness in internal controls seem to have a significant impact on stock prices (thus material to investors), Ogneva, Rahunanhan, & Subramanyam (2007) found no evidence that such mandatory disclosures are associated with a change in the cost of capital of a firm. At the same time, Bhattacharya, Groznik, & Haslem (2007) failed to prove that CEO certification is significantly associated with share prices in any direction.

According to the public float rule in 2002, firms that had a public float above $75 million in 2002 were required to comply with SOX Section 404 in 2004 (Iliev, 2010). Using this public float rule to identify the study subjects and investigate the costs of Section 404 to small firms, Iliev (2010) found that the attestation by the outside auditor of the management’s report (MR) significantly adds to the reporting costs for small firms. In fact, filing an MR in 2004 increased the audit fees by as much as 98%. In addition, Section 404 also contributes to the additional conservatism in financial reporting which is reflected in the significantly lower accruals and discretionary accruals in 2004.

In studying whether Section 404 of SOX had reduced the opaqueness of cross-listed firms, Arping & Sautner (2013) examined the analyst’s earnings forecasts (in particular forecast error and forecast dispersion) of firms in 15 European Union (EU) countries that were cross listed in the US (as the treatment sample) and similar non-cross listed EU firms (as the control sample) in these countries over the period from 2001 through 2007 (an unbalanced sample of 1,923 firms and 7,666 firm-year observations). As the cross listed firms were subject to Section 404 whereas the non-cross listed firms were not, these two samples enabled a good test for the impact of SOX on corporate disclosure quality. Apring & Sautner (2013) found that the opaqueness of the two types of firms are lowered with the cross listed firms demonstrated a significantly much greater decrease in the opaqueness. In other words, the treatment firms became more transparent post-SOX. These findings suggest that SOX improves the corporate disclosure quality.

The closest study to this paper is Kogan, Routledge, Sagi, & Smith (2010) which applied a novel text regression, as discussed in Kogan, Levin, Routledge, Sagi, & Smith (2009), on the MD&A sections from the annual reports (Form 10-K) of 8,393 publicly traded companies in the US over the eleven-year period from 1996 through 2006 and found that the MD&As are more informative post-SOX about the firm’s

12 Journal of Management Policy and Practice vol. 15(4) 2014

future risk. In particular, Kogan, et al. (2010) predicted the out of sample firm return volatility based on the MD&As. In their study, some additional information was also found associated with a reduction in share illiquidity. These findings suggest that the information revealed is new to investors. Those firms with high information production costs, including the ones with low market capitalization, high book-to-market ratio, low analyst coverage, or high analysts forecast dispersion, tend to have the greatest improvement in performance in the post-SOX era according to the text-based model. A possible explanation for this is the aim of narrowing of the gaps in information asymmetry among the firms. BACKGROUND OF THE STUDY Sarbanes-Oxley Act of 2002

In order to protect shareholders’ interest and prevent corporate insiders from misrepresenting company performance and redirecting company resources for their own personal benefits, the Sarbanes-Oxley Act (SOX) was passed in the House and Senate on July 25, 2002. The act’s official name is the Public Company Accounting Reform and Investor Protection Act of 2002. The passage of SOX was triggered by the scandals and subsequent collapses of several large corporations such as Enron, Qwest Communications, Global Crossing, WorldCom, Adelphia, and Tyco in late 2001 and early 2002. In accordance with SOX, the Public Company Accounting Oversight Board (PCAOB) was established. In addition, new rules and restrictions were also presented to corporations, their directors and performance auditors. The Security Exchange Commission (SEC) was charged with enforcing the law. From the time when it was enacted, SOX has widely been accepted as having introduced the most sweeping changes to US business legislation since the 1930s.

The principal objective of SOX was to restore the shaking confidence of investors (Rezaee, 2004; Jain, Kim & Rezaee, 2003; and Rezaee & Jain, 2003) in 2002 by improving the reliability of the issuer disclosure in the financial markets. The SOX consists of altogether eleven titles which are, in turn, subdivided into multiple sections. Among these titles is Title IV which deals mainly with the various financial disclosures. This title covers disclosures in periodic reports, enhanced conflict of interest provisions, disclosure of transactions involving management or principal stockholders, disclosure of the existence of an audit committee financial expert as well as management assessment of internal controls. On the other hand, Title I mainly deals with the establishment of the PCAOB and its responsibilities which include the determination and regulation of the standards for the enhanced disclosures mandated by Title IV. Title III places certain requirements for the composition and working of the audit committee and requires the CEO and CFO to certify, based on their knowledge, that the annual report contains all material information and represents the financial condition and results fairly (Arping& Sautner, 2013; Hochberg et al., 2009; and Kogan et al. , 2010).

Since the focus of this research is on management communication behavior in corporate disclosures pre- and post-SOX, I limit my discussion to cover the related aspects only. With the aim of enhancing disclosures by public companies, SOX requires issuer’s management to certify the financial information of the firm with regard to their accuracy and completeness. Failure to do so will result in charges filed by the Justice Department according to Section 906 of the act (Hochberg, et al., 2009). Additionally, company annual reports (Forms 10-Ks) must have the following attachments: management’s report on internal accounting control and the report of the issuer’s outside auditors on management’s report (Section 404). Company insiders are required to file the changes in their ownership within two business days of the change. Company annual and quarterly reports filed with the SEC are required to disclose all the material off-balance sheet transactions and all relationships of the issuer with any person who may have significant influence on the firms’ financial condition (Schaumann, 2004 and Hochberg, Sapienza, & Vissing-Jorgensen, 2009).

The sections which are particularly relevant to financial disclosures are Sections 302, 401, 404, and 906. Section 302 (on corporate responsibility for financial reports) requires CEOs and CFOs to certify that they have read the financial reports of their companies and these reports provide a fair, true and non-


misleading representation of the financial situation of the companies. Section 401 (on disclosures in periodic reports) requires firms to disclose their material off-balance sheet transactions, if any. The firm’s management also needs to attest to the completeness and accuracy of their pro forma financials. Section 404 (on management assessment of internal controls) requires firms to include a discussion on their internal controls in their annual reports. The discussion needs to highlight any material weaknesses of the firms. Section 906 (on corporate responsibility for financial reports) requires firms to provide information on the criminal penalties for the non-compiling executives (Arping& Sautner, 2013; Hochberg et al., 2009; and Kogan et al., 2010).

Prior to the effective date of Section 404, firms began reporting on internal controls quarterly under Section 302 (effective August 29, 2002, almost immediately after the passage of SOX) which were applied to all registrants. Since its effective day, Section 404 has been considered more important and powerful, as compared with Section 302. Here are some explanations. The exact reporting requirements related to material weaknesses are not very clear under Section 302 (Doyle, Ge, & McVay, 2007) whereas such disclosure is much more clearly mandated under Section 404. In addition, Section 404 reports are subject to additional documentation requirements as well as the necessary scrutiny of the independent auditor in order to enhance the chance of detecting (and subsequent disclosing) the existing weaknesses (Rice & Weber, 2012; Ashbaugh-Skaife, Collins, Kinney, & LaFond, 2009; Coates, 2007; Hochberg, et al., 2009; and Wang, 2010).

Despite its benefits to the investors, there has been an increase in the number of both firms deregistering from the SEC (Leuz, Triantis, & Wang, 2008) and firms going private (Engel, Hayes, & Wang, 2007, and Block, 2004) after the passage of SOX. In addition, in an examination of the US acquisition targets, Kamar, Karaca-Mandic, & Talley (2006) found a greater propensity for those targets to be acquired by private rather than public acquirers in the post-SOX period. Further, Kamar, Karaca-Mandic, & Talley (2007) concluded, after reviewing the then literature available, the costs imposed by the act are greater for small firms, consistent with the views of the act’s critics that it has raised the net costs of being public, with the burden relatively heavier for smaller firms (Romano, 2005 and Ribstein, 2002). Habermas’ Principles of Communication

Following the argument that each time a person communicates, the person needs to rely upon a set of norms or validity claims that are in general accepted by all participants, (Habermas, 1984, 1987) developed a communicative action theory which employed various practical reasons to establish these norms. The resulting Habermas’ principles for effective communicative action expect communicators to be comprehensive, truthful, sincere and legitimate in their discourses. In the Habermas’ communication framework, the comprehensibility claims emphasize that the speech (or other forms of discourse) made by the communicator should be understandable; the truthfulness claims stress that the content of the speech (or other forms of discourse) should be factually correct; the sincerity claims content that the communicator should be sincere in representing his/her motives; the legitimate claims state that the communicator should be justifiable in making his/her statements.

The following provides a brief discussion on these four principles as applied to the business communication setting, especially in the Management Discussion and Analysis (MD&A) of firm operation contained in the company annual reports. Comprehensibility

According to the comprehensibility principle, managers should communicate in the way that can be easily understood, even by the average people. To achieve this, managers can use commonly-used terminologies and avoid the industry and firm-specific jargons or complex logics that could add to the readers’ confusion. Firms that follow this principle will try to provide their MD&A narratives using more common terminologies and focusing on concrete matters. Despite the fact that auditors will prevent firms from making misleading statements in their annual reports, managers may choose to mislead or confuse readers by using rhetorical devices that could lower the comprehensibility of their communication.


Truthfulness Based on the truthfulness principle, what the managers communicate must be factually correct and

verifiable. Since the annual reports are required by law to be evaluated by auditors, firms are forced to include statements that are factually correct and verifiable in their MD&As. However, some managers may choose to omit some information or alter the tone of the information presented. Sincerity

Under the sincerity principle, communicators should accurately represent their perceptions, interests and objectives in their communications. In other words, managers must be authentic in their representations so that readers of their annual reports can develop an understanding of their views as well. However, under certain circumstances, managers may choose to disguise their true views. Legitimacy

Following the legitimacy principle, managers would use appropriate language to help keep readers’ attention focused and enhance their understanding in the company discourse. It is not uncommon that managers may choose to use inappropriate language or style of communication at times to draw readers’ attention away from their discourse. SAMPLE FORMATION AND EMPIRICAL TESTING

Public companies in the US are required to file their annual reports with the SEC. These annual reports contain a section in which the management of the firms discuss and analyze the financial conditions and results of their firms’ operations (Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations) and a section in which the management disclose the market risk of their firms both qualitatively and quantitatively (Item 7A Quantitative and Qualitative Disclosures About Market Risk). For the earlier years until 2000, there was no Item 7A. Corporate management’s discussion, analysis and disclosure of both the operation and market risk of the firms were included mainly under Item 7. Due to the increasing length and complexity of the disclosure of the company risk, annual reports filed after 2000 have a separate section of Item 7A.

In this paper, I study whether there is any impact of the enactment of SOX on management communication behavior. I extracted the Management Discussion and Analysis (MD&A) sections from the annual reports (Form 10-Ks) of some selected companies in the financial sector of the S&P500 firms as of February 1, 2013 (the date on which the research started). Only those firms on this target list with filing of annual reports available from 1993 through 2012 on the Edgar website http://www.sec.gov/ edgar.shtml) were included. The resulting sample consists of 30 companies.

Item 7 only for 1993 through 2000 and both Item 7 and Item 7A thereafter were extracted manually from the annual reports. From the extracted MD&As, I removed all the HTML mark-up codes, if any. For example, all those “<C>”, “<S>”, “<Caption>”, “</Table>” and the like were excluded. After that, I ran Diction 6 on the cleaned MD&As to obtain the values of the variables and composite scores attributed to the four norms required for effective communications.

The GICS-Sub Industry distribution of the sample companies is given in TABLE 1 below. There are relatively more banks (40%) than the other types of financial firms in the sample. TABLE 2 illustrates that these 30 companies on average have grown almost 4 times in the post-SOX period as compared with the pre-SOX period. They have also generated twice as much net income in the post-SOX period.


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TABLE 1 GICS-SUB INDUSTRY DISTRIBUTION OF THE SAMPLE FIRMS

GICS-Sub Industry Number of Firms Percentage Bank 12 40.00 Consumer Finance 1 3.33 Diversified Financial Service 4 13.33 Life & Health Insurance 2 6.67 Multi-sector Holdings 2 6.67 Multi-line Insurance 1 3.33 Property and Casualty Insurance 5 16.67 Real Estate Investment Trust (REIT) 3 10.00 Total 30 100.00

TABLE 2 SIZE AND PROFITABILITY OF THE SAMPLE FIRMS

Pre-SOX (1993 through 2001) Post-SOX (2004 through 2012)

Mean Std. Dev. Min Max Mean

Std. Dev. Min Max

Total Assets Overall 80.21 149.93 .55 1,051.45 307.02 562.94 3.10 2,359.14

Between 121.583 1.35 462.36 552.09 4.52 1,833.07

Within 90.203 -327.54 669.30 145.48 -385.07 864.00

Net Income Overall 1.03 1.79 -1.09 14.13 2.21 7.93 -99.29 24.59

Between 1.39 .08 5.80 3.47 -4.33 13.08

Within 1.16 -4.48 9.36 7.15 -92.75 25.04

Source: The statistics (across all firm years) are calculated with the total assets and net income obtained from the Form 10-Ks from 2004 through 2012, except 2002 and 2003, of the sample firms. The reported numbers are in billions of dollars.

The main objective of SOX is to improve the reliability of the issuer disclosures to the participants in the financial markets. In other words, SOX is expected to enhance the quality of management disclosures and financial reporting. Referring to the Habermas’ principles of effective communicative action, I expect an increase in comprehensibility, truthfulness, sincerity and legitimacy found in the MD&As of annual reports filed post-SOX as compared with the pre-SOX period.

The following panel regression analyses with firm random effects are conducted.

Habermas’ Normi,t = const + biSOXt [+ NetIncome i,t + Asseti,t + � 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑛,𝑖 7𝑛=1 ] + εi,t (1)

where SOXt is a dummy variable taking the value of 0 from 1993 through 2001 (pre-SOX), and the value of 1 in the years 2004 through 2012 (post-SOX); Asseti,t is the balance of total assets of Firm i as at the end of Year t; NetIncomei,t is amount of net income generated by Firm i during Year t; � Industry𝑛,𝑖

7n=1 is a series of dummy variables which are defined as below.


Industry1,i = 1, all else = 0: indicates that Firm i is a provider of consumer finance, Industry2,i = 1, all else = 0: indicates that Firm i is a provider of diversified financial services, Industry3,i = 1, all else = 0: indicates that Firm i is a provider of life and health insurance, Industry4,i = 1, all else = 0: indicates that Firm i is a multi-sector holdings firm, Industry5,i = 1, all else = 0: indicates that Firm i is a provider of multi-line insurance, Industry6,i = 1, all else = 0: indicates that Firm i is a provider of property and casualty insurance, Industry7,i = 1, all else = 0: indicates that Firm i is a REIT, Otherwise, represents that Firm i is a bank

The dependent variable Habermas’ Normi,t covers Comprehensibilityi,t, Truthfulnessi,t , Sincerityi,t and

Legitimacyi,t determined from the company discourse in the MD&A of Firm i for Year t. The value of the individual variables or composite scores of the various communication aspects

necessary for the composite scores of comprehensibility, truthfulness, sincerity and legitimacy for each firm-year is generated by first running Diction 6 on the cleaned MD&As. Then a composite score for each norm is calculated according to Yuthas et al. (2002) as below.

Comprehensibility = Realism – Denial (2) Truthfulness = Certainty + Present Concern (3) Sincerity = Optimism + Activity + Commonality (4) Legitimacy = Variety – Embellishment – Blame (5)

where

Realism, a composite score that measures the use of “language describing tangible, immediate, recognizable matters that affect people’s everyday lives” (Hart and Carroll, 2012, p. 4), is calculated by Diction 6 as below.

Realism = [Familiarity + Spatial Awareness + Temporal Awareness + Present Concern + Human Interest + Concreteness] – [Past Concern + Complexity] (6) • “Familiarity” is a measure of the use of common English words. • “Spatial Awareness” is a measure of the use of words that refer to

geographical locations and physical distances as well as modes of measurement.

• “Temporal Awareness” is a measure of the use of words that fixed events within a specific time-interval.

• “Present Concern” is a measure of the use of present-tense verbs. • “Human Interest” is a measure of the use of personal pronouns and other

words concentrating on people. • “Concreteness” is a measure of the use of words that indicate tangibility and

materiality. • “Past Concern” is a measure of the use of past-tense verbs. • “Complexity” is a measure of the average number of characters per word.

Certainty, a composite score that measures the use of “language indicating resoluteness, inflexibility, and completeness and a tendency to speak ex cathedra” (Hart and Carroll, 2012, p.4), is calculated by Diction 6 as below.

Certainty = [Tenacity + Leveling + Collectives + Insistence] – [Numerical Terms + Ambivalence + Self Reference + Variety] (7) • “Tenacity” is a measure of all uses of “verb to be” and their variants,

which, in turn, provides a measure of confidence and totality. • “Leveling” is a measure of the use of words that convey a sense of

completeness and assurance.


• “Collectives” is a measure of the use of singular nouns that imply plurality, thus reduce specificity.

• “Insistence” is a measure of repeated nouns. It is calculated by Diction 6 as [Number of eligible words × Sum of their occurrences]/10.

• “Numerical Terms” is a measure of the use of numbers such as sum, date, or product.

• “Ambivalence” is a measure of the use of words that indicate hesitation or uncertainty, in turn, the communicator’s inability and unwillingness to commit.

• “Self-Reference” is a measure of the use of first-person references. • “Variety” is a measure of the avoidance of overstatement and the preference

for clear and structured statements. It is calculated by dividing the number of different words by the total number of words in the passage analyzed.

Optimism, a composite score that measures the use of “language endorsing some person, group, concept or event or highlighting their positive entailments” (Hart and Carroll, 2012, p.4), is calculated by Diction 6 as below.

Optimism = [Praise + Satisfaction + Inspiration] – [Blame + Hardship + Denial] (8) • “Praise” is a measure of the use of words that provide affirmation of the

subject of discourse • “Satisfaction” is a measure of the use of words associated with positive

performance. • “Inspiration” is a measure of the use of nouns related to moral and personal

qualities such as honesty. • “Blame” is a measure of the use of adjectives that describe social

inappropriateness or unfortunate circumstances. • “Hardship” is a measure of the use of words that are associated with natural

disasters, blamable human behavior, antagonistic actions, negative political outcomes, normal human fears.

• “Denial” is a measure of the use of standard negative contractions and negative function words as well as words implying null sets.

Activity, a composite score that measures the use of “language featuring movement, change, the implementation of ideas and the avoidance of inertia” (Hart and Carroll, 2012, p.4), is calculated by Diction 6 as below.

Activity = [Aggression + Accomplishment + Communication + Motion] – [Cognitive Terms + Passivity + Embellishment] (9) • “Aggression” is a measure of the use of words that are associated with

competition and forceful action. • “Accomplishment” is a measure of the use of words that express task

completion and organized human behavior. • “Communication” is a measure of the use of words that refer to social

interaction. • “Motion” is a measure of the use of words that suggest human movement,

physical process, journeys, speed and modes of transit. • “Cognitive Terms” is a measure of the use of words that refer to cerebral

processes. • “Passivity” is a measure of the use of words that suggest a range from

neutrality to inactivity. • “Embellishment” is a composite score which measures the use of language

that de-emphasizes human and material action. It is calculated as below. Embellishment = [Praise + Blame + 1] / [Present Concern + Past Concern +1]


Commonality, a composite score that measures the use of “language highlighting the agreed-upon values of a group and rejecting idiosyncratic modes of engagement” (Hart and Carroll, 2012, p4), is calculated by Diction 6 as below

Commonality = [Centrality + Cooperation + Rapport] – [Diversity + Exclusion + Liberation] (10)

• “Centrality” is a measure of the use of words that imply institutional regularities and/or essential agreement on core values.

• “Cooperation” is a measure of the use of words that suggest a spirit of teamwork.

• “Rapport” is a measure of the use of words that describe attitudinal similarities.

• “Diversity” is a measure of the use of words that describe how individuals or groups differ from the norm.

• “Exclusion” is a measure of the use of words that describe the sources and effects of social isolation.

• “Liberation” is a measure of the use of words that describe maximizing individual choice and the rejection of social conventions.

DISCUSSION OF RESULTS

From TABLE 3(a), it can be seen that, after the passage and subsequent enactment of SOX (in 2002) and its various sections made effective (in 2004), the management of the sample firms, on average, tended to use in the MD&As more wording that signifies resoluteness, inflexibility and completeness. They also had a greater tendency to speak with the authority derived from their position (higher certainty). They used fewer “to be” verbs (lower tenacity) and fewer words that build a sense of completeness and assurance (lower leveling). In addition, they used fewer singular nouns that imply plurality (lower collectives) as well as fewer numbers (lower numerical terms). On the other hand, they used more repeated nouns (higher insistence), more words that indicate hesitation or uncertainty (higher ambivalence), and more first personal references (higher self-reference). As for their avoidance of overstatement and preference of using clear and structured statements, there is not much difference between the pre- and post-SOX period (same variety).

As shown in TABLE 3(b), in the post-SOX period, managers used relatively less wording that supports some person, group, concept, event or highlighting their necessary accompaniment or positive consequence (lower optimism). They used relatively fewer nouns that are associated with moral and personal qualities (lower inspiration) as well as fewer standard negative contractions and negative function words (lower denial). At the same time, they used relatively more words that provide affirmation of their companies (higher praise), more words associated with positive performance (higher satisfaction), more adjectives that describe social inappropriateness or unfortunate circumstances (higher blame), and more words that are associated with natural disasters, blamable human behavior, antagonistic actions, negative political outcomes and normal human fears (higher hardship).

As illustrated in TABLE (c), the managers used less wording that (i) emphasizes movement, change and the implementation of ideas as well as (ii) demonstrates avoidance of inertia (lower activity) post-SOX. They used relatively fewer words that express task completion (lower accomplishment), fewer words that refer to social interaction (lower communication), and fewer words that suggest a range from neutrality to inactivity (lower passivity). On the other hand, they used relatively more words that are associated with competition and forceful action (higher aggression), more words that suggested human movement (higher motion), more words that refer to cerebral processes (higher cognitive terms), and more words that de-emphasizes human and material action (higher embellishment).

According to TABLE 3(d), after the enactment of SOX, the managers used more wording that explains tangible, immediate, recognizable matters which are associated with people’s everyday lives (higher realism). They used relatively fewer words that fixed events with a specific time-interval (lower


temporal awareness). However, they used more common English words (higher familiarity), more words that refer to geographical locations and physical distances (higher spatial awareness), more present-tense verbs (higher present concern) and past-tense verbs (higher past concern), more personal pronouns and other words concentrating on people (higher human interest), more words that indicate tangibility and materiality (higher concreteness), and more words of more characters per word (high complexity).

TABLE 3(e) shows that, in the post-SOX period, managers used more wording that accentuates the agreed-upon values of a group and refuses to accept peculiar modes of engagement (higher commonality). They used relatively fewer words that describe (i) maximizing individual choice and (ii) rejection of social conventions (lower liberation). On the other hand, they used relatively more words that imply institutional regularities and/or essential agreement on core values (higher centrality), more words that suggest a spirit of teamwork (higher cooperation), more words that describe attitudinal similarities (higher rapport), more words that describe how individual or group differ from the norm (higher diversity), and more words that describe the sources and effects of social isolation (higher exclusion).

In sum, the sample corporate managers demonstrated relatively higher certainty, realism and commonality but lower optimism and activity in their post-SOX disclosures. These suggest that managers are aware of their new role in financial reporting and try to stick to the disclosure requirements specified in SOX. On one hand, they try to be more authentic by using the more determined wording derived from their positions, facts and agreed-upon values. On the other hand, they are afraid of and/or avoid giving promises by using less wording that highlight accompaniment, positive consequences, change and implementation of new ideas.

TABLE 4 shows that SOX has a significant impact on management communication in the company disclosures with regard to all the Habermas’ norms except sincerity. SOX raises the comprehensibility and truthfulness but lowers the legitimacy demonstrated by the corporate management in their discussion and analysis of the firms operation. The results are significant even after controlling for the firm’s profitability, size and industry within the financial sector. Firm size (measured by total assets) bears a significantly negative (positive) association with comprehensibility (truthfulness). This seems to suggest that the larger the firms grow, the more difficulty it will be for management to communicate clearly. On the other hand, as the firm grows, the management tends to provide more truth in their communications. Providers of diversified financial services and REITs offer relatively more truthfulness whereas providers of property & casualty insurance give relatively less legitimacy in their MD&As.


TABLE 3 COMPARISON OF COMMUNICATION ATTRIBUTES IN CORPORATE DISCLOSURES

PRE- AND POST-SOX (a) Certainty

Pre-SOX (1993 through 2001)

Post-SOX (2004 through 2012)

Change in

Mean

Variable

Mean Std.

Dev. Min Max Mean Std.

Dev. Min Max Certainty Overall 40.80 8.95 9.93 55.14 43.22 9.49 6.00 56.53 higher

Between

7.23 19.75 48.04

8.07 21.46 51.54

Within

5.41 12.98 61.52

5.20 24.19 65.71

Tenacity Overall 12.49 6.13 0.42 39.27 11.46 5.15 1.20 26.04 lower

Between

4.51 5.17 21.67

3.76 2.94 18.40

Within

4.23 1.39 30.09

3.58 0.28 25.40

Leveling Overall 5.81 3.33 0.62 23.35 5.44 2.65 0.63 20.43 lower

Between

2.15 1.64 10.66

1.90 1.76 9.05

Within

2.57 -0.32 20.32

1.88 1.16 18.97

Collectives Overall 6.67 5.13 0.03 38.43 5.77 5.27 0.34 37.64 lower

Between

3.34 1.17 17.33

4.04 1.59 19.55

Within

3.93 -9.21 27.76

3.46 -3.97 24.16

Insistence Overall 193.30 74.87 52.45 498.24 205.26 83.30 31.65 496.05 higher

Between

40.22 103.97 275.80

55.02 80.45 349.98

Within

63.53 33.22 496.73

63.27 51.45 421.77

Numerical Terms Overall 99.27 70.56 8.12 337.81 77.24 75.40 2.49 362.82 lower

Between

58.44 42.88 262.38

66.07 8.33 245.53

Within

40.80 -56.29 311.03

38.07 -106.95 235.76

Ambivalence Overall 3.10 3.10 0.07 23.87 4.42 3.84 0.01 19.70 higher

Between

1.60 0.52 7.31

3.44 0.42 17.60

Within

2.67 -3.18 19.66

1.80 -5.86 11.96

Self-Reference Overall 0.09 0.31 0.00 2.41 0.15 0.41 0.00 3.31 higher

Between

0.16 0.00 0.70

0.25 0.00 1.12

Within

0.27 -0.59 2.09

0.33 -0.96 3.09

Variety Overall 0.42 0.11 0.17 0.70 0.42 0.11 0.16 0.70 same

Between

0.07 0.25 0.53

0.08 0.24 0.53

Within

0.08 0.18 0.68

0.08 0.19 0.71



PRE- AND POST-SOX (CONT.) (b) Optimism

Pre-SOX

(1993 through 2001) Post-SOX

(2004 through 2012)

Change in

Mean

Variable Mean Std.


Dev. Min Max Optimism Overall 49.12 1.77 43.07 67.59 48.86 1.43 43.79 53.76 lower

Between

0.94 47.35 51.99

1.07 46.70 50.99

Within

1.51 42.71 64.71

0.96 44.42 51.79

Praise Overall 1.52 1.28 0.00 7.41 2.18 1.82 0.16 9.30 higher

Between

0.83 0.60 4.13

1.19 0.49 5.43

Within

0.98 -1.10 6.25

1.39 -0.89 8.31

Satisfaction Overall 0.48 0.67 0.00 4.67 0.54 0.56 0.00 3.08 higher

Between

0.38 0.00 1.89

0.41 0.03 1.36

Within

0.55 -1.31 4.32

0.39 -0.33 2.75

Inspiration Overall 2.92 5.75 0.12 86.44 2.63 3.27 0.12 19.58 lower

Between

2.67 0.70 13.66

3.04 0.43 16.81

Within

5.11 -9.46 75.70

1.31 -2.35 9.15

Blame Overall 0.35 0.57 0.00 4.60 0.58 0.71 0.00 4.08 higher

Between

0.31 0.00 1.16

0.52 0.03 2.46

Within

0.49 -0.55 4.15

0.48 -1.59 2.82

Hardship Overall 4.33 4.29 0.00 28.82 6.01 4.18 0.59 24.26 higher

Between

2.38 0.79 11.34

3.38 0.99 12.48

Within

3.59 -3.67 22.63

2.54 -0.36 20.25

Denial Overall 2.56 2.98 0.01 26.66 2.31 2.17 0.00 18.64 lower

Between

1.55 0.28 5.99

1.44 0.43 7.06

Within

2.56 -2.29 23.93

1.64 -2.79 16.99



PRE- AND POST-SOX (CONT.) (c) Activity

Pre-SOX


(2004 through 2012)

Change in

Mean

Variable Mean Std.


Dev. Min Max Activity Overall 49.31 3.66 39.32 100.32 49.08 2.54 32.41 55.06 lower

Between

1.51 46.43 54.91

1.86 45.23 52.97

Within

3.35 39.06 94.72

1.76 36.26 54.03

Aggression Overall 1.70 1.90 0.00 15.49 2.44 2.94 0.00 14.34 higher

Between

1.24 0.00 5.04

2.54 0.39 11.01

Within

1.46 -2.79 12.15

1.56 -3.22 10.38

Accomplishment Overall 17.78 12.43 4.10 180.49 17.46 8.59 4.11 43.66 lower

Between

6.31 8.27 41.35

7.37 8.48 37.06

Within

10.77 -9.61 156.92

4.59 0.38 35.00

Communication Overall 4.99 15.51 0.05 250.20 4.87 4.41 0.02 22.62 lower

Between

5.64 0.18 31.63

3.59 0.39 14.81

Within

14.48 -24.73 223.56

2.63 -1.64 19.78

Motion Overall 0.47 0.74 0.00 5.95 0.63 0.81 0.00 5.93 higher

Between

0.55 0.00 2.34

0.71 0.03 2.93

Within

0.51 -1.65 4.09

0.41 -0.87 3.63

Cognitive Terms Overall 6.48 3.84 0.34 24.73 8.34 5.60 1.06 42.42 higher

Between

2.15 1.57 10.09

4.92 1.66 23.18

Within

3.20 -1.24 21.25

2.81 -0.78 30.07

Passivity Overall 4.87 5.56 0.42 84.78 4.79 2.43 0.67 17.45 lower

Between

2.36 1.87 13.33

1.73 1.34 7.94

Within

5.05 -7.20 76.33

1.73 -0.09 17.45

Embellishment Overall 0.44 0.51 0.07 4.67 0.48 0.83 0.08 8.88 higher

Between

0.19 0.17 0.89

0.54 0.13 3.19

Within

0.48 -0.29 4.23

0.64 -1.43 6.27



PRE- AND POST-SOX (CONT.) (d) Realism

Pre-SOX


(2004 through 2012)

Change in

Mean

Variable Mean Std.


Dev. Min Max Realism Overall 42.75 2.55 29.37 48.71 43.30 2.91 37.25 50.86 higher

Between

1.52 39.85 46.49

2.54 38.67 49.12

Within

2.06 30.98 48.77

1.48 37.24 50.15

Familiarity Overall 102.63 28.66 25.08 149.88 104.16 25.24 22.20 225.82 higher

Between

22.99 41.25 126.97

22.26 49.88 137.11

Within

17.56 32.49 155.51

12.49 67.09 192.86

Spatial Awareness Overall 4.18 3.56 0.16 21.82 4.95 5.46 0.08 54.96 higher

Between

2.44 0.84 11.31

3.34 0.89 16.50

Within

2.63 -3.02 16.38

4.36 -1.44 52.61

Temporal Awareness Overall 10.09 4.48 1.38 28.60 8.16 3.71 1.84 23.60 lower

Between

2.63 4.22 16.99

2.73 3.87 14.58

Within

3.66 -1.33 23.62

2.56 0.83 20.46

Present Concern Overall 8.05 4.87 0.94 23.44 10.57 6.70 1.02 41.63 higher

Between

3.35 3.07 15.42

5.83 2.62 30.97

Within

3.57 -3.95 22.60

3.45 -0.55 31.69

Human Interest Overall 1.81 3.37 0.00 31.20 6.69 8.32 0.00 32.61 higher

Between

2.22 0.00 8.74

7.59 0.08 26.95

Within

2.57 -6.83 24.34

3.65 -15.20 20.11

Concreteness Overall 22.66 8.75 6.31 58.00 23.91 10.41 4.92 51.80 higher

Between

5.30 13.75 32.69

8.91 10.51 40.18

Within

7.03 3.17 52.48

5.59 1.41 46.45

Past Concern Overall 2.02 1.59 0.01 11.39 2.72 2.52 0.07 13.40 higher

Between

0.99 0.22 4.23

1.92 0.24 7.60

Within

1.26 -0.41 9.39

1.66 -2.17 9.82

Complexity Overall 5.04 0.55 3.30 7.68 5.07 0.60 2.94 6.48 higher

Between

0.41 3.83 5.60

0.52 3.82 5.88

Within

0.37 3.62 7.12

0.31 4.11 6.66



PRE- AND POST-SOX (CONT.) (e) Commonality

Pre-SOX


(2004 through 2012)

Change in

Mean

Variable Mean Std.


Dev. Min Max Commonality Overall 51.97 4.44 45.13 112.72 52.08 3.33 43.44 84.88 higher

Between

1.76 49.36 57.75

1.92 48.67 56.37

Within

4.08 43.56 106.94

2.75 45.14 81.98

Centrality Overall 6.60 3.78 1.91 32.21 7.34 5.18 0.86 66.37 higher

Between

1.86 3.17 10.65

3.08 2.47 16.36

Within

3.30 -1.44 28.16

4.19 -2.85 57.36

Cooperation Overall 11.04 15.88 1.68 255.35 11.84 8.05 2.53 84.93 higher

Between

5.71 3.27 36.14

4.34 6.15 22.39

Within

14.85 -19.07 230.24

6.82 -2.16 76.70

Rapport Overall 1.11 1.11 0.00 6.78 1.21 1.04 0.00 6.30 higher

Between

0.68 0.01 3.32

0.62 0.18 2.58

Within

0.89 -2.02 4.56

0.84 -1.01 5.92

Diversity Overall 2.05 1.83 0.07 13.45 2.48 2.00 0.02 13.15 higher

Between

1.02 0.32 4.98

1.72 0.36 7.80

Within

1.53 -1.08 11.70

1.07 -0.45 7.83

Exclusion Overall 2.59 2.53 0.02 23.16 2.93 2.67 0.00 16.23 higher

Between

1.40 0.71 5.94

1.93 0.28 8.71

Within

2.12 -2.30 19.81

1.87 -2.54 12.81

Liberation Overall 0.76 1.22 0.00 10.40 0.74 1.18 0.00 11.98 lower

Between

0.69 0.00 2.92

0.74 0.07 3.31

Within

1.02 -2.04 8.23

0.92 -1.71 9.41


TABLE 4 RESULTS OF PANEL DATA RANDOM EFFECT REGRESSION ANALYSIS

Habermas’ Normi,t = const + biSOXt [+ NetIncome i,t + Asseti,t + � 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑛,𝑖

7𝑛=1 ] + εi,t

where SOXt is a dummy variable taking the value of 0 from 1993 through 2001 (pre-SOX), and the value of 1 in the years 2004 through 2012 (post-SOX); Asseti,t is the balance of total assets of Firm i as at the end of Year t; NetIncomei,t is amount of net income generated by Firm i during Year t; � Industry𝑛,𝑖

7n=1 is a series of dummy variables.

Model I Model II Model III Model IV

Independent Variable Comprehensibility Truthfulness SOX 0.804 (2.77***) 1.029 (3.27 ***) 4.938 (6.62***) 4.05(4.97***) Net Income

0.035 (1.27)

.079(1.12)

Total Assets

-0.001(-2.20**)

.004(2.38**) Industry 1

0.372(0.20)

10.672(1.16)

Industry 2

1.285(1.21)

11.730(2.30**) Industry 3

-0.354(-0.25)

7.890(1.17)

Industry 4

1.962(1.41)

6.352(0.94) Industry 5

2.107(1.11)

7.227(0.79)

Industry 6

-0.812(-0.83)

.818(.17) Industry 7

1.757 (1.48)

9.919(1.74*)

Constant 40.191 (99.86***) 39.848(70.88***) 48.843 (29.02***) 44.24(17.00***) Number of Obs 540 540 540 540 R2 (overall) 0.0108 0.099 0.0393 0.1965

Model V Model VI Model VII Model VIII

Independent Variable Sincerity Legitimacy SOX -0.387(-0.93) -0.617(-1.39) -0.253(-3.17***) -0.222(-2.57***) Net Income

-.006(-0.14)

-0.005(-0.72)

Total Assets

.001(1.51)

-.0001(-0.75) Industry 1

.058(.03)

-0.133(-0.26)

Industry 2

.723(.69)

.085(0.30) Industry 3

.452(.33)

.011(0.03)

Industry 4

-2.006(-1.47)

-.264(-0.70) Industry 5

-2.994(-1.62)

-.212(-0.42)

Industry 6

-683(-0.59)

-.548(-2.09**) Industry 7

-683(-0.59)

.185(0.58)

Constant 150.3989

( 384.89 ***) 150.696

(259.34***) -0.3756296 (-3.91***)

-.271 (-1.79*)

Number of Obs 540 540 540 540 R2 (overall) 0.0015 0.0445 0.0153 0.0683 Note: z-scores are shown in parentheses next to the regression coefficients. Asterisks *, ** and *** indicate significance at 10%, 5% and 1% respectively.


CONCLUSION

Habermas (1984, 1987) developed a theory in which various practical reasons were employed to establish four principles of effective communicative action. In accordance with this theory, effective communicators are expected to demonstrate comprehensibility, truthfulness, sincerity and legitimacy in their discourses. This study is an extension to Yuthas et al. (2002), with an attempt to further operationalize the Habermas’ principles as applied to the business communication setting. I investigate the communication behavior of corporate management in the disclosure of their firms’ operations using the four Habermas’ principles. In addition, the impact of the Sarbanes-Oxley Act (in short, SOX) on management communication behavior is evaluated at the same time. In examining the MD&A sections of the annual reports from 1993 through 2012 (except 2002 and 2003) of 30 large companies in the financial sector using Diction 6, I find that SOX has a significant impact on management communication in their company disclosures with regard to all the Habermas’ norms except sincerity. SOX raises comprehensibility and truthfulness but lowers legitimacy demonstrated by corporate management in their discussion and analysis of the firms’ operations. The results are significant even after controlling for the profitability, size and industry within the financial sector of the firms. REFERENCES Arping, S. & Sautner, Z. (2013). Does SOX section 404 make firms less opaque? Evidence from cross-

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The Role of Consultants in Organizational Learning

Qing Hu Cardiff University

Pauline Found

University of South Wales

Sharon Williams Cardiff University

Robert Mason

Cardiff University

This paper aims to find out how the OL processes (i.e. intuiting, interpreting, integrating and institutionalizing) are influenced by the roles of consultants. Through a longitudinal case study, it was found that based on the directive roles of consultants, the evidence of the direct use of intuition was weak but the processes of interpreting and integrating became the main constraints for lean knowledge to be learnt by managers and employees. The efficiency of institutionalizing was enhanced but its effectiveness was restrained by the processes of interpreting and integrating. Theoretical and practical implications of this study are provided in the conclusion. INTRODUCTION

Given the increasing competition in the marketplace, many organizations attempt to learn and implement some advanced management concepts, techniques and methods such as mass customization, lean production or thinking, agile manufacturing, and business process re-engineering (BPR) to better meet different customer requirements. To learn and implement these techniques and methods efficiently and effectively, some organizations employ consulting companies to provide useful ideas and a professional service (O’Mahoney & Markham, 2013). Fincham and Clark (2002) describe the management consultancy industry as one of the fastest growing industries. However, it is worth noting that consultants play various roles in different projects. Kubr (2002) categorizes two basic roles of consultants as the resource role and process role. Antal and Krebsbach-Gnath (2001) and Kubr (2002) point out that the roles of consultants can be represented by a directive and non-directive continuum and these roles could have a strong impact on organizational learning (OL) processes and activities. This paper aims to investigate how the learning processes can be influenced by the roles of consultants. As the literature on OL is prolific, this paper focuses on Crossan, Lane and White’s (1999) 4I framework (i.e. intuiting, interpreting, integrating and institutionalizing) which illustrates the dynamic of organizational learning.


LITERATURE REVIEW Organizational Learning The Definition of OL

Numerous studies can be found in the area of OL but there is no standard definition or interpretation of OL. Some researchers (e.g. Cangelosi & Dill, 1965; March & Olsen, 1976) emphasize that OL means the adaption to internal or external environment changes. While Fiol and Lyles (1985) argue that although contextual factors such as culture, strategy, organizational structure and environment can affect learning activities, adaption should not be confused with learning. They point out that adaption means adjustments or modifications based on the environment changes but learning stands for knowledge and insight development and the linkages between effective past actions and future actions (Fiol & Lyles, 1985). It implies that adaption is more passive rather than proactive and it may not contribute to knowledge or insight development.

Fiol and Lyles’ interpretation of learning is confirmed and developed by other researchers. For example, Miller (1996) describes OL as activities to acquire new knowledge which could be implemented in decision making processes or affecting other organizations. Sadler-Smith, Spicer and Chaston (2001) and Lopez, Peón and Ordás (2005) agree that OL refers to the acquisition and development of knowledge and skills to achieving better organizational effectiveness or performance. However, from Crossan, Lane and White’s perspective, OL is more than knowledge creation, acquisition or development. They point out that OL is “a principle means of achieving strategic renewal of an enterprise” (Crossan, Lane & White, 1999, pp. 522). In other words, OL could occur at all the levels of the organization such as individual, group and organizational levels and the tension between learning new knowledge and taking advantage of the learned one is the central issue of OL (Crossan, Lane & White, 1999). OL Sources

Organizations can learn from both internal and external sources. Experience of the organization such as routines which has been adopted by individuals or groups or the organization (Levitt & March, 1988), organizational self-appraisal which examines and solves errors or problems or reflection of failure within the organization (Argyris, 1976; Daudelin, 1996; Huber 1991; Shrivastava & Schneider, 1984), can be viewed as the foundations of OL sources. Those routines or activities which could achieve positive results are more likely to be accepted and adopted by other employees in the organization (Cyert & March, 1963; Levitt & March, 1988). However, Argyris (1976, 1977) claims that OL is associated with error detection and correction and similarly Daudelin (1996) and Popper and Lipshitz (2000) argue that failure can also be a potential source of OL. In addition to the internal sources, indirect experience from other organizations or professionals such as customers, suppliers, management consultants, governmental advisers or other successful organizations can also facilitate OL. For example, Fletcher and Harris (2012) who have investigated ten cases of Scottish organizations which attempted to achieve internationalization found that consultants could provide internationalization knowledge to these organizations. Similarly, external sources such as consultants and professionals enable organizations to learn new knowledge based on their expertise and skills through training and implementing specific projects (Easterby-Smith & Araujo, 1999). OL Processes

By reviewing OL literature, a number of frameworks or models which describe and analyze OL processes or stages can be found. Among these models or frameworks, some researchers prefer to view OL processes as several highly structured and distinct constructs. For example, Huber’s (1991) study identifies four typical constructs of OL (i.e. knowledge acquisition, information distribution, information interpretation and organizational memory). Similarly, Nevis, DiBella and Gould (1995) affirm that there are three important stages of OL including knowledge acquisition, knowledge sharing and utilization. However, it is argued by many researchers that OL processes are interacted with each other. In other words, one process or level can affect other processes or levels of OL. For example, Buckler (1996)


points out that learning processes cover three elements (i.e. focus, environment and technique) and these three elements can overlap and be interdependent with each other. Lam (2001) develops a three-dimensional model of OL which illustrates how these dimensions are interconnected with each other. Williams’ (2001) belief-focused process model of OL which conceptualizes and presents the social interactions between OL processes is also a typical example. Although the above examples recognize the interactions between processes, they lack a clear analysis of different levels of OL.

In this study, we employ Crossan, Lane and White’s (1999) 4I framework of OL which is widely accepted and applied by a large number of studies (e.g. Holmqvist, 2004; Schilling & Kluge, 2009; Vera & Crossan, 2004). It considers different levels of OL, interaction between these levels and reveals the dynamic of OL processes. There are four main OL processes (i.e. intuiting, interpreting, integrating and institutionalizing) that relate to three levels of learning (individual, group and organization). Crossan, Lane and White (1999) reject the perspective that OL is purely an analytical and conscious process by positing that learning could occur subconsciously. They argue that intuiting which means recognizing patterns subconsciously at the individual level is crucial to OL processes. Their perspective of intuiting is later supported and confirmed by other researchers. For example, Sinclair and Ashkanasy (2005) define intuition as “a non-sequential information-processing mode which comprises both cognitive and affective elements and results in direct knowing without any conscious reasoning” (Sinclair & Ashkanasy, 2005, p.353) and their model of decision-making clearly differentiates intuitive decision-making from analytical decision-making. In addition to intuiting, the second process-interpreting-enables individuals to consciously explain their insights or ideas through various languages and develop their cognitive maps (Crossan, Lane & White, 1999).

It is agreed by researchers that language is central to interpreting (Walsh, 1988; Weick, 1979). As individuals may explain the same phenomenon differently, the issue of equivocality could occur. However, according to Crossan, Lane and White (1999), this issue can be solved by group interpretive process. Compared to interpreting, the process of integrating emphasizes the development of collective action based on shared understanding across group members and the deeper shared understanding can be achieved through dialogue among group members (Crossan, Lane & White, 1999). The process which distinguishes learning at organization level from learning at individual or group level is institutionalizing. By proposing the assumption that OL does not simply equal the sum of individual or group learning, Crossan, Lane and White (1999) indicate that some learning results can be integrated and embedded in organizational strategy, structures, systems, practices and investments. They also suggest that it is not necessary for learning to go through every process and sometimes, some processes can be skipped. Although Crossan, Lane and White’s (1999) study shows a rich and in-depth understanding of OL processes, some researchers argue that as OL includes various sources, it is also meaningful to extend the understanding of the 4I model from intra- to inter-organizational level (Jones & Macpherson, 2006). In other words, researchers should clarify how these 4I learning processes within the organization can be changed or affected by external professionals which in this paper we use management consultancy as a proxy. Management Consultancy The Definition of Management Consultancy

Trying to find out one unified definition of management consultancy can be problematic as it is defined differently by researchers. According to Sturdy’s (2011) study which reviews and examines the literature of management consultancy, there are two dominated types of definitions. One type highlights activities that could assist or facilitate organizational change or improvement (Block, 2000). It implies that in addition to the experts or professionals outside the organization, any employee within the organization that provides help to others or the organization can be considered as the consultant. Compared to this broad and inclusive definition, the other type gives a narrower definition. It proposes that management consultancy is a special and professional service provided by specially trained and qualified persons (Greiner & Metzger, 1983). Based on these two distinct definitions, Kubr (2002) suggests a clearer and more fundamental definition of management consultancy which is employed in our


study. From his perspective, management consultancy or consulting is defined as “an independent professional advisory service assisting managers and organizations to achieve organizational purposes and objectives by solving management and business problems, identifying and seizing new opportunities, enhancing learning and implementing changes” (Kubr, 2002, pp. 10). The Roles of Consultants

At a more macro level, consultants are normally viewed as “knowledge providers”. For example, Kubr (2002) suggests that the role of consultants can be broadly categorized as resource role and process role. In the resource role the consultants are expected to provide a specific service to the client based on their expertise and in the process role consultants need to facilitate and enable the client to reflect upon and understand their own organization and its processes (Massey & Walker, 1999; Schein, 1998). Hence, it implies that consultants are expected to provide and transfer explicit and (or) tacit knowledge to the client organization (Richter & Niewiem, 2009). Gammelsater (2002) further points out that managers and consultants possess different knowledge base as managers’ knowledge base includes more specific and organizational content and consultants’ knowledge base is broader and external based. This difference implies that on the one hand, consultants can provide some new or at least different knowledge to the client organization but on the other hand, it may lead to “burdens of otherness” as consultants lack the context based knowledge of the client organization (Kipping & Armbrüster, 2002). A more critical perspective of the role of consultants argues that consultants actually do not provide new knowledge (O’Mahoney & Markham, 2013). Sometimes they just legitimize the existing knowledge (Bouwmeester & van Werven, 2011) or commodify some management concepts and then simply persuade managers to adopt them (Fincham, 1999; Fincham & Clark 2002; Nikolova, Reihlen & Schlapfner, 2009). The above views provide useful insights into the role of consultants in general but they are insufficient to analyze the diverse activities and roles of consultants in the project (Kubr, 2002). At a more micro level, some typologies of roles have been established by researchers to analyze the role of consultants in the project (e.g. Kubr, 2002; Nees & Greiner 1985; Turner 1982). In this paper, we employ Kubr’s (2002) typology to identify the roles of consultants as it considers both the actual activities and different levels of involvement of consultants in the project. Based on Lippitt and Lippitt’s (1979) study, Kubr (2002, pp. 73-76) propose eight roles of consultants from a directive extreme (i.e. consultants lead the project and directly tell the clients what should be done) to a non-directive extreme (i.e. consultants only provide information for clients without intervening the decision-making process in the client organization): advocate, technical expert, trainer or educator, collaborator, identifier of alternatives, fact finder, process specialist and reflector. RESEARCH METHODS

In this study, a single and in-depth case study was adopted for three reasons. First, according to Handfield and Melnyk (1998), a case study are employed for the following research purposes: 1) exploration (i.e. to understand the uncovered domains of previous theories); 2) theory building (i.e. to identify key variables, their relationships and the reasons for these relationships); 3) theory testing (i.e. to test the previous theories); 4) theory extension (i.e. to better structure the theory based on the observed results). In this study, as the main purpose is to explain how the roles of consultants can affect OL processes, case study can be viewed as the most suitable research method. Second, as suggested by Yin (2009), case study is most suitable for answering “how” and “why” questions which could contribute to both theory testing and building. In this study, as the research question is a “how” question, it is reasonable to choose a case study approach. Third, in terms of the choice of cases, Voss et al. (2002) point out that single and in-depth case study is commonly used in longitudinal research. In this study, one of the authors had a unique opportunity to get access to a Chinese SME (Small and Medium Enterprise) in the foundry industry which was implementing a lean project with the support from a consulting company from Feb 2012 to Jan 2013. Table 1 provides the background information of these two companies. During this period, the author visited this company twice: the first visit was at the early-to-


mid stage of the project from Feb 2012 to May 2012 and the second visit was at the mid-to-end stage from Nov 2012 to Jan 2013.

TABLE 1 THE BACKGROUND OF CASE STUDY

Background The Case Company The Consulting Company Ownership Private Private

Founded in 1983 1985

Business sector Manufacturing-Foundry industry

Management consulting

Position in the market Tier 2 supplier -

Customers Tier1 supplier (Domestic, Japan and U.S.)

SMEs (Domestic)

Products/service Auto parts such as knuckle and brake drum

A wide range of services including strategic management, performance management, human resource management, marketing, financial management and most recently, lean production (since 2005)

No. of employees 296 employees with 40 engineers

58 full-time (6 CMC) and 98 part-time

To aid the rigorous collection of data some instruments for case study were employed. Yin (2009)

suggests that the interview can be viewed as a vital source for case study. In this study, one of the most important instruments is the semi-structured interview. Gubrium and Holstein (2001) indicate that compared to structured and unstructured interview, semi-structured interview possesses unique strengths. On the one hand, some closed questions can enable the researcher to compare and contrast answers from interviewees and on the other hand, some open-ended questions can be asked to gather rich information. To understand the learning processes which occur at different levels and the roles of consultants, managers, consultants, supervisors and operators were interviewed. For managers, they were interviewed with the focus on their past experience of lean, their attitudes and understanding towards lean and reasons to employ consultants and their expectations of consultants. For consultants who were directly responsible for the project, they were interviewed in terms of their interpretation of their roles, their understanding of lean, learning and training issues or difficulties in the project. For supervisors and operators who attended different workshops, they were interviewed in relation to their attitudes and interpretations of lean, courses delivered by consultants and learning and communication issues. All the interviews were transcribed and then sent to interviewees to confirm these were accurate recording of the interview.

In addition to the semi-structured interviews, direct observation and documentation were also employed to enrich the case study. For direct observation, the author was given access to the shop-floor, training courses and meetings to observe how managers, supervisors and operators worked and communicated with each other and how training courses were delivered by consultants or managers. The documentation included materials from the training courses, the improvement project plan, the implementation handbook, reports from consultants and new documents of rules and performance assessment. Memos were also used to record ideas and thoughts during the field work. To analyze different sources of data in a logical way, coding was employed. A group of codes that linked to the roles of consultants and OL processes were generated and developed from literature prior to collating any data.


New codes were also developed and added during data analysis. As there was no pre-defined hypothesis of how the OL processes can be influenced by the roles of consultants, patterns that emerged from the data (e.g. interview transcript) were recorded and then compared with other sources of data (e.g. observation and documentation). To enhance the validity of analysis, several meetings were held between authors to discuss and draft the results. Additionally, before completing the final version of results, the drafted results were circulated with senior managers and consultants. FINDINGS The Roles of Consultants in the Project

Through the analysis of the interview transcripts and data from observation and documentation, four types of roles were identified.

The first one is trainer. It was found that both managers and consultants mentioned this role frequently during the interviews. From the managers’ perspective, consultants can be labelled as their “teacher” who possessed “various types of knowledge and experience” in this area and educated them to understand and implement lean. From the consultants’ perspective, they were responsible for training the managers and employees in terms of the meaning of lean, the approaches and requirements of lean.

The second role identified is the advocate. One of the most important reasons for managers to choose lean implementation was as a result of the recommendation from the consultants. During the first meeting, the consultants explained the benefits of implementing lean, such as cost reduction, quality improvement and employee quality enhancement and successful cases of lean implementation after the senior managers described their difficulties and problems the organization was experiencing. In this case, the consultants persuaded their client (the case company) to select and adopt a particular solution (i.e. lean production) and the introduction of benefits and successful cases convinced the managers that lean production could be a suitable and valuable solution. Additionally, the consultants also designed and proposed the detailed plan and guidelines for lean implementation. It is worth noting that the role of the advocate should not be confused with the collaborator in problem-solving or identifier of alternatives. The advocate tries to promote specific ideas or solutions and persuade managers to accept and adopt these ideas or solutions rather than providing alternative solutions. In the case of this project, the consultants offered one detailed plan for the whole project which they believed could be the most suitable and comprehensive approach (including organizational, operational and technical levels of changes) rather than several alternative plans. Additionally, when applying lean tools such as 6S and visual management, the consultants directly provided 6S implementation and assessment method which formulated why and how to change the status quo by using 6S.

The third role is the fact-finder. The consultants investigated the status quo (e.g. organizational structure, culture, employee quality, shop floor management) of the case company through interviewing managers and employees and observing their management, production processes and shop floor during the preparation stage to identify the problems, potential improvement areas and the main focuses of the project.

The final role identified is the one of technical expert. When interviewing managers, it was found that they described themselves as having a “lack of sufficient knowledge of lean production” and therefore the most important reason to employ consultants was for their experience and knowledge to cope with problems. In other words, the consultants could provide a professional service. For the consultants, it was evident that they had developed their lean based knowledge from both direct and indirect experience. For indirect experience, they invited professors in academia and experts in the consulting industry (who had successfully completed lean implementation projects) to deliver lean based training courses to enable them to better understand the concepts and practices. Additionally, the consulting company purchased some databases which cover a wide range of trade magazines and academic journals to enable the consultants to learn from various cases. For direct experience, the consultants were required to submit monthly reports to reflect the tasks completed, the results that were achieved, the problems or difficulties they identified and the plan or solutions for the next step. By the end of project, the consultants were


required to submit a full project report which reflected their tasks and achievements. By writing the reports, the consultants were able to record, review and reflect their experience in a regular and structured way and therefore, learn from this reflection.

In summary, although the consultants acted as fact finder that is closer to non-directive extreme at the beginning of project, it was evident that the roles in this project were more directive and resource based. The Roles of Consultants and OL Processes The Roles of Consultants and Intuiting

As documented in the previous section, intuiting is an important process for OL. The results from this case study suggest that the evidence for direct use of intuition is weak for two main reasons. One reason is that the process of intuiting at an individual level is largely replaced by the roles of consultants. For example, as the consultants acted as the fact finder, they were mainly responsible for identifying problems and potential solutions by using different data collection methods (i.e. interviewing employees and managers, getting access to company documents, sending mini-questionnaires and observing shop floor) and analytical tools (i.e. statistical analysis such as descriptive statistics of mini-questionnaire, content analysis of company documents or reports and interviews). Through this analytical work, a report of the ‘status quo’ can be generated. This report can also be viewed as the source for their planning process and evidence for persuading managers to accept their plan. In other words, instead of the employees or managers, consultants recognized patterns or problems by using professional data collection methods and analytical tools. It may be argued that the consultants could recognize patterns subconsciously or directly identify patterns based on their expertise and experience. However, when interviewing the consultants, it was found that they rarely use intuition. The consultants explained that they needed to show the evidence for their proposed plan or guideline through scientific methods. It implies that when playing a directive role particularly as an advocate, consultants should list and analyze reasons and benefits to persuade managers and therefore, it is automatically a counterintuitive process. The other reason is that lean itself is counterintuitive. Emiliani (1998) points out that managers’ intuitive or natural way of thinking is batch and queue production mode rather than lean production. Hence, wastes identified by lean thinkers cannot be recognized by managers unless they are educated to learn lean tools or lean concepts (Emiliani, 1998). In the case of this project, most managers and employees have not been trained or taught lean based knowledge before. Therefore, it is less likely for them to intuitively recognize waste or process improvement opportunities.

The Roles of Consultants and Interpreting and Integrating

Consultants attempted to teach and explain the ideas and benefits of lean production through meetings and training courses. As training courses delivered by the consultants were the main pathway for managers and employees’ learning, how to interpret lean in an understandable and acceptable way can be a challenge for consultants. By observing their training courses, it was found that these were mainly delivered through lectures (the consultants acted as trainer or teacher while the managers or supervisors or operators acted as students). However, when interviewing some of the “students” after the first and second training courses, which mainly focused on organizational structure and job responsibility, negative feedback was received. Some “students” complained that they could not memorize what the consultants said as they were not familiar with conceptual words or phrases in the training courses. Several “students” highlighted that the examples or cases employed by consultants did not link closely with their daily jobs and thereby, they did not know what or how to change. It implies that the consultants failed to develop common language to interpret the training materials. Additionally, as “students” could not memorize or understand the training course, it was difficult for them to change their existing mindset, or develop shared understanding or engage in the project. This difficulty was also reflected in their meetings. While consultants tried to explain their guideline for lean implementation in the meetings, several middle managers questioned the benefits of lean production and they complained that actually they did not quite understand it as the linkages between lean production and their current daily work were unclear. They


argued that they needed a more practical and easy-to-understand or easy-to-use guideline for lean production which could directly reflected on their daily work.

Moreover, consultants attempted to integrate lean production into employees’ behavior by changing the current operations procedures and policies as well as their performance assessment methods. However, both middle managers and employees felt uncomfortable with the new proposed procedures and policies as they were too wordy and abstract. Hence, finding a common language or at least an acceptable language to interpret the ideas of lean production became a core issue. To deal with this issue, the managers and consultants decided to change the training method. As managers knew their company and employees better than the consultants, and also as the consultants worked closely with the managers during the project, the consultants attempted to train the managers first. Managers were then expected to deliver the training courses with the common language to supervisors or operators. In this case, the consultants acted as “head trainers or coaches” who educated managers. Managers acted as “assistant trainers” who were responsible to educate employees in their department. For example, one of the important training courses is 6S implementation. As this course was mainly associated with the operations management (OM) department, the head of OM was expected to be the “assistant trainer”.

As a result of interviewing consultants and managers, it was found that compared to the previous training method, the new method provided more opportunities for both managers and consultants to discuss or communicate with each other and this immediate communication enabled consultants to gain better understanding of the situations in the company. By interviewing supervisors and operators, they highlighted that it was easier for them to understand the managers’ language and cases or examples provided by managers directly reflected their daily jobs. Based on this training course, some collective actions can be found in several workshops. For example, two supervisors mentioned that their operators began to clean machines and floors after the training course. Another supervisor reported that operators realized the importance of safety and they proactively checked whether their colleagues wore helmets and gloves.

In addition, a revised version of operations procedures and policies was provided by the consultants during the later meetings. Although the language and structure was simplified in the revised version, manager (particularly middle managers) and supervisors still felt difficult to read and understand it. Several middle managers argued that the content included in the revised version was too general and conceptual. They were not interested in reading “a general conceptual book” and once again they highlighted what they expected was “practical guideline” which can exclusively match the context of their company. As middle managers and supervisors were unsatisfied with the revised version, consultants were forced to do a second revision of their proposed procedures and policies. One of the consultants complained that it was an endless work as none of them had the working experience in this company and it was difficult for them to gain a comprehensive understanding of each department in this company within a short period. Another consultant worried that they lagged behind their schedule. As planned, the current state of shop floor should be changed and the new policies and work procedures should began to be implemented during the middle to end stage but actually, consultants were still in the process of developing and revising the procedures, policies and assessment methods. If they could not accomplish all the tasks on time, managers would complain again at the end stage of this project. The Roles of Consultants and Institutionalizing

The efficiency of institutionalizing was improved based on the directive consultants’ roles. This study found that as the consultants acted as the technical expert and advocate, they were responsible to re-design and re-organize the operations procedures, policies, job responsibility, and performance assessment criteria based on their knowledge of lean production. For example, the safety and quality policy was developed by consultants. The assessment of Total Productive Maintenance (TPM) and 6S was included in the supervisor and operator’s performance assessment criteria and related activities incorporated in their operations procedures. This implies that the process of institutionalizing can be led by consultants rather than managers. Consultants could directly and efficiently embed their knowledge of lean production into organizational level change within a relatively short time period. Managers and


employees were then expected to be persuaded and trained to accept or implement the re-designed organizational structure, policy, job responsibilities and performance assessment criteria. However, it is worth noting that efficiency does not mean effectiveness. For example, as discussed in the previous section, middle managers did not understand the ideas and benefits of lean production. In this case, the consultants drafted the documents relating to the operations procedures and policies in a relatively short time, but whether these documents, without proper interpretation, could be adopted and implemented by managers or employees effectively remained as an issue. CONCLUSION

The aim of this paper was to establish how the learning process can be affected by the role of consultants. The 4I framework, which illustrates the dynamics and different levels of learning, was employed to identify learning processes. Kubr’s (2002) typology was also employed to identify the roles of consultants. Through a longitudinal and in-depth case study of a Chinese SME which implemented a consultancy-led lean project it was found that the roles of consultants were directive and operated at four levels; trainer, advocate, fact-finder and technical expert. There was insufficient evidence to show the direct use of intuition in this project. However, the consultants were forced to improve the processes of interpreting and integrating. These processes, although intervened by directive roles of consultants, became the main constraints for lean production to be understood and accepted by managers and employees. The directive roles of the consultants can contribute to the efficiency of institutionalizing but its effectiveness can be restrained by the process of interpreting.

This paper enriches the OL literature (particularly 4I framework) by investigating learning activities and processes in a specific project and illustrating how these four processes can be affected by external professionals such as consultants. Furthermore, it also has practical implications for consultants and managers. For consultants, while they play directive roles in the improvement project, it is insufficient for them to simply introduce the new knowledge such as lean production, provide guidelines for implementation or directly change the rules and policies in the client organization. The main constraint is how to enable the managers and employees to understand lean production. In other words, consultants should focus on how to interpret the new ideas in an acceptable way and integrate them into managers and employees’ daily work. As argued by Gammelsater (2002) and Kipping and Armbrüster (2002), the different knowledge base of consultants and managers may lead to “burden of otherness”. In the consultancy-led project, to enable new knowledge such as lean production to be learnt and implemented effectively, the importance of middle managers should be recognized by consultants. Middle managers normally do not directly involve in the first contact or meetings at the beginning of project. Their importance can easily be underestimated by consultants as consultants who play directive roles in the project and seek to persuade the senior managers to accept and support their suggestions. However, middle managers work closely with employees and are actually more familiar with the organizational (particularly operational) context. Hence, instead of solely focusing on senior managers, consultants should actively cooperate with and involve middle managers during the project (e.g. involving middle managers in the training courses). For senior managers, on the one hand, they should involve middle managers at the beginning of project as they can provide useful and up-to-date operational information. On the other hand, the selection of consultants should be considered carefully. Consultants with experience in the relevant industries seem to be a more realistic and suitable choice. As a single case study, the generalizability of these findings is limited. Therefore the long-term research aim is to investigate more cases and compare and contrast different roles of consultants and their effects on the effectiveness of 4I learning processes. REFERENCES Akinci, C., & Sadler-Smith, E. (2012). Intuition in Management Research: A Historical Review.

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Is Team Based Tacit Knowledge Transferable? Players as Strategic Resources

Roy Heath Keller

Murray State University

The transferability of tacit knowledge is a topic that is at the core of many leading theories of the firm. Using the National Basketball Association (NBA) as the unit of analysis, this paper addresses the following question: What effect does tacit knowledge held by a strategic bundle of resources (team) have on the market value of an individual resource (player)? Results indicate that player fit with other team members and strategic philosophy are significant predictors of market value. INTRODUCTION

Since Barney’s (1991) seminal work on a resource based view (RBV) of the firm much work has been done that provides for the development and implementation of strategic firm resources to realize a sustainable competitive advantage. As the resource based view has evolved and matured, RBV has been utilized in many streams of and different areas of management research. Specifically related to the current research is the area of strategic human capital that is beginning to develop and take shape in strategy as well as human resources (Wright, Coff, & Molterno, 2014).

In the context of the National Basketball Association (NBA), this study examines how the value of an individual human resource (player) is affected relative to the other resources that form a specific bundle (team). This is related to recent works by Crocker and Eckardt (2014) and Campbell, Saxton, & Banerjee (2014). Crocker and Eckardt (2014) used data from Major League Baseball and found that individual level performance was influenced by complementary resources at the unit or team level. Much like the current study, Campbell, Saxton, and Banerjee (2014) considered mobility of human resources (player and personnel) in the NBA and that found that mobility events generally caused performance to be adversely affected.

The use of athletic teams for RBV and strategic human capital research is not uncommon. Work in this area has focused on the relationship between team performance and human resources (Wright, Smart, & McMahan, 1995), program history and culture (Smart & Wolfe, 2000), team tacit knowledge (Berman, Down, & Hill, 2002), and managerial experience (Lechner & Gudmundsson, 2012). Each of these studies found a relationship between the aforementioned independent variables and the dependent variable of team performance. This paper is unique in that it examines the effect that team-possessed tacit knowledge has on the market value of individual members of the team. This offers a different perspective to RBV based research that primarily identifies competitive advantage as the dependent variable.

This paper is organized as follows. First a general review of the foundational literature of the RBV, with particular attention given to human and tacitly held resources of the firm is provided to establish the conceptual background for this study. Next, the RBV is described in terms of the NBA and a set of


hypotheses is offered to examine the relationship between team possessed tacit knowledge and the market value of individual resources. The research framework focuses on players and coaches as the individual human resources that compose a team. The team is viewed as a unique bundle of resources that are all working to maximize team performance. For example, the NBA is composed of unique bundles of resources known as teams (e.g. Los Angeles Lakers, Miami Heat, Chicago Bulls, etc.). Each team is made up of several players (e.g. Kobe Bryant, Lebron James, Kevin Durant, etc.) and coaches (e.g. Doc Rivers, Eric Spoelstra, George Karl, etc.) that all share the same goal of winning basketball games. Next, a methodological section is provided that defines the measures and analyses that are used. Finally, the paper concludes by suggesting the business strategy implications for future empirical and theoretical testing as well as practical applications. LITERATURE REVIEW Resource-Based View (RBV)

Wernerfelt simply identified resources as “those tangible and intangible assets which are tied semipermanently to the firm” (1984, p. 172). Barney (1991) further clarifies this definition by classifying resources as being either physical capital resources, human capital resources, or organizational capital resources. This paper focuses on the human capital resources which Barney defines as “the training, experience, judgment, intelligence, relationships, and insight of individual managers and workers in a firm” (1991, p. 101). The RBV attempts to identify resources and/or bundles of resources that firms can leverage to create an advantage that produces supernormal performance over a sustained period of time. In terms of sustainability, Barney contends that “a competitive advantage is sustained only if it continues to exist after efforts to duplicate that advantage have ceased” (1991, p. 102). Furthermore, he contends that for a firm’s resource to produce a sustained competitive advantage they must be 1) valuable in that it takes advantage of environmental opportunities and minimizes threats, 2) rare in that few (if any) competitors possess it, 3) imperfectly imitable meaning that other firms cannot easily purchase or imitate it, and 4) non-substitutable meaning that other non-strategic resources can be reapplied to produce similar results (Barney, 1991). It is important to note that each of these criteria must be met. For example, a valuable, rare, and hard to imitate resource will not lead to a sustained competitive advantage as long as substitutes are available.

Peteraf’s (1993) analysis of the third criteria (imperfectly imitable) mentioned above is especially relevant to this argument. She suggests that assets that are “cospecialized” (1993, p. 183) are assets that must be used together or are at least most valuable when used together; consequently, the more cospecialized the assets; the more immobile they become (Peteraf, 1993). In this context, a team’s specific combination of players and coaches are considered strategic firm resources in that they are cospecialized assets and imperfectly mobile. A degree of immobility can be related to technical issues of player contract restrictions, league salary cap rules, league trading rules, etc., but the focus of this paper is on the imperfect mobility due to the tacit knowledge that is gained through a team playing together over time. Tacit Knowledge as a Resource

A stream of RBV related literature has grown from the belief that firms realize sustained competitive advantage through the application and evolution of knowledge within the firm. Grant (1996) makes a distinction between tacit knowledge and explicit knowledge. He identifies “knowing how with tacit knowledge, and knowing about facts and theories with explicit knowledge” (Grant, 1996, p. 111). In basketball terms, the rules of the game would be considered explicit knowledge; whereas, how to shoot a free-throw or dribble the ball would be considered tacit knowledge. These simple examples also support Grant’s contention that knowledge value is realized through 1) its ability to transferred within or across firms, 2) its ability to be absorbed by others, and 3) its appropriability, which is the ability of the owner of the knowledge to receive a return equal to its value (Grant, 1996). In the simple basketball example, transferring ones knowledge of game rules would be relatively simple and therefore, easy to imitate.


Absorption and appropriability would also be relatively simple to achieve. However, transferring one’s knowledge of how to dribble or shoot would be much more difficult; consequently, tacitly held knowledge can be viewed as a source of competitive advantage, especially in uncertain and unpredictable environments (Miller & Shamsie, 1996). Berman, Down, and Hill (2002) point out that “at the individual level, tacit knowledge is closely related to the concept of skills” (2002, p. 14). A basketball player uses tacit knowledge when he secures a rebound; dribbles the ball to the opposite end of the court; and executes a slam dunk all the while avoiding defenders. This series of activities is a product of tacit knowledge that is possessed within the individual that is extremely difficult, maybe even impossible, to document and teach others to execute.

At the group or team level, the individually held tacit knowledge of all members is combined to create team-based tacit knowledge. Cohen and Levinthal (1990) point out that although team-based knowledge “tends to develop cumulatively” (1990, p. 131) it is not the sum of the team member’s knowledge that is the major issue. The major component of team-based knowledge is the team’s ability to exploit the collective knowledge of its members (Cohen & Levinthal, 1990). Teece, Pisano, and Shuen (1997) support this by stating, “While individual skills are of relevance, their value depends on their employment in particular organizational settings” (1997, p. 520). The contextual value of the knowledge possessed by a bundle of resources is well documented in the literature. Pandian and Mahoney (1992) suggest that firms generate rents not due to the possession of better resources, but due to making better use of the resources they do possess. In her analysis of imperfectly mobile resources, Peteraf (1993), describes resources such as this as “tradeable but more valuable within the firm that currently employs them than they would be in other employ” (1993, p. 183). These arguments implicitly suggest that the sum is greater than the whole and is specific and unique to the context in which it is applied. Hall (1992) clarifies this stance, “Even when one firm acquires another for the purpose of duplicating a competitive advantage creating resource, the acquiring firm cannot be certain that (it) will retain the intangible resources of know-how, culture, or networks (1992, p. 136).

In the context of this paper, it could be reasoned that just because a player performs at a certain level in the context of their current team, there is no guarantee that they will realize the same level of performance with a different team. In short, the team (resource bundle) is more important than any individual player (single resource).

THEORETICAL FRAMEWORK

A theoretical framework and hypotheses are developed in this section to explain the degree that the relationship between team based tacit knowledge and player market value is enhanced by the performance of the team to which it is a member. Specifically, team based tacit knowledge is operationalized as the level of experience of the individual members of the team, the performance of unique combinations of team members, and fit (or lack of) between the strategic philosophies of the team and the valuable skills of individual players.

One previous athletic focused study examined the relationship between intangible assets (history, trust, and organizational culture) and performance of a collegiate football program (Smart & Wolfe, 2000), while another focused on the relationship between tacit knowledge and performance of NBA basketball teams (Berman, Down & Hill, 2002). Both studies found that the strength of the intangible assets studied was directly related to the performance of the organization. Experience and Resource Combinations

In the NBA, team-based tacit knowledge is developed by members of a team playing together and becoming aware and comfortable with the individually held tacit knowledge of each member. In a sense, organizational learning is a product of teams playing together. “As players interact on the same team over time, they increase team performance and perhaps build a competitive advantage through group-level tacit knowledge” (Berman, Down, & Hill 2002). This increase in team-based tacit knowledge was found to lead to an increase in team performance (Berman, Down, & Hill, 2002). These team effects are a product


of the increased tacit knowledge and level of performance of the individual players on the team that is a product of each individual’s experience on the team and the specific interactions of various team member combinations. Cohen and Levinthal support this “an organization’s absorptive capacities depends on the absorptive capacities of its individual members” (1990, p. 131).

Based on these arguments a logical conclusion can be reached that as the level of team-based tacit knowledge increases in the form of experience or the specific and unique combination of players on the team so will the tacit knowledge of the individual. And, as a result, the performance of the team as well as the individual players will increase. Consequently, as a player’s performance increases, their market value will also increase, meaning they will be able to demand a higher wage in the free-agent market (Vrooman, 1995; Gerrard, 2005).

Hypothesis 1: Team-based tacit knowledge in the form of experience is positively related to the market value of an individual member of the team. Hypothesis 2: Team based tacit knowledge in the form of the performance of specific combinations of players is positively related to the market value of an individual member of the team.

Strategy/Capability Fit

The strategic philosophies of teams and their coaches can have an effect on the types of players the team seeks to acquire through free agency or the draft (Wright, Smart, & McMahan, 1995). This is especially the case in basketball due to the fact that “there is a general consensus regarding the strategies a team might pursue” (Wright, Smart & McMahan, 1995, p. 1058) and these different strategies would most likely value different characteristics of human resources. For example, one team may choose to implement a fast-paced strategy that focuses on offense; whereas, another team may choose to implement a strategy that focuses on power and defense. Fast-paced teams would likely value characteristics of shooting, ball handling, stamina, and quickness; whereas, power-minded teams would be more interested in characteristics of size, strength, and rebounding.

Based on these arguments, one can conclude that players that have previous experience implementing a certain strategic philosophy will more easily be able to transfer their tacit knowledge to a new team that employs a similar strategy. Further evidence for this can be found in the upper echelons literature (Hambrick & Mason, 1984; Finklestein & Hambrick, 1990; Carpenter, Sanders & Gregersen, 2001). This stream of literature theoretically and empirically suggests top managers are more attractive and valuable in the labor market when they have experience implementing strategic philosophies that are somewhat congruent with other firms in the industry. In this context, one could surmise that those players with experience in similar strategies will be able to demand a higher wage from teams with similar strategic philosophies.

Hypothesis 3: Team-based tacit knowledge in the form of strategic-philosophy/player- skill fit is positively related with the market value of an individual member of the team.

METHODS

One of the benefits of using the NBA as the unit of analysis is the vast amount of readily available data. By its nature, sports are grounded in statistics and provide a laboratory of sorts for empirical research. Sample

The population consists of the 450 players that played on 30 (each team has a 15 player roster) teams in the NBA during the 2005-2006 and 2006-2007 seasons. This period was selected due it being in the middle of the dataset. By utilizing a period in the middle of the dataset, the potential to establish and


include a longitudinal component to this research is possible. This represents the entire population of players and teams. The sample for this study is those players that were members of more than one team during the time period. 76 players changed teams during the time frame studied. This makes up the sample for the study. Data was gathered from the NBA’s official website (http://www.nba.com). This sample size yields approximately at 25:1 ratio of cases to predictors. This is very close to the preferred ratio of 30:1 and should be sufficient for this study.

It should be noted that each of these teams are sanctioned and governed by the NBA. This means that each of these teams follow the same rules of competition. For example, each team can only utilize five players at any one time during a game, and each game is officiated by league-employed referees that have no prior allegiance to any one team. The fact that each team is governed by the same rules should increase the validity of this study. Measures Independent Variables

Three measures were used for team tacit knowledge. The first measure of team tacit knowledge is team experience. This is a continuous variable and has been established as a proxy for team tacit knowledge in the literature (Berman, Down, & Hill, 2002). This variable consists of the number of years of experience that each player has with the team at the end of the season. Experience is weighted by the number of minutes played during the season. This variable is calculated by multiplying the number of years that a player was a member of the team he left in 2005-2006 by the number of total number of minutes that he played in games during his final season with the team. For example, if player A was a member of Team X for four seasons and in his fourth season he played 1800 minutes, his team experience would be 4 x 1800 = 7200 (See Berman, Down, & Hill, 2002 for further description of this variable). I argue here that the larger a player’s experience, the greater his market value will be.

The second measure of team tacit knowledge is also a continuous variable and is the NBA developed Lenovo Statistic. The NBA explanation of the Lenovo Statistic: “The Lenovo Stat shows the power of teamwork. It's a way of showing the best-engineered/best combination of players on the court. The Lenovo Stat is a plus/minus statistic that looks at the point differential when players are both in and out of the game, to see how the team performs with various combinations. The Lenovo Stat can look at a variety of combinations – including the best two player, three player and even five player combinations for each game” (http://www.nba.com). At the individual level, the Lenovo Statistic measures the amount that an individual contributes to their team. Positive Lenovo values indicate that a team’s performance increases when an individual is in the game, contributing to the team; conversely, negative Lenovo values indicate that the team’s performance decreases when an individual is in the game. The strength, either positive or negative, indicates the magnitude of an individual player’s contribution. It should be noted that a negative Lenovo Statistic does not necessarily mean that an individual player performs poorly. It could indicate that the player simply does not perform as well as other players. I argue here that the more positive an individual player’s Lenovo Statistic; the more valuable they will be.

The third independent variable is the match between an individual player’s strength in terms of style of play and the strategic philosophy of the team that he went to play for in 2006-2007. Three raters with considerable knowledge of the NBA and its players independently categorized each of the 30 NBA teams and the 76 players in the sample as either as either 1) transition focused – meaning they support the notion of fast-past offense where players are expected to score as quickly and as often as possible; 2) half-court focused – meaning the offense is focused on running set plays where players are expected to maximize the amount of time used and take the best shot; or 3) defense focused – meaning that the team is primarily focused on preventing the other team from scoring and players are less interested in scoring points as they are with steals, deflections, and blocked shots. Inner-rater reliability was considered and determined not to be a concern. There were only two discrepancies in the team categorization and 6 in the player categorization and were easily resolved through a brief discussion. Players’ styles were then compared with the strategic philosophies of the teams that they were to be playing for in 2006-2007. This variable is


categorical or nominal and is coded as 0 for instances where no match was found, and coded as 1 for instances when a match between player style and team strategic philosophy was found. Dependent Variables

The dependent variable in this study is a player’s market value. Two measures are used to represent a player’s market value. Both measures are interval or continuous in nature. The first measure of player market value is the change in the value of the player’s contract from the 2005-2006 season to the 2006-2007 season. Data for this measure was taken from the ESPN’s Basketball Salaries Database (http://espn.go.com/nba/salaries). This database contains historical salary data for the NBA (1999-2013).

The second measure for player value is the change in attendance of the team the player left in the 2005-2006 season and the change in attendance of the team they joined in the 2006-2007 season. One would expect a team that has a valuable player leave will experience a decrease in attendance in the year after the departure. Likewise, it would be expected that the arrival of a valuable player to a team would result in an increase in that team’s attendance. This data was collected through the NBA’s official website (http://www.nba.com). Analysis

Descriptive statistics and correlation results are provided to illustrate the general relationships between the variables. Multivariate multiple regression is the primary statistical method used to address the research question in this study. Tests of significance were conducted on the overall model and each individual predictor. To determine the best model relative to the seven different combinations of the predictors, separate analyses were run of the independent variables and compared based on each model’s adjusted R2.

RESULTS

Table 1 includes descriptive statistics and correlations. As shown in Table 1, the standard deviations of the variables are rather large. This is especially true for the salary change variable. The large standard deviation value in this variable is likely due to fact that several of the players included in this sample were traded from one team to another in the midst of a current contract. Often times when a player is traded and there is time remaining in the contract, the acquiring team will honor the terms of the player’s current contract, meaning that there is no change in the value of the contract.

It is also worth noting that the significant positive correlation between the Lenovo Statistic and experience. This is expected and is in-line with the theory presented here. Also in agreement with this theory is the significant negative correlation between the Lenovo statistic and the 05-06 attendance. This suggests that when a valuable player leaves a team, the attendance at home games in the following year decreased for the team that he departed.


TABLE 1 DESCRIPTIVE STATISTICS AND CORRELATIONS

Mean s.d. 1 2 3 4 5

1. 05-06 Attendance

17,314

1,172

2. 06-07 Attendance

17,557

1,078

-.059

3. Experience 3,359 3,487 -.120 .042 4. Contract Change

-410,110

17,676,512

.028

-.030

.154

5. +/- Statistic -14.84 152.10 -.334** .062 .402** -.118 6. Philosophy Match

0.34

0.48

.204

.167

.006

-.140

-.107

**Correlation is significant at the 0.01 level (2-tailed).

Univariate tests were run to test the significance of the three predictor variables in predicting each of the dependent variables individually. Table 2 shows the univariate results related to the significance of each dependent variable. Based on the univariate results, the only dependent variable that was significantly predicted by the variables in this model was 2005-2006 attendance. In this model, only the Lenovo Statistic contributed significantly at .01 (t(1) = -2.65, p = .0098).

TABLE 2 UNIVARIATE TESTS OF SIGNIFICANCE

Dependent Variable D

F F P

05-06 Attendance 3/

72 3.

91 0.012

06-07 Attendance 3/

72 0.

85 0.4695

Salary Change 3/

72 2.

36 0.0783 Multivariate multiple regression analyses were performed to determine the best model considering the

three predictor variables of Lenovo Statistic (Len), team experience (Exp), and philosophy match (Phil_Match). First, the overall model with all predictors included was tested. The null hypothesis: H0: BLen = BExp = BPhil_Match = 0 was tested and rejected at the .05 level. Table 3 shows the results of the Wilks' Lambda, Roy's Greatest Root, Hotelling-Lawley Trace, and Pillai's Trace tests. These tests indicate that the predictors are significantly better than the baseline model in predicting the 2005-2006 attendance change, 2006-2007 attendance change, and change in contract value.


TABLE 3 TESTS OF SIGNIFICANCE – OVERALL MODEL

MULTIVARIATE STATISTICS AND F APPROXIMATIONS

Statistic Value F Value Num DF Den DF Pr > F Wilks' Lambda 0.75535643 2.31 9 170.51 0.0176 Pillai's Trace 0.26342641 2.31 9 216 0.0169 Hotelling-Lawley Trace 0.29936337 2.30 9 106.86 0.0208 Roy's Greatest Root 0.16792081 4.03 3 72 0.0104 NOTE: F Statistic for Roy's Greatest Root is an upper bound.

The above results indicate significance in at least one of the three predictors in predicting the

dependent variables; however, the do not give any indication as to which individual predictor variables are contributing significance to the model. Additional tests of significance were conducted on the predictor variables individually to determine if each significantly contributes to the model over and above what the two other variables are contributing. Table 4 shows the results of these tests and shows that the Lenovo Statistic significantly contributes to the model over and above experience and philosophy match at the .05 level and that the philosophy match variable significantly contributes over and above at the .1 level; consequently, hypotheses 2 and 3 are supported. Experience was not found to be a significant predictor; therefore, no support was found for hypothesis 1.

TABLE 4 OVER AND ABOVE TESTS OF INDIVIDUAL PREDICTORS

Predictor Variable Pr > F Experience 0.2687 Lenovo Statistic 0.0206** Philosophy Match 0.0803* **Significant at .05 *Significant at .1

Additional tests were done to determine the relatively better linear model using the adjusted R2

criterion. Subsequently, six additional multivariate multiple regression analyses were run to determine the relatively best model at predicting the dependent variables. Models were compared based on adjusted R2 values. The adjusted R2 measure was chosen due to the fact that it takes into consideration the number of predictors and sample size of the model. Table 5 shows the p-values for determining significance of each of these models and the adjusted R2 for the seven models (includes the overall model) that were tested. (See Appendix C for detailed results.)


TABLE 5 MODELS WITH DIFFERENT VARIABLE COMBINATIONS

Predictors Included Pr > F Adjusted R2 All 0.0169* 0.749 Lenovo and Philosophy Match 0.0123* 0.794 Experience and Philosophy Match 0.1182 0.866 Experience and Lenovo 0.0386* -2.033E+12 Philosophy Match Only 0.0689 0.907 Lenovo Only 0.0215* 0.875 Experience Only 0.3901 0.959 *Significant at .05

Based on these results, I conclude that the best model for predicting the change in attendance across

the two seasons and change in contract value is the model that includes only the Lenovo Statistic. Of the significant models, this model had the largest adjusted R2 of all the models. DISCUSSION Implications for Theory and Practice

“Not only is professional sports a business; it is an exemplar for business” (Keidal, 1984, p. 5). Many parallels between the sports and business worlds are evident (e.g. teamwork, group cohesiveness, developing young talent, competition, etc.) This paper has built on these connections to further theoretically connect the two areas. In most cases, sports metaphors are applied to business; however, this paper turns the perspective in the other direction by applying business theories (RBV, knowledge management, etc.) to sports. I feel this area is ripe for future research.

From a practical perspective, this paper offers guidance for managers in the business world and players and coaches in the sports world. From the business perspective, managers can apply this theory to recognize and identify the importance of tacit knowledge that is created by grouping certain people in the organization. Additionally, this establishes a clear link between strategy and personnel that managers could use when recruiting new talent from the labor market. Likewise, players could use this data to leverage larger contracts with the teams they currently play for or from other teams with similar strategic philosophies. Limitations and Future Research

Professional sports provide a laboratory of sorts for examining strategic management phenomena. This is partly due to the large amounts of data (statistics) available and various measures of individual (all-star teams, scoring titles, etc.) and firm performance (titles, win/loss record, etc.) inherent in sports. Where parallels between sports and business can be established, researchers will find a plethora of data sources and statistics for empirical testing.

The findings of this study demonstrate the use and importance of teamwork. The Lenovo Statistic was found to be the strongest predictor of a player’s market value. A major limitation of this study is the use of change in contract value for players that were under contract and transferred their contract to a new team. This caused problems with the data in that several players in the sample had 0 change in their contract. Future research should focus on players who had new contracts during the time period, regardless of the team for which they were a member. This would create issues with the change in attendance variables, but would add to the interest level of the study. This research could also be applied to other professional sports (e.g. baseball, football, hockey, etc.) and comparison studies could be


conducted to see if there any differences across sports. I would hypothesize that teamwork variables would be consistent across sports. Future research should also consider other player-specific variables that influence a player’s market value. A player’s height, for example, is generally understood to a contributing factor in the market value of a basketball player. The taller a player is; the higher the salary they are able to demand. Conclusion

Using the resource based view’s focus on strategic resources as rare and inimitable as my foundation, I examined professional athletes as strategic resources. This analysis examined the relationship between the perceived rarity and imitableness of players as they relate to membership on a certain team. I believe that the imitableness and rarity of resources (players) is firm (team) specific. Logically, this provides a basis for players as sources of competitive advantage. In this situation, transferability would be the degree that players could move from organization to organization and their competitive advantage generating value remains constant. The argument provided in this paper is an initial attempt to determine who actually owns tacit knowledge and whether or not individuals that are members of high performing organizations can leverage group-based tacit knowledge in the labor market. REFERENCES Barney, J. (1991). Firm Resources and sustained competitive advantage. Journal of Management, 17,(1),

99-120. Berman, S.L., Down, J., & Hill, C.W. (2002). Tacit knowledge as a source of competitive advantage in

the national basketball association. Academy of Management Journal, 45,(1), 13-31. Campbell, B.A., Saxton, B.M., & Banerjee, P.M., (2014). Resetting the shot clock: The effect of

comobility on human capital. Journal of Management, 40, (2), 531-556. Carpenter, M.A., Sanders, W.G., & Gregersen, H.B. (2001). Bundling human capital with organizational

context: The impact of international assignment experience on multinational firm performance and CEO pay. Academy of Management Journal, 493-512.

Cohen, W.M., & Levinthal, D.A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 128-152.

Crocker, A., & Eckardt, R. (2014). A multilevel investigation of individual- and unit-level human capital complementarities. Journal of Management, 40, (2), 509-530.

Finkelstein, S., & Hambrick, D.C. (1990). Top management team tenure and organizational outcomes: The moderating role of managerial discretion. Administrative Science Quarterly, 484-503.

Gerrard, B. (2005). A resource-utilization model of organizational efficiency in professional sports teams. Journal of Sport Management, 19, 143-169.

Grant, R., (1996). Toward a knowledge-based theory of the firm. Strategic Management Journal, 109-122.

Hambrick, D., & Mason, P. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 193-206.

Lechner, C., & Gudmundsson, S.V. (2012). Superior value creation in sports teams: Resources and managerial experience. M@na@ment, 15(3): 284-312.

Mahoney, J. T., & Pandian, J. R. (1992). The resource-based view within the conversation of strategic management. Strategic Management Journal, 13, 363-380.

Miller, D., & Shamsie, J. (1996). The resource-based view of the firm in two environments: The Hollywood film studios 1936 to 1965. Academy of Management Journal, 519-543.

Peteraf, M.A. (1993). The cornerstones of competitive advantage: A resource-based view. Strategic Management Journal, 179-192.

Smart, D., & Wolfe, R. (2000). Examining sustainable competitive advantage in intercollegiate athletics: A resource-based view. Journal of Sport Management, 14, 133-153.


Teece, D. J., Pisano, G., & Shuen A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18, (7), 509-533.

Vrooman, J. (1995). A general theory of professional sports leagues. Southern Economic Journal. 61, (4), 971-990.

Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5, 171-180. Wright, P.M., Coff, R., & Moliterno, T.P. (2014). Strategic human capital: Crossing the great divide.

Journal of Management, 40, (2), 353-370. Wright, P.M., Smart, D.L., & McMahan, G.C. (1995). Matches between human resources and strategy

among ncaa basketball teams. Academy of Management Journal, 38, (4), 1052-1074.


“Like” A Global Endorsement. How Clicking “Like” Influences Facebook Users Brand Recall and Future Purchasing Intentions

Ronda Mariani

Saint Leo University

Derek Mohammed Saint Leo University

Social media particularly Facebook acts as a global force with over 100 billion connections worldwide. Each day Facebook users flaunt their activities, pictures, and likes. Many of these “likes” represent endorsements where users broadcast their favorite brands. This form of marketing engagement can be effectively measured. The purpose of this study is to conduct a quantitative survey among Facebook users to explore and analyze the impact of friends clicking “like”. This study will test brand recall, particularly global brands, and the impact a friend’s endorsement, “like” has on future purchasing decisions of global brands. INTRODUCTION

Facebook currently remains the top social networking site on the web and is considered to be no longer in its infancy (Nielsen, 2012). Even more significant, approximately over two billion users participate on the internet in some type of online networking environment (Stats, 2013). With so many users worldwide, brand managers can only begin to contemplate what this exposure could mean for their brand and the benefits that could be achieved. As consumers increasingly obtain their news and connect with friends and family within social networking sites, brands are not only adopting these social networking sites as opportunities to communicate with consumers, but embracing this new found interactive cocktail party where anyone can listen and join the fun (Bushelow, 2012).

Since the advent of the internet, measuring the effectiveness of brand advertising was very difficult and many times would not yield the best results. Display advertising usually in the form of banner advertisements did not achieve the results needed to support many marketing decisions. A phenomenon called “advertising banner blindness,” the tendency in which consumers “ignore and avoid banners or display advertisements, is especially prominent among heavy internet users” (Cho, 2003). Marketing managers already understood the barriers which were present on the web yet needed to seek creative ways to challenge and revise these barriers within social networking environments. This technique employing social media and social influencers to achieve marketing and business goals were coined “social influence marketing” (Singh & Diamond, 2012).

Because Facebook is the largest social networking site to date (Shih, 2011), it has become critical “to examine the factors that influence how consumers process advertising messages which are endorsed (like) by friends within their Facebook network and if these like’s affected future purchase intentions” (Yang,


2011, p.51). To date, there are very few studies addressing the effects of consumer engagement behaviors and its influences on purchasing intentions, especially within Facebook (Gunnerus, Liljander, Wenman, & Pihlstrom, 2012). There is also a significant lack of understanding and support addressing how clicking “like” influences Facebook users brand recall and if it leads to future purchasing intent.

“Facebook introduced their infamous “like” button in April of 2010” (Kerpen, 2011, p. 22). With over 2.7 billion likes per day (Bullas, 2012), expressing the endorsements of photos, fan pages, status updates, articles, news feeds, products, services, and more, brand managers understood they had to develop a method to utilize and capitalize this powerful tool. Mangers realized that when a user clicks like, not only does the user display approval of their endorsement, but now anyone and everyone within their network also saw this approval, delivering a whole new meaning to word of mouth (WOM) marketing. WOM is known to be one of the most positive and effective tools in marketing producing satisfactory results for brands (Haque, Momen, Sultana, & Yasmin, 2013).

Current research lacked concrete evidence to whether a friend’s endorsement, clicking like below a brands advertisement impacted Facebook user’s future purchasing decisions pertaining to both global and local brands. There is also a lack of evidence supporting if clicking like influenced Facebook users brand recall and future purchasing intentions. Past research has demonstrated that “managing long term customer equity, brand awareness plays a very important role and awareness is an integral part of brand association in the memory of consumers” (Haque et al., 2013). Connecting with consumers within Facebook provides opportunities for mangers to build relationships between their brands and Facebook users (Yu, 2012). Even Kotler and Keller (2012) stated the importance of social factors which included family and friends and the influences these groups have on consumer purchasing decisions. Since much of Facebook is created and used for interactions between friends and families, one can assume these individuals will have influence on future purchasing intentions.

Goodrich (2011) presents a very important question which is the basis of this study. “Does a friends endorsement, like of a brand promote positive recognition of the brand to friends within his or hers social network” (Goodrich, 2011, p. 423)? If positive recognition of a brand is experienced through a friend clicking like, does this action then influence a Facebook user’s brand recall and future purchasing intentions?

Past research by Yang (2011) explored Facebook user involvement and how this involvement may affect purchasing intentions after having exposure to an advertisement message within a friend of family social network. Yang (2011) also suggested advertising messages presented by close friends affect consumer brand attitudes towards the brand. Hof (2011) suggested that individuals view a friend’s recommendation as more credible that marketers. Lastly, Goodrich (2011) suggests consumer awareness of a brand promotes attention which leads to increased brand recall. Ha (2004) found there is a significant correlation between brand trust and motivation; however this trust is created, trust influenced consumer motivation to purchase. Trust was a pivotal factor in influencing purchasing decisions online. Research documented and proved that the action of clicking like in return promoted attention but a gap was found in trying to find a link to whether attention created brand recall (Goodrich, 2011) which would lead to future purchase intent (Yang, 2011). If brand recall was a contributor, was this contribution to motivation founded on trust (Ha, 2004)

The following is a visual representation predicting a Facebook user’s reaction to a friend within their network clicking like. Figure 1 demonstrates if a friend clicks like for a brand within their network, attention (Goodrich, 2011) will be triggered by friends within the users Facebook network. Attention should create future recognition (Yang, 2011) of a brand because a friend’s recommendation is more credible (Hof, 2011) which also creates trust (Ha, 2004) leading to future purchase intent.


FIGURE 1 PREDICTS THE BEHAVIOR A FACEBOOK USER MAY HAVE WHEN A FRIEND

ENDORSES A BRAND BY CLICKING LIKE

METHODOLOGY Research Design and Sample Size

The purpose of this study was to explore and analyze brand recall and the impact a friend’s endorsement; like has on future purchasing intentions of a brand. The proposed research question asked; does a friend clicking like influence a Facebook user’s brand recall and future purchase intentions? Several hypotheses were developed to test the relationships between brand recall, future purchasing intent, trust and a Facebook user’s friend clicking like for a brand in which the user endorsed.

The research design for this study was based upon the development of a survey containing 23 questions testing Facebook user’s friend’s reactions to actions of their friend clicking like for a global brand. Facebook users were asked if they noticed when their friends clicked like for a global brand and the impact like had on their future purchasing intents. The study targeted a sample of Facebook users only and no personal information was required for the study. 136 Facebook users completed the survey. Of the 136 surveys completed 113 were considered valid for the study. Study Analysis

This study tested the relationship between brand recall and a friend’s endorsement; like has for future purchasing decisions of a global brand. The study also sought to understand a link between the development of trust (Ha, 2004) by a Facebook friends action of clicking like and this actions contribution to credibility (Hof, 2011) and its perceived impact regarding brand recall (Goodrich, 2011) and future purchasing intent (Yang, 2011). Statistical analysis was conducted using SPSS (Statistical Package for the Social Sciences) software. Pearson correlation was used to examine the correlations of the effects of noticing (Goodrich, 2011) brand advertisements through a friend’s endorsement of clicking like and the motivational (Hof, 2011) impact it had on future purchasing intent (Yang, 2011).


RESULTS Frequency of Use versus Noticing Brand Advertisements

A chi-square analysis was conducted to determine the effects of using Facebook and noticing brand advertisements. Table 1 demonstrates the frequency and percentage of participants who noticed advertisements based on their frequency of using Facebook.

TABLE 1 FREQUENCY AND PERCENTAGE OF PARTICIPANTS WHO

NOTICED ADVERTISEMENTS BASED ON THEIR FREQUENCY OF USING FACEBOOK

Frequency of using Facebook

Total 1x to 6x per

week Every Day

Do you notice brand advertisements on Facebook? Choose Yes or No.

Yes Count 22 71 93

% within Frequency of using Facebook

68.8% 87.7% 82.3%

No Count 10 10 20


31.3% 12.3% 17.7%

Total Count 32 81 113


100.0% 100.0% 100.0%

The results of the question, do you notice brand advertisements within Facebook, revealed the 22 users who participated in Facebook 1x to 6x per week, 68.8% said yes they notice advertisements within Facebook. The 71 users who participated in Facebook every day, 87.7% said yes they notice advertisements within Facebook (See Figure 2).


FIGURE 2 FREQUENCY OF USING FACEBOOK

A Chi-square analysis was conducted to determine the proportion of participants who noticed brand advertisements compared to frequency of use. Table 2 demonstrates the Chi-square test was significant, χ2 (1) = 5.628, p = .018. The proportion of participants who noticed brand advertisements was higher for those who checked Facebook every day (87.8%) than for those who checked Facebook 1x to 6x times per week (68.8%). Overall whether a 1x to 6x per week user or an everyday user both results demonstrated that Facebook users are aware and notice brand advertisements with their Facebook network.

TABLE 2 RESULTS COMPARING NOTICING BRAND ADVERTISEMENTS

WITH FREQUENCY OF USE

Value Df

Asymp. Sig. (2-sided)

Exact Sig. (2-sided)


Pearson Chi-Square 5.628a 1 .018

Continuity Correctionb 4.405 1 .036

Likelihood Ratio 5.199 1 .023

Fisher's Exact Test .027 .021

Linear-by-Linear Association

5.578 1 .018

N of Valid Cases 113

a. 0 cells (.0%) have expected count less than 5. The minimum expected count is 5.66. b. Computed only for a 2x2 table.

31.3%

12.3%

68.8%

87.7%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%

100.0%

1x to 6x per week Every Day

Frequency of Using Facebook

No

Yes


Global Brand Advertisements versus National Brand Advertisements The bar graph in Figure 3 shows the proportion of those Facebook users, whether an everyday user or

a 1x to 6x per week user, who noticed global brand advertisements compared to those Facebook users who notice national brand advertisements posted by their friends posted within their Facebook network. Results demonstrated 55% said yes they noticed brand advertisements within Facebook, but specifically 82% noticed global advertisements.

FIGURE 3 FREQUENCY COMPARISON OF USE TO NOTICING BRAND ADVERTISEMENTS

Once basic information was collected comparing the frequency of use to whether or not the participants noticed brand advertisements, the participants were presented with the following scenario during questioning:

You login to Facebook and begin to read posts by your friends. One of the posts by a friend is of an Italian Roast Espresso Coffee produced in Italy by the international brand “illy”. You notice the picture of the can of coffee and that your friend “likes” (endorses) the international brand “illy”. At a later date you enter a local coffee shop. You are presented with many choices BUT you know you want to try something NEW. While browsing the choices you notice the international brand “illy”. You have never tried this international brand of coffee before. Please answer the following questions based on this scenario.

Since this study is global in nature the scenario needed to reflect a global brand in order to understand

if global brands were being noticed when like was clicked by a friend endorsing the brand. We first wanted to understand if there was a difference between genders and what was being noticed. Gender Comparison

A Chi-square analysis was conducted to determine if both men and women noticed global advertisements that were liked by their friends and family within their Facebook network. Table 3


demonstrates the Chi-square test was significant, χ2 (1) = 5.187, p = .023. Both men and women noticed global advertisements within their Facebook network liked by their friends. The bar graph in Figure 4 demonstrates that both men (79.3%) and women (60.0%) agreed yes, a friend clicking like underneath the picture of the global brand ”illy” Italian roast coffee would influenced their future purchasing decisions.

TABLE 3 COMPARES GENDER TO NOTICING BRAND ADVERTISEMENT

LIKED BY THEIR FACEBOOK FRIENDS

Value df

Asymp. Sig. (2-sided)








5.143 1 .023


a. 0 cells (.0%) have expected count less than 5. The minimum expected count is 17.69. b. Computed only for a 2x2 table

FIGURE 4

MEN AND WOMEN FUTURE PURCHASE INTENTIONS ARE INFLUENCED BY A FRIEND CLICKING LIKE WITHIN FACEBOOK

20.7%

40.0%

79.3%

60.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%

Female Male

What is your gender?

No

Yes


15.0%

67.2%

85.0%

32.8%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%

Yes No

Would you trust this brand?

Trust and Willingness to Try a Brand A Chi-square analysis was conducted to understand the linkage between trust, assumed to be

developed by a friend clicking like for the global brand” illy” and future purchasing intent of this brand. Table 4 demonstrates the Chi-square test was significant, χ2 (1) = 33.354a, p = .000. Trust does develop when a friend likes a global brand and contributed to a significant role in future purchasing decisions. The bar graph in Figure 5 demonstrated further how clicking like develops trust and contributes to future purchasing intent.

TABLE 4 COMPARING TRUST TO FUTURE PURCHASE INTENT

Value df Asymp. Sig. (2-

sided) Exact Sig. (2-


sided)






33.072 1 .000


a. 0 cells (.0%) have expected count less than 5. The minimum expected count is 23.59 b. Computed only for a 2x2 table.

FIGURE 5 COMPARING THE IMPACT OF TRUST ON FUTURE PURCHASING INTENT


Individuals who answered yes to trust that was developed by a friend with their Facebook network clicking like under the picture of a global brand, 85% would most likely purchase the brand and 15% would not. Individuals who answered no to a friend’s clicking like under a global brand did not create trust for that brand, 33% would most likely purchase the brand and 67% would not, still indicating a close connection to trust and the action of a friend clicking like on a global brand. Future Purchase

Comparing would you be willing to try a brand which was liked by a friend to actually purchasing the liked brand; the results were close for Facebook users that stated yes. A Chi-square analysis was conducted to uncover if actual purchases were made because of a friend’s action of clicking like. Table 5 demonstrates the Chi-square test was significant, χ2 (1) =11.253a, p = .001. Table 5. Comparing like to an actual future purchase.

TABLE 5 COMPARING LIKE TO AN ACTUAL FUTURE PURCHASE

Value df Asymp. Sig. (2-



sided)





Linear-by-Linear Association 11.158 1 .001


a. 0 cells (.0%) have expected count less than 5. The minimum expected count is 8.54.

The bar chart in Figure 6 demonstrates individuals that answered yes to the question are you willing to try a brand based on a friend’s like, 54% of them actually purchased the brand and 46% did not. Individuals that answered no to the question are you willing to try a brand based on a friend’s like, 11% of them actually purchased the brand and 89 % did not. This was a positive result, which revealed if a friend noticed a friend in their network liked a global brand such as the example “illy” provided in this study, the action of liking the brand did motivate a future purchase.


FIGURE 6 COMPARING WILLINGNESS TO TRY THE BRAND AND ACTUALLY

PURCHASING THE BRAND

DISCUSSION

Although Facebook may no longer be in its infancy (Nielsen, 2012), understanding the interactions

between friends within this social networking environment is critical to marketing. Social influence marketing (Singh & Diamond, 2012) seeks to understand the relationships between brands and users within social environments on the internet. This study contributes to social influence marketing because it evaluates factors in these social relationships seeking to understand the impact a friend has within a friend’s Facebook network. The following findings resulted.

First from the survey, 87.7% of participants said they notice advertisements within Facebook. When Facebook first debut it was a challenge to understand and develop marketing strategies that would have impact and provide measured results. Cho (2003) conducted extensive research about banner blindness on the internet due to overexposure of advertisements. This study was conducted in order to move away from the traditional method of internet advertising; the banner and seek a new and alternative approach. Clicking like as a form of advertising revealed the possible impacts this action would have on the consumers’ decision making process. The popularity of Facebook and it’s convenient like button provides something that every brand eagerly awaits; the social endorsement.

Second, the proportion of participants who noticed brand advertisements was higher for those who checked Facebook every day (87.8%) than for those who checked Facebook 1x to 6x times per week (68.8%). It also demonstrated, that both everyday user ands ever so often users, were noticing brand advertisements within their Facebook network. This supports the potential for word of mouth (WOM) marketing and follows from the work of Haque et al. (2013) in the effectiveness of WOM as a positive force for marketing brands and its impact on consumer decision making and their purchasing decisions. Kotler and Keller (2012) understood clearly for many years one of the main influencers that impact


consumer choices and purchasing intent were friends and family. Since Facebook is comprised of just that, friends and family, the potential outreach and influence of a social network is highly relevant to brand recall and future purchasing intent.

Third, 82% of everyday users who participated noticed global advertisements versus 55% who said they noticed national brand advertisements within Facebook. This is supported by Burson-Marsteller’s (2012) finding that “the largest global companies were mentioned on Facebook a total of 10,400,132 times in one month. With the average Facebook user having at least 130 friends on their friends list, this type of reach is profound” (p. 1).

Fourth, both men (79.3%) and women (60.0%) are influenced in their future purchasing decisions by a friend clicking like for a global brand of coffee. This study’s results indicate clicking like is not gender specific. Both men and women are affected by a friend clicking like within their Facebook network and this click would influence their future purchasing intent.

Fifth, trust is fostered when a friend likes a global brand resulting in future purchasing intent. Individuals who trusted a friend in their Facebook network would most likely (85%) purchase the global brand. We also found and established there is a significant connection between a friend clicking like and the willingness to try the brand in the future.

Future research needs to be conducted to understand and reveal the creation of trust (Ha, 2004) is systematic to a friend clicking like for a brand. This study does indicate trust plays a role but what does it contribute and how? This study demonstrated that for those Facebook users who agreed that trust (Ha, 2004) was established, it became a motivating factor which led to consumer awareness promoting attention (Goodrich, 2011) of the brand. Facebook users who perceived trust (Ha, 2004) from a friend liking a global brand would consider (Hof, 2011) and did purchase (Yang, 2011) the global brand in the future. This opens a gap for further research to justify if like is the connection between brands and users (Yu, 2012). The research in this study indicates clear connections are being made between the importance of trust (Ha, 2004) created from clicking like and motivation. It has also been demonstrated that the development of this trust (Ha, 2004) leads to the willingness to try a global brand and actually purchase the global brand.

A consensus can be made that clicking like does contribute to brand recall and future purchasing intent (Goodrich, 2011). Understanding the motivation and contribution that clicking like by friends within an individual’s network has on that individual is critical to global brands.

Returning to the original model formed at the beginning of this study, we have added one more variable that would need further research and discussion; motivation. What is motivation’s contribution to brand recall and future purchasing intent? It has been established that clicking like does promote attention to a global brand and this recognition and memory of the global brand creates recall (Goodrich, 2011). Therefore it creates a connection with the friend who clicked like (Yu, 2012). This connection with the friend creates trust leading to motivation of future purchasing intent, see Figure 7.


FIGURE 7 THE ADDITION OF MOTIVATION IN PREDICTING THE BEHAVIOR A FACEBOOK USER

MAY HAVE WHEN A FRIEND ENDORSE A BRAND BY CLICKING LIKE

CONCLUSION

This study provides insight to how powerful a friend’s endorsement “Like” is within Facebook and its

connection to consumer attention. The study demonstrates the importance between trust, brand recall and purchasing decisions. In particular, the study found that most everyday users noticed advertisements within Facebook. Out of these the majority noticed global versus national brand advertisements. Both men and women were influenced in their future purchasing decisions by their friend’s likes. This appears to come from the trust engendered by the relationship with friends in their Facebook network that influenced them to most likely purchase a global brand.

However, further research is needed to make a true connection between trust and a Facebook users’ brand endorsement (like) and the role of consumer motivation when making purchasing decisions. Ultimately the use of this global force for word of mouth marketing has and continues to be a viable and effective means of marketing global brands. REFERENCES Bullas, J. (2012). Staggering Facts, Figures and Statistics about Facebook. Retrieved from

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Assessing the Innovation Competence of a Third-Party Logistics Service Provider: A Survey Approach

Shong-Iee Ivan Su

Soochow University, Taiwan

Jian-yu Fisher Ke University of Wisconsin-Eau Claire

Lianguang Cui

Nankai University, China

Due to its nature as a complex service process with the intensive capital requirements, many firms outsource the logistics function to third-party logistics service providers (3PLs). How a 3PL firm innovates as an organization is still a white space in logistics research literature. This paper proposes a 3PL innovation competence model and designs a 23-item diagnostic instrument to assess the innovation competence of a 3PL firm. The model and the instrument allow managers and researchers to assess the degree of importance and the current status of six core innovation capabilities of a 3PL firm for further innovation efforts. The assessment results of two U.S. 3PL firms are analyzed and discussed. The findings from this study have provided insightful information on the nature of the innovation competence of 3PL firms. INTRODUCTION

A competence (or competency) is a persistent pattern of behavior resulting from a cluster of

knowledge, skills, abilities, and motivations. A core competence is the result of a specific set of skills or production techniques that deliver value to the customer (Prahalad & Hamel, 1990; Kandampully, 2002). Such competences enable an organization to access a wide variety of markets. Bettis & Prahalad (1995) claim that core competences contribute to the formulation of an organization's dominant logic and help to define the route a firm chooses and its future positions in the market.

Innovation is the key to the advancement of society, the economy, and the growth of enterprises (UK DTI, 2003; Gaynor, et al., 2009; Linden, Dedrick, & Kraemer, 2011). The 3PL industry has evolved during the past three decades into a sophisticated service industry with many innovative players, such as DHL, UPS, FedEx, and C.H. Robinson, who are constantly seeking new ways to serve customers better by creating new value in their supply chains (Burnson, 2011; Langley & Capgemini, 2010; Su, Hertz, & Cui, 2011). For third-party logistics providers (3PLs) seeking high value service opportunities in the increasingly competitive 3PL outsourcing markets, developing innovation competence has become a very important, however, challenging strategic goal (Halldorsson & Skjott-Larsen, 2004).


UPS, a highly recognized global 3PL, has been very successful in developing its logistics innovation competence by formulating a formal organizational mechanism for innovation and creating high-impact and value-added new services (Mullen, 2004). We believe it is the key reason for its continuing record-breaking profit achievement (economicsnewspaper.com, 2011; Berman, 2013). It is clear that innovation has evolved as a core competency of many 3PL firms.

The purpose of this paper is to introduce an innovation competence model for 3PL firms and develop a diagnostic instrument for them to assess their innovation competence levels. The innovation competence model prescribes the ideal organizational patterns and formalizes the organizational behaviors needed for exceptional 3PL innovation performance. The diagnostic instrument helps a 3PL firm to assess its key capability gaps and develop strategies to enhance its innovation competence.

LITERATURE REVIEW

Logistics is an essential business function. This function has increased its importance in the past two

decades due to factors such as customer requirements, pressure to reduce costs while still maintaining service levels, and globalization. The focus of logistics management has also changed from the operational to the strategic arena and also from the internal integration to the external collaboration emphasis (Mentzer, et al., 2008). A firm’s logistics distinctive capability has been considered a valuable strategic resource that provides sustainable competitive advantage and eventually superior performance. Firms’ implementation of process innovation is increasingly relying on logistics-oriented solutions (Olavarrieta & Ellinger, 1997).

The 3PL service industry is developing as a result of the emerging demand on logistics services. Specialization and outsourcing, logistics as a strategic component, globalization, lead time reductions, and customer orientation are some of the major changes contributing to this interest in logistics. Integration of the supply chain has become an important way for industrial firms to gain competitive advantage (Bowersox, Daugherty, Dröge, Rogers, & Wardlaw, 1989; CLM, 1995; Mentzer, Stank, & Esper, 2008). Furthermore, due to its nature as a complex service process with the intensive capital requirements, many firms outsource the logistics function to 3PLs that possess the expertise in the supply chain logistics integration and execution.

The U.S. 3PL industry has experienced explosive growth in the last two decades (Knemeyer & Murphy, 2005), and the trend is expected to continue (Lieb, 2008). However, extensive outsourcing of logistical needs is not limited to the U.S. market. The rationale for choosing to outsource is somewhat universal. As Lau and Zhang (2006) noted, economic, strategic, and environmental factors are the main drivers that motivate organizations to outsource in both developed and developing countries. Managers also realize they can develop logistics competencies through third-party relationships, rather than by trying to develop the necessary expertise internally (Halldorsson & Skjott-Larsen, 2004). Armstrong & Associates (2013) has been calculating the global 3PL market for more than 10 years. In 2011, the global 3PL industry was estimated to create $616 billion in revenues. Asia was the largest ($191.1 billion), Europe came next ($160.4 billion), North America was third ($159.9 billion), and all other countries ($104.7 billion) took up the rest.

Wagner & Franklin (2008) claimed that logistics innovation has a unique nature since it often arises not because of a formal plan or process but as an ad hoc response to a customer request. However, there is not a common and consistent understanding of the meaning of logistics innovation across the organization (Oke, 2008). According to Oke (2008), logistics innovation should include service product innovations and technological developments. In contrast, Wagner & Busse (2008) define innovation as "a subjective novelty which is the result of a conscious management process and which aims at economic exploitation” (p.2). They concluded that logistics innovation should be manageable and serves exploitation purpose (Wagner & Busse, 2008).

Flint, Larsson, Gammelgaard, and Mentzer (2005) treat logistics innovation as ‘‘any logistics related service from the basic to the complex that is seen as new and helpful to a particular focal audience’’ (p.114). How do firms and organizations organize processes for logistics innovation? Flint et al. (2005)


argue that the focus for successful firms is not on the innovations themselves, but on the processes they use to be innovative. They focused their study on the social aspects of logistics innovation highlighting interactions and reflexivity among the innovating actors (i.e., executives, managers, and frontline personnel in a logistics innovation project).

Several international, multiple case, comparison studies on the innovation of 3PLs in Northern Europe and Greater China (mainland China, Hong Kong, Macau, and Taiwan) have revealed new insights into the innovation of 3PLs. In their earlier work, Cui, Hertz, and Su (2008; 2009), found that 3PLs possess strong intention to innovate to deliver high value to their customers in many business dimensions and thus create their own value. Cui, Hertz, and Su (2010a) also utilized the case data collected from the 3PL innovation study to examine a case firm from the perspective of a strategic management process. They recognized that 3PL innovation can be a critical strategic management process, including communicating, identifying needs, generating ideas, analyzing, developing, transferring, and creating atmosphere. In their later studies (Cui, Hertz, & Su, 2010b; Cui, Su, & Hertz, 2012; Su, Cui, & Hertz, 2012), they looked at factors that drive or deter 3PLs from innovation and the performance of 3PL innovations. The findings showed that successful 3PL innovations could bring substantial tangible and intangible advantages to supply chain partners.

METHODOLOGY Development of 3PL Innovation Competence Model

Following on the work of Su et al. (2012), a 3PL innovation competence model is developed. Figure 1 shows a 3PL innovation competence model composed of six key innovation capabilities (or constructs in the original paper, Su, et al., 2012). Their relationships are represented by the linked arrows and corresponding propositions.

FIGURE 1 3PL INNOVATION COMPETENCE MODEL

Table 1 lists the definitions and codes for the six innovation capabilities shown in Figure 1. The

strong motivation to create substantial new value for its supply chain has led a 3PL to develop deep relationships with external supply chain partners, particularly its key clients. Deep external relationships with key clients or potential clients create more opportunities for a 3PL to investigate the logistics demands that are needed but are not yet satisfied; in other words, the logistics jobs-to-be-done of its clients. With the knowledge of the clients’ jobs-to-be-done, a 3PL can design the most appropriate service offerings and related supporting business dimensions to satisfy clients’ unmet needs. Furthermore, organizational transition in the 3PL will need to be in place to cope with all the changes required for the new service offerings. Finally, a 3PL must collaborate closely and intensely with its clients and supply chain partners to deliver superior supply chain performance; that is, they must create substantial new value for the 3PL, its clients, and its supply chain partners.

Superior

supply chain performance

P 1

P 2 P 3.2 P 4

P 5

P 3.1

Strong new value creation

motivation

Deep external

relationships

Client’s Jobs-to-be-

done

Organizational transition in supply chain

Multi-faceted dimensional

service offerings

P 6


TABLE 1 DEFINITIONS OF SIX KEY INNOVATION CAPABILITIES OF A 3PL

Capability Definition Code

New value creation

New values of business of a 3PL firm are created by service innovation in the supply chain. They are mainly driven by those controllable factors to look for substantial new value creation opportunities in their supply chains.

NVC

External relationships

In order to find the new value creation opportunities, an innovative 3PL firm tries hard to develop deep relationships with their supply chain partners, especially focusing on the core clients.

ER

Jobs-to-be-done

An innovative 3PL interacts with their key clients proactively and develop intelligence capability to monitor key industry trends to identify important but unsatisfied clients’ problems, or “jobs” with the goal to design new service offerings to help clients more effectively, reliably, conveniently, and affordably solve these important problems at a given price.

JOB

Organizational transition

An innovative 3PL owns reliable, flexible and economic service capability to effectively interact with its clients and supply chain partners to support its transition from the current organizational format to that needed by the innovative solution provisions for clients.

OT

Multi-faceted dimensional service offerings

An innovative 3PL designs, tests, launches and improves the innovative service offerings supported by multi-facet business dimensions for its clients in need and collaborate effectively with its clients. Other supply chain partners may often join to bring in their capabilities that are required to deliver the innovative service offerings.

MSO

Supply chain performance

The tangible benefits and the intangible effects in supply chain are created from the superior supply chain performance when 3PL innovative service offerings supported by multi-faceted business dimensions are successfully implemented. Tangible benefits are related to the operational and financial performances and can be measured quantitatively. Intangible effects are related to competence and relational performances and are normally measured qualitatively.

SCP

To be more specific, the proposed relationships between the six capabilities in the 3PL innovation competence model are described in Table 2.


TABLE 2 PROPOSED RELATIONSHIPS BETWEEN THE SIX CAPABILITIES IN THE 3PL

INNOVATION COMPETENCE MODEL

P1: A strong drive to create substantial new value positively affects 3PL firms, leading them to develop deep relationships with current or potential clients, which in turn may lead to opportunities to create substantial supply chain value.

P2: A deep relationship with current or potential clients positively affects 3PL firms’ ability to identify opportunities in the logistics of jobs-to-be-done within clients’ supply chains.

P3.1: Jobs-to-be-done logistics opportunities positively affect 3PL firms’ collaboration with clients and/or other supply chain partners, encouraging them to pursue innovative multi-faceted logistics services to realize jobs-to-be-done opportunities.

P3.2: Jobs-to-be-done logistics opportunities positively affect 3PL firms’ efforts to transition their organizations from the current state to the new state meeting the new requirements for pursuing innovative logistics services.

P4: The speed and effectiveness of organizational transition positively affects the development and implementation of innovative multi-faceted logistics services.

P5: The innovative logistics service offerings, supported by the multi-faceted business dimensions, positively affect the performance of the supply chain.

P6: Superior supply chain performance provides supply chain partners with stronger incentive and better knowledge to undertake the next innovation cycle for new value creation.

A supply chain innovation award-winning case (Clabby, 2010) is used to illustrate how a 3PL

innovation competence model operates. In the following case illustration, key innovation capabilities are expressed by the innovation activities. The rapid growth of the SUBWAY® franchise has made it even more challenging to ensure available supply while keeping the supply chain lean and product costs competitive in the food service industry. Independent Purchasing Cooperative (IPC) is the SUBWAY® franchisee-owned and operated nonprofit organization that negotiates the lowest cost for purchased goods and services. It does this while at the same time improving quality, enhancing competitiveness, and ensuring the best value to SUBWAY® franchisees and their customers. IPC is the 3PL in this case. Table 3 shows IPC’s innovation activities and the identified relationships between these activities. These innovation activities were implemented between 2002 and 2004, in about 3 years. With the success of its supply chain innovation, this knowledge and experience has been utilized continuously for other major supply chain reconfigurations in the SUBWAY supply chains (Clabby, 2010).

Diagnostic Instrument In Su et al.’s research (2012), 23 items were developed to measure the six key innovation capabilities

in Figure 1. The validity and reliability of these items were verified through multiple 3PL innovation case studies and an extensive 3PL industry and innovation literature review (Cui, et al., 2009; 2010a; 2010b; 2012; Su, et al., 2011). These items were further examined and modified through the feedback from several 3PL executives and logistics researchers (Su, et al., 2011; 2012).


TABLE 3 IPC AS A CASE ILLUSTRATION OF 3PL INNOVATION COMPETENCE MODEL

Innovation activities Relationship proposition

In an effort to better streamline and improve redistribution of slow-moving dry products, IPC worked with C.H. Robinson and other supply chain partners to consolidate multi-SKU shipments via truckload rather than less than truckload (LTL) shipments.

P1

C.H. Robinson’s network analysis identified a facility owned by Southwest Sanitation (SWS) in Dallas, one of IPC’s existing vendors. Leveraging C.H. Robinson’s technology, business processes, and transportation expertise, IPC gained intelligence on the wider supply chain and identified more opportunities to optimize loads and save.

P2, P3.1, P3.2

Dry co-resident manufacturing and distribution facilities greatly minimized transportation miles and LTL shipments. IPC has built close, highly collaborative relationships with its vendors to ensure continuous improvement at all levels of the supply chain. IPC also created opportunities for vendors to contribute to and benefit from the supply chain. By utilizing technology, implementing best practices, inefficiencies and costs were reduced in the whole supply chain. Although IPC hadn’t formally named their efforts “sustainability,” their improvements were significantly reducing truck miles and greenhouse gases (GHGs).

P4, P5

Subsequently, driven by the success of the SWS redistribution center (RDC), IPC applied the concept of redistribution to faster-moving, refrigerated proteins and also gained outstanding performance results.

P6

Source: summarized from Clabby (2010)

FIGURE 2 3PL INNOVATION CAPABILITY DIAGNOSTIC ITEMS

P 1

P 2 P 3 2 P 4

P 5 P 3.1

NVC1

Strong new value creation

motivation

NVC2

NVC3

Deep external relationships

ER1 ER2 ER3 ER4

Client’s Jobs-

to-be-done

JOB1 JOB2

JOB3

Organizational transition in supply chain

OT1 OT2 OT3

OT4

Multi-faceted dimensional

service offerings

MSO1 MSO2

MSO3 MSO4 MSO5

Superior supply chain

performance

SCP2

SCP3

SCP4 SCP1

P 6


In this paper, we use the 23 items developed in the aforementioned research as diagnostic items for the six innovation capabilities of the 3PL innovation competence model. Items associated with each capability are illustrated in Figure 2 and further described in detail in Table 4.

TABLE 4 DEFINITIONS OF 3PL INNOVATION DIAGNOSTIC ITEMS

Code Item Definition

NVC1 The desire to grow and enhance competitiveness drives a 3PL to look for the new value creation opportunities in its supply chains.

NVC2

The needs to integrate the supply chains and satisfy the requirements of the current and potential customers motivate a 3PL to develop the new service offerings that may create substantial value to the 3PL, its customers and other supply chain partners in stake.

NVC3 The new value creation opportunities are often related to major regulatory changes, emergence of new technologies, market disruptions, and environmental pressures in a 3PL’s industry.

ER1 The customer contact personnel play a critical role between a 3PL and its clients because they are at the frontline where the inter-firm interactions occur.

ER2 Good personal relationships from the top to the frontline employees between a 3PL and its clients can facilitate and promote the sharing of proprietary information, as well as joint exploration of market opportunities and joint development of new ideas.

ER3 Favorable interactions between a 3PL’s knowledgeable and experienced employees and its key clients influence the willingness of clients to collaborate in new value creation initiatives.

ER4 The positive attitudes and effective communication skills of a 3PL’s employees can increase the confidence and trust of the clients with the 3PL.

JOB1 A 3PL has a good and formal mechanism to collect information regarding to the unmet needs or unsolved problems of key clients or in the industry.

JOB2

A 3PL has a dedicated team to make good use of the collected information regarding to the unmet needs or unsolved problems of key clients or in the industry to come up with Customer Value Propositions (CVPs), that is, service offerings that can effectively help clients to solve their unmet needs or unsolved problems at a reasonable price.

JOB3 CVPs are the important premises that guide a 3PL’s new value creation efforts.

OT1 A 3PL and its employee are not complacent to what they are providing to the markets now and always ready to make the changes needed to serve customers better.

OT2 The social and political dynamics of logistics innovation is an important issue as a 3PL addresses the energy and commitment that are needed among coalitions of cross-functional groups and supply chain partners to develop the innovation for clients.

OT3

Individuals involved in individual transactions in a 3PL do not lose sight of the whole innovation effort. Rather these individuals see things from a total picture and often become strong advocates to the changes needed. Multiple functions, resources, and disciplines are often needed to transform an innovative opportunity into a concrete reality.

OT4 In a 3PL, innovations not only adapt to existing organizational and industrial arrangements, but they also transform the structure and practices of these environments. The 3PL is able to create an infrastructure that is conducive to innovation.


MSO1

A 3PL designs and tests the innovative service offerings to meet the unmet needs of its clients based on Customer Value Propositions defined by the 3PL. Once tested and passed (or revised), the 3PL will launch the service offerings and improve them overtime.

MSO2 Delivering innovative service offerings often incorporates multiple business dimensions such as customer involvement, channel set-up, enabling technology, supply chain partners, infrastructure adjustment, and organizational redesign.

MSO3 Investing in new systems that will enhance supply chain integration and communication is imperative in a 3PL’s innovation process.

MSO4 A 3PL involves the critical decision-makers such as clients and supply chain partners to the logistics innovation process as early as possible to develop a high level of trust required for effective collaboration.

MSO5 A 3PL strives hard to establish commitment and create understanding among members of the supply chain regarding logistics innovation to increase the willingness and ability to collaborate effectively among these members.

SCP1

Successful implementation of innovative service offerings can create very positive operational and financial performances to a 3PL. A 3PL’s clients and its supply chain partners would also achieve high operational and financial performances. (Tangible benefits)

SCP2 Successful implementation of innovative service offerings can enhance a 3PL’s logistics innovation competence and develop better relationships with its clients and supply chain partners. (Intangible effects)

SCP3 A 3PL has a good way to measure the tangible benefits and intangible effects created by logistics innovation.

SCP4 A 3PL has a good way to leverage the tangible benefits and intangible effects created by logistics innovation to build stronger supply chain advantages.

An executive interview tool with 23 questions is developed from the item definitions in Table 4 and used to assess quantitatively the innovation capabilities of a 3PL. Since 3PL service innovation must be led and driven by senior managers or executives in a 3PL, the interview tool is designed and targeted for the senior managers or executives to gain high quality information regarding the innovation of a 3PL. The interview questions are designed by using a seven-point Likert measurement scale following procedures of Churchill (1979) and Dunn, Seaker, and Waller (1994). Each question contains two types of query. The first type is to ask the interviewed executive to indicate the importance of the diagnostic item stated in the question to his/her company by giving an integer score between one and seven, that is, the higher the score, the greater the importance. The second type asks for his/her assessment of the company’s current status regarding the diagnostic item asked in the question, again, by using the same measurement scale.

In Table 5, the third diagnostic item for the supply chain performance capability (SCP3) is used as an illustration of a question and its responses. It shows that the importance score for SCP3 is seven, which is greater than the current status score. In other words, the executive for the assessment deems SCP3 to be very important to the company. However, the current status is subpar at only five. Therefore, SCP3 can be an object for further enhancement on this innovation capability.


TABLE 5 INTERVIEW QUESTIONS FOR THE DIAGNOSTIC ITEM: SCP3 IN TABLE 4

SCP3: Your company has a good way of measuring the tangible benefits and intangible effects created by logistics innovation.

1 2 3 4 5 6 7 Not very Important / Strongly Disagree ← Neutral → Very Important / Strongly Agree

Importance 7 Current status 5

RESULTS

Using the executive interview tool developed in the previous section, this study assesses the

innovation competence of two U.S. 3PLs, i.e. C.H. Robinson Worldwide, Inc. (CHRW) and Aeronet. From our survey data, these two firms were delivering very high revenue and profit growth during 2001-2010 period and they have been aggressively developing their services into multiple functions and expanding service coverage to other regions. They have shown the characteristics of an advanced 3PL active in the business innovation.

A senior executive from each firm who possesses the experience and knowledge of the logistics innovation specific to that firm was chosen to fill out the questionnaire. The questionnaire was explained interactively to the interviewee in each case to guarantee a full understanding of all questions and the validity of the survey result. Because the main purpose of this questionnaire instrument is to assess an individual firm’s innovation competence, the profile and the interview results of each company is presented and discussed separately. The details of the interview results are in the appendix. C.H. Robinson Worldwide

CHRW, founded by Charles Henry Robinson at Grand Forks, North Dakota in 1905 and based at Eden Prairie, Minnesota, is one of the largest 3PLs in the world with a 2010 gross margin of $9.3 billion. As an industry-leading 3PL, CHRW provides not only freight transportation services but also a comprehensive portfolio of transportation, logistics, sourcing, and information services to more than 36,000 customers. The top 200 customers account for approximately 37 percent of total net revenues, and the largest customer was less than three percent of total net revenues. Since it became a publicly-traded company in 1997, CHRW has exceeded its long-term compounded annual growth target at 15 percent for net revenues, income from operations, and earnings per share.

CHRW owns a worldwide network of over 230 offices in North America, South America, Europe, Asia, Australia, and Middle East and access to over 49,000 transportation providers in the world. Its network of motor carrier capacity is considered the largest in North America. North American branches have a common technology platform that they use to match customer needs with supplier capabilities, to collaborate with other branch locations, and to utilize centralized support resources to complete all facets of the transaction. CHRW encourages its approximately 7,600 employees to be more service-oriented and creative through a performance-oriented compensation plan. A customer resource team is formed with many experienced professionals developed in house or hired from outside to focus on the special needs of customers.

A director of supply chain solutions with over 22 years experience was asked to fill out the questionnaire in May of 2011. The result of the innovation competence assessment for CHRW is presented in Table 6. Each capability is measured by the scores of its importance and current status calculated respectively by the average scores of all diagnostic items regarding this capability. The total


scores for importance and current status are first summed up respectively and then an innovation competence ratio (IC ratio) is calculated by dividing the current status sum over the importance sum. This ratio is a percentage between 14% and 100%; the higher the percentage, the more innovative the 3PL under assessment is.

TABLE 6 RESULTS OF INNOVATION COMPETENCE ASSESSMENT – CHRW

Capability Current Status Importance (Firm Goal) Gap

NVC 4.67 5.00 -0.33 ER 6.00 6.75 -0.75 JOB 5.67 6.33 -0.67 OT 5.00 6.00 -1.00 MSO 5.60 6.20 -0.60 SCP 5.00 7.00 -2.00 Competence (capability average) 5.35 6.26 -0.91 Total scores 123 144 -21 IC Ratio 85%(123/144)

Note: IC Ratio=Total scores of 23 questions on current status÷Total scores of 23 questions on importance

As a whole, CHRW got an IC ratio of 0.85, which implies that CHRW is 15% behind its ideal innovation competence level. The score level actually reveals CHRW’s management philosophy. The new value creation (NVC) current status score is the lowest at 4.67, resulting primarily from the low score of NVC3 (the ability to notice the major regulatory changes, emergence of new technologies, market disruptions, and environment pressures) at only two out of seven. It shows that CHRW may pay less attention to changes in the external environment. Instead, CHRW focuses more on customers’ current needs and establishes a tight relationship with its supply chain members. Based on CHRW’s profile presented above, CHRW is a company with very strong supply chain and customer orientation. It strives to serve customers better with a highly collaborative carrier network and dedicated employees. Thus, it gives ER (external relationships with its supply chain partners) the second highest importance, next to SCP (supply chain performance), the highest importance score among all capabilities. In addition, the strong external relationships help CHRW identify customers’ potential needs and develop appropriate service offerings. CHRW has a relatively high achievement in its goals of JOB (client’s job-to-be-done) and MSO (multi-faced dimensional service offerings). This result implies that CHRW has sensed the needs for quick response to the dynamics of customers’ demand. Looking at Gap statistics, SCP and OT (organizational transition) have lagged behind other capabilities. It probably reveals the common challenge of a large corporation: setting high performance goals but having difficulty positioning the organization for change. Finally, it shows that CHRW considers superior supply chain performance the most important capability and the current situation is approximately 30 percent behind the goal.

An innovation competence diagnostic radar diagram is also developed to assist a 3PL innovation team to better capture and discuss the key gaps among its six core capabilities. In Figure 3, C.H. Robinson’s radar diagram is shown. It is clear that the importance scores of six capabilities are all higher than their respective current status scores. SCP (supply chain performance capability), a very important capability to C.H. Robinson, presents the largest gap and also the biggest opportunity for this 3PL. The second point to note from the radar diagram is NVC (new value creation capability) showing relative lower score than the


rest. It asserts our previous discussion that C.H. Robinson sticks with customers and does not concern too much on the external environment to drive its value creation efforts.

FIGURE 3 RADAR CHART FOR THE INNOVATION COMPETENCE MODEL OF CHRW

Aeronet

Aeronet, an Irvine, CA based company founded in 1982, offers integrated logistics solutions including a full range of domestic and international time-definite shipping, import/export management, total supply chain management, warehousing and distribution. It owns over 600 offices and partners located throughout the U.S. and in 75 countries worldwide. It features urgent logistics solutions and has developed a sophisticated system, using a combination of planning and warehousing, to manage emergency and urgent deliveries throughout the world. Aeronet currently has 150 employees and generated the revenue of $70 million in 2010 fiscal year. Its revenue comes from Asia (60%), North America (20%), Europe (15%), and the rest of the world (5%) (Aeronet, 2013).

A senior VP of Aeronet with experience over 20 years was interviewed in June, 2011. The results of the innovation competence assessment are presented in Table 7. As a whole, Aeronet evaluates itself as 21% behind the goal of innovation competence based on the IC ratio. Aeronet considers that all innovation competence is of high importance at six or above out of seven, and ER (external relationships), MSO (multi-faceted dimensional service offerings), and OT (organizational transition) are the top three important capabilities. The result shows that Aeronet emphasizes its capability to promptly respond to customers’ needs. That is likely so because Aeronet focuses on urgent logistics, which rely heavily on a highly integrated network and agile logistics capability. Except for ER, the gaps between current status and the goal of innovation capabilities are quite large and require further improvement. To shorten the gaps in OT and MSO, Aeronet needs to enhance its capabilities to support customers’ needs and offer appropriate service to the customers who need urgent logistics. Aeronet requires collaboration among supply chain partners and team members. In addition, Aeronet should get its customers involved in the process of new service development and collaborate with its customers to deliver innovative service offerings.

Since Aeronet is a relatively small firm, it seems to cultivate a very close relationship with its clients. However, due to its small nature, it is probable that Aeronet does not have enough resources and talents to keep up with the goals of most of the innovation capabilities. It may be the reason the company has


sought alliances in Asia and Europe to extend its service network and increase its global coverage for North American customers.

TABLE 7 RESULTS OF INNOVATION COMPETENCE ASSESSMENT – AERONET

Capability Current Status Importance (Firm Goal) Gap

NVC 5.00 6.33 -1.33 ER 6.50 7.00 -0.50 JOB 4.67 6.00 -1.33 OT 4.75 6.75 -2.00 MSO 4.80 6.80 -2.00 SCP 5.50 6.50 -1.00 Competence (capability average) 5.22 6.61 -1.39 Total scores 120 152 -32 IC Ratio 79%

The innovation competence diagnostic radar diagram for Aeronet is shown in Figure 4. Again, the importance scores of six capabilities are all higher than their respective current status scores. The capability gaps are larger in this case. MSO (multi-faceted dimensional service offerings) and OT (organizational transition) were assessed to have the wider gaps that seem to require immediate management attention.

FIGURE 4 RADAR CHART FOR THE INNOVATION COMPETENCE MODEL – AERONET


DISCUSSION Logistics in business is growing complex and far reaching. However, logistics has also become more

important and strategic to industrial and trading firms. 3PLs meeting the logistics needs of these firms in the 21st century are service intensive and require the ability to adapt quickly to constant changes from their customers or the environments in which they are situated. Innovation is now a core competence that 3PLs are seeking to ensure their roles as logistics experts for their clients, creating new value and fending off risks and uncertainties in an ever changing world.

Developing innovation competence is difficult but not impossible. Based on the research outputs of several recent major 3PL innovation studies (Cui, et al., 2008, 2009, 2010b; Su, et al., 2011, 2012), this paper is able to design an innovation competence assessment tool for 3PLs to aid them to assess their competence status and discover the capability gaps deviating from the firms’ goals. This information allows 3PLs to identify key innovation capability(ies) requiring most efforts to improve.

Summarizing from the assessment results of two 3PLs discussed in the section of results, the first observation is that results of the two cases are all unique. Since each 3PL and the executives who filled out the questionnaire are different in many aspects, the results should not be compared and must be considered on a case-by-case basis. Rather, the assessment result of each case reflects the sole condition of that 3PL and ought to be used only by the 3PL to develop its own innovation competence enhancement strategy.

The second observation is that the importance scores are higher than the current status scores in all two cases. Since the interview and survey were conducted by an author with an executive interviewee in each case, this gap reflects the results from an objective assessment tool and a subjective assessment by the executive with the aid of a neutral third party researcher. Without other proper means, this approach is a reasonable way to help a 3PL, with the assistance of its senior executive(s), to systematically identify opportunities to improve its innovation competence.

The third observation finds that the gaps of six innovation capabilities vary in a range for all two cases. Identification of this variance means the assessment tool helps a 3PL to distinguish the innovation capability(ies) most needed for improvement from those less needed. The innovation competence assessment radar can effectively identify the key gaps among the six core innovation capabilities. In a world of limited resources for many businesses, it is quite valuable to prioritize options of strategic importance such as the innovation competence development program in a 3PL for its resource allocation.

Since the 3PL innovation competence assessment tool developed in this paper is derived from academic research, the innovation capabilities, its relationship propositions, and the diagnostic items in questionnaire format are not easy to comprehend fully by the interviewee by simply reading through the questionnaire. Therefore, a limitation of using this tool is that a researcher or consultant familiar with the tool is needed to conduct the interview through a face-to-face discussion or a personal phone call. After the interview and collection of the questionnaire, the basic statistical analysis must first be done and then the results be interpreted together with the executive(s) of the 3PL to identify innovation competence enhancement opportunities. Furthermore, due to the limit of the time and resource, this study only assessed the innovation competence of two U.S. 3PLs. Even though the results indicate the diagnostic instrument is useful as an innovation competence assessment tool, it will create more insights and understanding on the use of the tool by surveying more 3PLs with high financial performance in the future studies.

The purpose of this study is more practically oriented: to design an innovation competence assessment tool that is relatively easy to be applied by practitioners and researchers. Many research issues remain regarding the 3PL innovation competence model developed in this paper. First, each innovation capability by itself can be a profound research area worthy of further research efforts. Researchers should aim to provide more insights to both the practice and the theory regarding future 3PL innovation studies. Second, the proposed relationships between capabilities in Figure 1 are derived from qualitative case studies. They should be examined through a quantitative approach regarding their validity and reliability for theoretical rigor. Third, it would be interesting to work closely with some 3PLs on applying the tool to


enhance its innovation competence using a multiple-year action research approach. The effort may improve the current competence model and produce more theories and practical guidelines for the management and study of 3PL innovation.

CONCLUSION

Industrial and trading firms have outsourced a broader range of logistics services (e.g., financial

services, contract manufacturing, procurement support) and some even desire ‘one-stop shopping’ to ensure a single point of contact. 3PLs that cannot meet such demanding customer requirements might be forced to serve as subcontractors to those who can, thus, incur the risk of lower profit margins, and experience fewer growth opportunities. Through innovation, 3PLs can offer a broader range of services meeting specific customer demands. Furthermore, customers that will be partners for 3PLs’ innovation activities will be those who offer a greater potential for growth and profitability (Wagner & Sutter, 2012).

This paper reports and discusses the application of recently developed 3PL innovation theories on the assessment of 3PL innovation competence and its related findings. The key contribution of this paper is the development of a 3PL innovation competence model and the design of an assessment tool for 3PL innovation competence. This tool was used to assess the innovation competence of two U.S. 3PLs. The assessment results provide useful managerial information to 3PL executives to tap into the innovation capability gaps that hinder 3PLs from being more innovative.

Since there is rare literature in theory or in practice on assessing the innovation competence of 3PLs, the findings in this paper are encouraging regarding the applicability of this new tool developed for assessing 3PL innovation competence. However, we notice that there are still research issues yet to be explored and further studies are needed to advance the knowledge regarding the 3PL innovation competence.

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APPENDIX

RESULTS OF INTERVIEWS

CHRW Aeronet

status importance gap status importance gap

1 NVC1 6 6 0 6 6 0 1 NVC2 6 7 -1 5 7 -2 1 NVC3 2 2 0 4 6 -2 2 ER1 5 7 -2 7 7 0 2 ER2 5 7 -2 6 7 -1 2 ER3 7 7 0 6 7 -1 2 ER4 7 6 1 7 7 0 3 JOB1 5 6 -1 4 6 -2 3 JOB2 6 6 0 5 6 -1 3 JOB3 6 7 -1 5 6 -1 4 OT1 6 6 0 5 7 -2 4 OT2 5 7 -2 4 6 -2 4 OT3 4 6 -2 5 7 -2 4 OT4 5 5 0 5 7 -2 5 MSO1 7 7 0 4 6 -2 5 MSO2 5 5 0 5 7 -2 5 MSO3 5 6 -1 4 7 -3 5 MSO4 6 6 0 5 7 -2 5 MSO5 5 7 -2 6 7 -1 6 SCP1 5 7 -2 7 7 0 6 SCP2 5 7 -2 5 7 -2 6 SCP3 5 7 -2 5 6 -1 6 SCP4 5 7 -2 5 6 -1


Seven Tips for Managing Generation Y

Jennifer Kilber Northern State University

Allen Barclay

Northern State University

Douglas Ohmer Northern State University

A new generation, or group of like-minded employees composed of similar ages, arrives every twenty years into the workforce. Every time a new generation enters the workforce managers tend to struggle to understand the new group. As the next generation enters the workforce, managers must adjust their management techniques to get better results. The new generation is about understanding that everyone sees the world their own way, a concept that is crucial for managers to understand. Each generation has unique experiences that shape their behaviors and attitudes. Generation Y views the world much differently than the previous generations. INTRODUCTION

According to Howe and Strauss (2007), a new generation, or group of like-minded employees composed of similar ages, arrives about every twenty years into the workforce. Like clock-work, every time a new generation enters the workforce managers tend to struggle to understand the new group (Gelbart & Komninos, 2012). As the next generation, referred to as Generation Y in this paper, enters the workforce, managers must adjust their management techniques for Generation Y in order to get better results (Tapscott, 2009). According to Sheahan (2005) “the key to managing [Generation Y] is about understanding that everyone sees the world their own way” (p. 205), a concept that is crucial for managers to understand for managing generational differences. Each generation has unique experiences that shape their behaviors and attitudes (Bannon, Ford, & Meltzer, 2011). Generation Y views the world much differently than the previous generations and management techniques should be adjusted for this generation (Balda & Mora, 2011).

Baby Boomers, Generation X, and Generation Y are the three generations currently in the workplace (Tapscott, 2009). Baby Boomers are those born between 1946 and1964 (Beekman, 2011) and they number around 76 million (Cahill & Sedrak, 2012). Generation X are those born between 1965 and 1980 (Beekman, 2011) and there are about 60 million of them (Cahill & Sedrak, 2012). Generation Y is defined as those born between 1981 and 2000 and are the largest cohort, numbering around 88 million (Cahill & Sedrak, 2012). Meister (2012) claims that Generation Y “will be roughly 50% of the USA workforce by 2020 and 75% of the global workforce by 2030” (p.1).


Gelbart and Komninos (2012) noted the debate between some managers over Generation Y “being labeled lazy and filled with a sense of entitlement” (p. 20). The debate continues to be between whether or not employers should adjust to this generation or whether Generation Y should adjust themselves to the current workplace culture.

In recent interviews conducted by this researcher (Heinz, 2012; Kendall, 2012) with individuals who manage Generation Y employees, parallel generational differences were noted by these managers, including differences in education, salary expectations, autonomy preferences, management techniques, communication, workplace styles, and work-life balances. However, the key to managerial success is the acceptance of the new generation (Meister, 2012; Espinoza, Ukleja, & Rusch, 2010). Managers should not ignore these differences, but should embrace them in order to get the most out of this new generation in the workplace (Meister, 2012; Tulgan & Martin, 2001).

“There are plenty of concerns and criticisms of this generation that are voiced by everyone from parents to frustrated employers” (Tapscott, 2009, p, 3). Tapscott (2009) reported the top ten cynical issues he found academics, journalists, and experts had with Generation Y including the following:

(1) They’re dumber than we were at their age. (2) They’re screenagers, Net addicted, losing their social skills, and they have no time for sports or healthy activities. (3) They have no shame. (4) Because their parents have coddled them, they are adrift in the world and afraid to choose a path. (5) They steal. (6) They’re bullying friends online. (7) They’re violent. (8) They have no work ethic and will be bad employees. (9) This is the latest narcissistic “me” generation. (10) They don’t give a damn (pp. 3-5).

Tulgan and Martin (2001) stated that “if you are positioned to meet the challenges [Generation Y]

bringvs to the workplace…you will take a quantum leap ahead of your competition” (p. XVI). Espinoza, et al., (2010) also stated:

Simply put, failing to suspend the bias of one’s own experience excuses managerial leaders from the adaptive work that is required of them to manage in today’s world. Part of the adaptive process is getting outside of the orbit of your own experience and entering the world in which [Generation Y’s] live (p. 25).

Tulgan and Martin (2001) identified four positive truths about Generation Y, including describing Generation Y as “a generation of new confidence, upbeat and full of self-esteem, the most educated-minded generation in history, a generation paving the way to a more open, tolerant society” and as “a generation leading a new wave of volunteerism” (p. 4).

Instead of pigeonholing Generation Y into negative stereotypes that do not improve worker efficiency (Tapscott, 2009), this paper discusses how managers should manage Generation Y employees to increase productivity, because as the numbers indicate, Generation Y is a sizeable element in the workforce.

GENERATION Y

Although the exact years vary between sources, most research recognizes Generation Y to have been born between the years from 1980 to 2000 (Beekman, 2011; Cekada, 2012). Generation Y numbers between 50 and 80 million employees in the U.S. workplace (Bannon, et al., 2011). There are a couple monikers researchers use to describe Generation Y, including: the entitled generation, net generation (NetGen), screenagers, Google generation, and digital natives; but the most common nickname is millennials (Balda & Mora, 2011; Cekada, 2012; Evans, 2011).

There are many stereotyped characterizations of Generation Y, including tech savvy, multi-taskers, team players, autonomous, self-centered, ambitious, informal, and they like to enjoy their work that has meaning (Bannon, et al., 2011; Beekman, 2011; Balda & Mora, 2011). I use the word stereotyped


because, although not every single person fits the overall description of a Generation Y employee, these descriptors are frequently used in literature to describe the Generation Y employee base, as a whole.

According to Tulgan and Martin (2001), more Generation Y employees, with parents who value hard work and education and a workplace that embraces both, attain a higher education than previous generations. Generation Y recognizes that the livelihood of success lies in higher education. Tulgan and Martin (2001) stated,

Ninety percent of high school seniors expect to attend college. Seventy percent of them expect to work in professional jobs. Seventy percent of teens believe college is necessary to meet their goals. Forty percent of college freshmen expect to get their master’s degree (p. 7).

As is evidenced, Generation Y believes education is the key to success. More recent statistics from Pew Research Center as of 2010 reveal that 74% of Generation Y are already college graduates or plan to graduate college (Jayson, 2006). The statistic is even higher among the latter cohort of Generation Y with 91% of 18-24 year olds either planning to graduate from college or have already (Jayson, 2006). Tulgan and Martin (2001) reported that students now expect to earn anywhere from a $600 to a $3,400 raise, which is common for the class of 2000 college graduates, evidencing the Generation Y thought process that the more education a person receives, the higher the salary that person expects.

One characteristic recognized by authors is that Generation Y is tech savvy (Bannon, et al., 2011; Beekman, 2011; Cekada, 2012), the first to experience a post-digital, globalized world; grew up with wireless devices, social networks, laptops, internet-based news, and texting. Not only did they grow up with this technology, they grew up untethered from it. A recent survey conducted among Generation Y revealed that 83% of them keep their cell phones close, or near 24 hours a day, seven days a week (Bannon, et al., 2011).

Generation Y is a connected generation, meaning they are able to connect at all times with family and friends across vast distances instantly (Cekada, 2012). While some generations may view this communication as a waste of a time, “Gen Y’s relish technology and the social interaction they receive through activities such as instant messaging, blogging, texting, and e-mails” (Cekada, 2012, p. 42). Bannon, et al. (2011) stated, Generation Y is more liberal with sharing private information online and are comfortable building relationships online (p. 62).

This generation is adept to working with technology and they expect to do so in the workplace. Balda and Mora (2011), stated that Generation Y was “raised speaking fluently the language of computers, video games, information management and sharing, networks, and the Internet” (p. 14). Tapscott (2008) reported that Generation Y records 30,000 hours on the Internet or playing video games by the time they are in their 20’s. Technology has allowed this generation to “develop hypertext minds, which allow them to gather information rapidly from multiple sources and make connections or links between the data” (Bannon, et al., 2011, p. 63). This ability to take in information from numerous sources all at once and analyze it leads to the next characteristic of Generation Y, multitasking.

According to Cekada (2012), while other generations view Generation Y as impatient and having ADD-like characteristics, this is a generation composed of proficient multitaskers who can move from one activity to the next seamlessly. Generation Y is used to multitasking, especially with communication media. They are able give instant feedback to others and expect it in return. Sometimes they place more importance on the speed of the response rather than the content in the response (Cekada, 2012).

Generation Y learns best by doing and through visual methods rather than by reading text (Cekada, 2012). They like to discover things on their own and do not like being told the minute details on how to perform a task. Because they are independent learners, they need to be “set in motion and they will find the information they need” (Cekada, 2012, p. 43) to accomplish the task.

Cekada (2012) stated, with a desire for constant social interaction, Generation Y employees are team players. In fact, they prefer team work to independent-type work. They believe in working together in a group in order to share ideas and feed off those ideas. While other generations scour at the idea of team


projects, Generation Y is accustomed to working with diverse people, as they are the most racially diverse workforce generation in history.

Although Generation Y employees value teamwork, they also place a high value on autonomy (Sheehan, 2005; Espinoza, et al., 2010). They detest micromanaging and often view it as a sign of distrust. Generation Y desires “to be coached, rather than directed” (Sheehan, 2005, p. 102). Heinz, an elementary principal in Huron, South Dakota, agrees. When asked what the difference between a manager and a leader was, Heinz (2012) stated, “A leader is like a coach.” (Personal communication, Sept, 26) She uses a mentoring approach to managing her Generation Y employees. As a Generation X manager, she finds it easiest to manage her Generation Y employees over other generations (Heinz, 2012). Heinz (2012) believes because she takes the mentor approach to managing rather than directing, her Generation Y employees follow her more willingly.

Generation Y is changing the status quo of the typical workplace environment (Hewlett, Sherbin & Sumberg, 2009). Many companies have created favorable environments that meet Generation Y employee needs and expectations by incorporating open workspaces and technology. They are less formal as a generation, so they prefer informal meetings and flexible work environments that include team workspaces (Bannon, et al., 2011). Because this generation is used to getting information in short snippets (Cekada, 2012), they should be given breaks up to every 10-15 minutes and allowed to switch between tasks. According to Beekman (2011), “Millennials find the ability to do work on their schedule very empowering” (p. 16).

Generation Y employees enjoy having fun at work. They realize the value of truly enjoying their jobs (Sheahan, 2005). Enjoyment and satisfaction in a job is important for an employee’s overall happiness (Sheahan, 2005). During a 60 Minutes interview on CBS Television, correspondent Morley Safer (2007) reported:

More and more businesses are responding, offering free food, fun and flexibility to keep their employees happy. Online shoe retailer Zappos.com has found that the best way of keeping employees is giving them what they want. Actual work actually happens, despite goofy parades, snoozing in the nap room, and plenty of happy hours (p. 1).

Managers know and research (Sheahan, 2005) has demonstrated that happiness directly relates to productivity; to keep the best employees, managers must keep them happy which means making the Generation Y employee work environment fun. As the CEO of Zappos stated, creating a fun culture for employees boosts productivity and employee retention (Hsieh, 2010).

A commonality among researchers (Sheahan, 2005; Tulgan & Martin 2001) was the assessment that Generation Y employees are self-centered and place their personal lives much higher than their work life. Many Generation Y employees believe in the statement “work to live—not live to work” (Espinoza, et al., 2010, p. 50). Generation Y wants to be able to make time for their friends, families, and hobbies. They realize that life exists outside work.

Work also has to have meaning for Generation Y employees. They gravitate towards projects that they feel they can make a difference with (Cekada, 2012). Sheahan (2005) stated, “This new breed of talent does not work for the sake of working. [Work] has to have meaning or a result” (p. 94). Generation Y employees are often goal oriented. Thome (2012), a manager at an information solutions firm, states that, Generation Y employees are “eager to participate in the process” (Personal communication, February, 27). Generation Y employees want to be given a task that contributes to the bigger picture in some way and then be left alone to accomplish that task (Cekada, 2012).

According to Sheahan (2005), a common word used to describe Generation Y is informal. Their rejection of the “we-have-always-done-it-this-way approach” (Sheahan, 2005, p. 57) reflects this information. This is beneficial because they add creative and innovative value to a company. “They do not settle for the old way of doing things; but instead always try to find new and more efficient methods” (Sheahan, 2005, p. 57). This can be frustrating for managers. Kendall (2012) stated, “I find it most difficult to manage Generation Y because when I was their age I never questioned the supervisor’s


authority” (Personal communication, Sept, 25). Managers must realize that the “Generation Y employees are not questioning their authority, but rather questioning the effectiveness of the method” (Sheahan, 2005, p. 57).

The retirement of traditionalists and baby boomers coupled with the relatively small size of Generation X has resulted in increased competition and more demand for employees in the workforce. According to Bannon, et al. (2011), depending on birth year definitions, Generation Y numbers between 50 and 80 million. Generational differences can no longer be ignored (Bannon, et al., 2011; Putre, 2013; Reisenwitz & Iyer, 2009).

Some managers complain that Generation Y should learn how to assimilate into the workforce. Managers should not have to change their management techniques, but rather the Generation Y should change their attitudes. Safer (2007) reported, “If this generation knows anything, it’s that there are more jobs than young people to fill them” (p. 17). If a Generation Y doesn’t like his or her job, they will move on and go to another. They do not mind switching jobs until they find the one that suits them best. During the 60 Minutes interview with Safer (2007), Generation Y Jason Dorsey stated:

We’re not going to settle. Because we saw our parents settle. And we have options. That we can keep hopping jobs. No longer is it bad to have four jobs on your resume in a year. Whereas for our parents or even Gen X, that was terrible. But that’s the new reality for us. And we’re going to keep adapting and switching and trying new things until we figure out what it is (p. 1).

Generation Y employees view themselves as valuable merchandise who are not afraid to put numerous positions on their resumes, because they see it as added experience (Safer, 2007). Generation Ys will be in high demand in the job market due to many factors, such as the retirement of baby boomers, and the relatively smaller size of Generation X. Therefore it becomes crucial for managers to retain their Generation Y employees and take advantage of their talents and skills (Bannon, et al., 2011). SEVEN TIPS FOR MANAGING GENERATION Y

Tulgan (2009) promises that Generation Y will be “the most high-performing workforce in history for those who know how to manage them properly” (p. 4). The following are seven tips for managers to better manage Generation Y for more productive results based on their traits, which were discussed above. This is not a comprehensive list of all ideas to better manage Generation Y, but is based upon some of the literature written about Generation Y. Although there are multiple generations in the workplace, this list is for managers who manage Generation Y employees. It is possible that by implementing these ideas, it may conflict with managing other generations. Create a Desirable Work Environment

One method to retain Generation Y employees is to create a desirable work environment. It just so happens that this new generation demands a new type of work environment, whereas generations before have accepted the archetypical work environment. Generation Y views a favorable work environment as one that allows them an opportunity for career development, includes access to technology, offer flexible work schedules, options for telecommuting, flexible work policies, a work-life balance, and trust (Cahill & Sedrak, 2012). Terrie Campbell from Ricoh, recommends that organizations “build [their] brand as a great place to work” (Kahn, 2013, p. 2) to attract and retain Generation Y employees.

Progressive companies have established a culture of work-life balance for their employees and have seen retention rates increase because of it. Companies, such as Google, offer benefits such as onsite daycare, scholarships for employee’s children, adequate vacation time, maternity and paternal leave, and adoption assistance to cater to Generation Y and the importance it places on parenthood and family.

Companies that offer flexible work schedules, flextime, or part-time telecommuting have also seen retention rates increase (Bannon, et al., 2011). Evans (2011) reported that work now occurs anywhere and


everywhere for Generation Y employees, due to advanced networking and mobile technologies. Because this generation is connected socially, they expect to be connected in their professions as well. They are accustomed to checking e-mail on their mobile devices during all of their waking hours; so even if they arrive at the office “late” or “leave early” they still have a jumpstart to their day by responding to e-mails (Evans, 2011).

Investing in employee happiness and satisfaction is directly related to employee productivity (Sheehan, 2005). Keeping your employees happy, including Generation Y, means making their work environment fun. “You may not need to have your job be fun, but don’t fault them if that’s their preference” (Suleman & Nelson, 2011, p. 41). Generation Y wants to enjoy being at work, so creating a fun work environment is an essential key to retaining Generation Y employees. Suleman and Nelson (2011) report:

Millennials want and expect to be constantly excited about how they are spending their time at work. They are consummate multitaskers, very capable of managing a multitude of activities at once. Easily bored, they want and need to be challenged, which is a blessing for managers who want to take advantage of their energy, skills, and resourcefulness (p. 41).

Adopting flexible work policies, including allowing Generation Y employees to take short, but

numerous breaks can help create a desirable work environment. “They are used to getting information in short snippets” (Cekada, 2012, p. 43), so by giving them these needed breaks they are able to stay focused and motivated on the task at hand. By segmenting their time into small batches, they are able to do more focused work for shorter periods of time. “Instead of working in four-hour continuous blocks, digital natives work in smaller chunks” (Evans, 2011, p.60). Dr. Brent Coker from the University of Melbourne reports that by allowing employees to take digital leisure breaks to surf the internet “leads to increased productivity because short breaks help us zone out for a while, so that we can return to our tasks with greater concentration afterward” (Evans, 2011, p. 61).

Building trust among Generation Y employees may be difficult when there are tensions between generations, but according to both Blake Mycoskie, Chief Shoe Giver for Tom’s Shoes, and Tony Hsieh, CEO of Zappos, building trust among all employees is essential in creating a desirable work environment. Hsieh says, “Trust is a fundamental part of a business” (Mycoskie, 2012, p. 124) and that “a brand succeeds or fails based on whether or not people trust the company with which they’re about to do business” (p. 124). Building trust among your employees encourages them to have the company’s best interest in mind rather than their own personal reasons (Mycoskie, 2012).

There are many ways you can build trust among employees, but encouraging employees to spend time together outside the workplace, open and honest communication, and implementing training programs to find the best fit for both employer and employee are ways Zappos builds trust among their employees (Mycoskie, 2012). Zappos even gives a new hire $3,000 if they decide not to take the job after they complete training (Mycoskie, 2012). This ensures that the employee and company are a good fit for each other.

Managers should develop a work culture that allows Generation Y employees to achieve career success, live meaningfully, and nurture their family relationships in order to retain Generation Y employees (Bannon, et al., 2011). For more ideas on how to create a desirable work environment for Generation Y, managers can listen to their Generation Y employees and offer workplace benefits they are most interested in. Enhance Award and Recognition Programs

Generation Y grew up getting trophies just for participation and had parents that adored them and constantly fed them confidence (Tulgan, 2009). Suleman and Nelson (2011) suggest giving this cohort feedback and praise to increase productivity and morale in the workplace:


Provide a context for how their contributions relate to team and organizational goals, the organization’s customers, and even to society. This systematic framing of feedback and praise takes it from being unearned hype to a practical information stream that can help shape desired behaviors and enhance results (p. 42).

Constant feedback and performance readjustments are ways Millennials have learned to stay on track during times of change. “Feedback and praise serve as reinforcement as well as a corrective mechanism for this generation” (Suleman & Nelson, 2011, p. 42).

Enhancing awards and recognition programs is a technique managers can use to motivate Generation Y employees. A small thank-you can go a long way with Generation Y employees. Not only do Generation Y workers crave gratitude and encouragement from their bosses and co-workers, but they also like to hear it from their family and friends. “Millennials want rewards that are meaningful and exciting to them when they have done good work or an outstanding job” (Suleman & Nelson, 2011, p. 42).

“[Generation Y] increasingly expect rewards that are creative, varied, and personalized” (Suleman & Nelson, 2011, p. 42). One way to personalize praise is to send the recognition to their home address, so their family is aware of the good work they do. Sending it to their home address also allows them to brag to someone and get that extra gratification and recognition from the people they care most about. This practice has worked well for Avera St. Luke’s manager, Meyer (2013), who reports that by sending thank-you or congratulatory notes to Generation Y employees’ homes, it has increased motivation and work pride (Personal communication, February 26). Adjust Training Techniques to Generation Y Employees’ Learning Styles

According to Cekada (2012) managers should adjust their training techniques to Generation Y employees’ learning styles. Taking an untraditional approach to training Generation Y employees includes allowing them to learn by doing. Managers can try allowing them to explore and discover first, then teach them the proper techniques that have been proven to work for the company if they didn’t learn through discovery first. By making training a three-step process including listening, seeing, and then doing, this allows managers to teach the basics, show the steps, and then allow Generation Y to try the steps on their own. They learn best by doing with a little direction (Cekada, 2012). Also by allowing Generation Y employees to grow and learn along the way, “they will be less likely to look to change jobs at the first sign of frustration or disappointment” (Suleman & Nelson, 2011, p. 41).

Generation Y also prefers visual learning methods coupled with video and multimedia (Cekada, 2012). Cekada (2012) suggests providing Generation Y employees with the fundamentals, then letting them explore through simulation, role playing, or with the Internet. Using online tools such as blogs, texting, wikis, and social networking can appeal to their social tendencies (Cekada, 2012). Allowing them to work in teams to share ideas also gives them a chance to be social. Also, by adding nontraditional methods that incorporate entertainment can help keep Generation Y’s attention (Cekada, 2012).

According to Prensky (2008), education for Generation Y should reflect its digital upbringing. “Kids in developed countries grow up knowing about, or being able to find out about, pretty much anything from the past or present that interests them” (p.95). Prensky (2008) suggests that educators, or trainers, should act as an explainer rather than providers of information.

Managers should tap into their energy and skills to get the most productivity out of Generation Y employees. They want and need to be challenged, since they bore easily (Suleman & Nelson, 2011). “Encourage their desire to contribute, and reward them opportunities for advancement. Building a sense of loyalty with them now will ensure you hold onto your leaders of tomorrow” (Beekman, 2011, pp.16-17).

As mentioned before, Zappos offers an incentive to trainees to quit before they even start. By offering them $3,000 after they complete their training courses, it allows the employee to decide if Zappos is truly the right fit for them without having wasted unpaid time training for a job they decide they don’t want in the end. This results in only employing committed employees (Mycoskie, 2012).


Lastly, connecting Generation Y’s training to experiences they will come across on the job can help Generation Y understand the importance of the training topic. Generation Y likes their work to have meaning (Hewlett, et al., 2009), so relating what they are being taught to their actual job can also help them understand the importance of the task. “Show them the big picture as to how their jobs relate to the mission, strategic objectives, and core values of the organization” (Suleman & Nelson, 2011, p. 41). Stop, Collaborate and Listen

Generation Y is team orientated (Bannon, et al., 2011; Gavatorta, 2012) so they enjoy working in a collaborative, informal work environment. Gavatorta (2012) suggests managers make the first move towards collaboration to let Generation Y employees know they are willing to work as a team.

Since Generation Y employees are team players and they would rather work in teams than on their own, managers should compose teams to work on projects. Generation Y has the unique ability to work well in teams due to their constant need for social connections (Balda & Mora, 2011). They have a need to share their ideas; being able to bounce ideas off other team members can help perfect procedures and projects.

Each generation has skills and traits that the other generations do not possess and those skills can serve the group to increase productivity (Beekman, 2011). For example, Traditionalists are often knowledgeable about company policy. Baby Boomers have a team-oriented outlook that can be taught to individualistic generations. Generation X can demonstrate how to solve problems with little instruction, and Generation Y is well-versed in technology (Beekman, 2011). By utilizing each generation’s skills, managers can implement cross-generational mentoring in order to bring generations together (Beekman, 2011) to be more productive with projects. Each generation has a strength that can be beneficial to other generational co-workers.

If at all possible, managers should try to match Baby Boomers and Generation Y employees together to collaborate and utilize cross-generational mentoring, because many Baby Boomer employees have Generation Y children, which means these two generations naturally seek each other out in the workplace (Hewlett, et al., 2009). Boomers enjoy acting as mentors to Generation Y. While 65% of Boomers report that Generation Y looks to them for advice, Generation Y trusts the Baby Boomer generation (Hewlett, et al., 2009). “Most [Generation Y’s] (58%) say they look to Boomers, rather than [Generation X’ers], for professional advice, and over three-quarters say they enjoy working with Boomers” (Hewlett, et al., 2009, p. 73).

Hewlett, et al. (2009) report that companies like Cisco are implementing intergenerational mentoring programs such as their Legacy Leaders Network for Baby Boomer aged executives who mentor the new hires. Cisco reports that both groups are learning from each other. Tulgan (2009) also suggests implementing a mentor program, in which managers can encourage older, more experienced leaders to seek out younger employees and vice versa for career advice. Although Tulgan (2009) suggests managers not label it mentoring. Rather, managers should label it career advising or organizational support, because of the negative connotation Generation Y associates with mentoring, as Generation Y doesn’t think they need a mentor (Tulgan, 2009). Do Not Micromanage

Romero (2012) offers an accepted definition of the construct of micromanagement,

Micromanaging is when a manager or leader assigns the work, tells capable employees exactly how to do it, monitors them excessively, and often takes over when work is not done exactly as the manager wanted (p. 8).

Micromanaging Generation Y employees results in disengagement and a loss of productivity (Bielaszka-DuVernay, 2007; Romero, 2012). Micromanagers who are controlling and try to manage every aspect of their employee’s job will not be successful with managing this generation because “employees become discouraged and loose interest in the job since they have no sense of ownership in the process or


outcomes of their work; the manager does” (Romero, 2012, p. 8). Instead of micromanaging, managers should act as a coach or a mentor and “be willing to allow for a coaching approach that creates dialogues rather than monologues” (Gavatorta, 2012, p. 62). “Millennials are committed to constant learning and personal development and growth, and their manager can easily serve as a coach and mentor to meet that expectation (Suleman & Nelson, 2011, p. 41). Sheahan (2005) asserts Generation Y employees detest micromanaging and do not respond well to it.

Giving Generation Y employees the necessary tools and resources they need to get started with a project and the letting them take full control can defer managers from micromanaging. This allows them to make the project their own. “They are independent learners. Set them in motion and they will find the information they need to learn the rest” (Cekada, 2012, p. 43). If managers want to make sure the task is being done efficiently, they can check on progress and coach them along, but use the opportunity to offer help and to teach them (Romero, 2012). Give Generation Y Employees Work that Has a Greater Purpose

One way to build loyalty among Generation Y employees is to give them work that makes a difference. Generation Y members like to do work that has a greater meaning of which they can see contributes the company in a real way (Hewlett, et al., 2009). Beekman (2011) stated that Generation Y employees to make a difference and by tapping into their desire to do so helps your company achieve its goals.

To help Generation Y employees make the connection to how the work they are doing contributes to the greater whole, managers should make sure employees are aware of the company’s mission, vision, and values. This allows Generation Y to align their work according to those values, mission, and vision. In doing so, it helps the company as a whole focus on the greater mission and accomplishes company-wide goals as well as helps Generation Y employees see how their work pertains to the company’s goals (Hewlett, et al., 2009).

86% of Generation Y employees state that it is important to them to involve giving back in their work and making a positive impact in the world (Hewlett, et al., 2009). Implementing opportunities for employees to volunteer is one way to give Generation Y work that has a greater purpose. Allowing employees to take one or two days out of the year to volunteer or to coordinate volunteer projects can boost morale and satisfy their desire to give back to the community and engage in work that has a greater purpose (Hewlett, et al., 2009).

Hewlett, et al. (2009), give an example of an Ernst and Young program called the Responsibility Fellows Program, which allows their accounting employees to teach accounting and managerial skills to entrepreneurs in parts of the world where management capabilities are scarce. Managers can implement similar programs that allow their employees to use their talents to give back. Programs like these provide good publicity for the company. Utilize Sophisticated Communication

Cekada (2012) stated that after a Generation Y employee sends a message they expect an immediate response, but sometimes they place more value on the speed of the response rather than on its accuracy. One way to promote sophisticated communication is for managers to practice responding to communication as soon as possible, “within at least 24 hours and preferably the same working day” (Hardy, 2012, p. 30). In doing so, managers can satisfy both the need for Generation Y’s immediate response and also provide accuracy in the response, because it gives them time to respond appropriately or find the answer. At IBM (2012), their managers realize the importance of responding to co-workers in a timely manner; “in social spaces, responsiveness is visible” (p. 7). IBM (2012) uses “internal social network tools” (p. 7) to help employees respond to others. They use online tools that allow them to set their status as “do not disturb” or “out of the office” (IBM, 2012). When an employee sees the “away” status, they understand that person is unable to respond immediately, and therefore, do not expect an immediate response (IBM, 2012).


When managers are communicating with Generation Y employees, they should adjust their communication medium depending on the message content and length. When creating effective communication with Generation Y, the medium used can make all the difference when managers want to generate a quick, effective response. “Gen Y’s relish technology and the social interaction they receive through activities such as instant messaging, blogging, texting and e-mails” (Cekada, 2012, p. 42). Generation Y employees prefer electronic mediums, such as a text or instant message (Cekada, 2012). According to Gavatorta (2012), “most relationships, regardless of generation, struggle due to a lack of effective communication” (p. 61). Gavatorta (2012) suggested creating a common language in order to bridge generational gaps and cure ineffective communications. Creating a common language means focusing on the similarities between employees rather than on the dissimilarities. Gavatorta (2012) explains:

Rather than immediately jumping to conclusions about your generational differences, focus on your similarities. That’s not to say that all generational differences will go away, but by taking the approach of looking for that common ground, you can lay the foundation for open communication and being to build trust (p. 62).

Gavatorta (2012) also suggested using tools such as the Meyers-Briggs Personality Assessment to

help co-workers discover each other’s personality traits, which can help them properly adjust their communication medium, pace, and tone based on the individual. Gavatorta (2012) gives an example of how managers can use the Meyers-Briggs Personality Assessment to understand how to interact with others better:

Greg communicates in a methodical, thoughtful, slower-paced way, which is common for someone with ISTJ preferences, whereas she is more fast-paced, expressive, and imaginative—with ENFP preferences. Greg essentially adapted his approach to her by aligning his pace more closely with the pace with which she was more comfortable. He said they now communicate seamlessly (p. 62).

This is a good example of how managers can slightly adjust their communication based on the individual they are communicating with. By better understanding Generation Y and their communication preferences, managers should be able to successfully communicate with them. LIMITATIONS

The timeliness of the literature used may misconstrue theories because not all of Generation Y has entered the workforce yet. It is also difficult to find definitive trends because Generation Y employees have only been in the workforce for about 15 years.

The seven tips are not a comprehensive list of all methods managers can use to better manage Generation Y employees. Rather they are suggestions based on the literature written about Generation Y. Also, the tips are for managers who manage Generation Y employees, so managers who manage a multi-generational workforce may find that the tips create conflict with other generations in the workplace. FURTHER RESEARCH

Additional research in this area also includes researching differences among generations globally and geographically. Researchers should consider generational differences between cultures and countries and what causes worldwide differences in generations’ attitudes and behaviors, if any. Attitudes, beliefs, and work expectations may differ by country.


CONCLUSION

Managers should keep in mind that Generation Y sees the world differently. Managers should also understand how to deal with those differences to support a business’ growth and success. By being aware of generational differences in the workplace and adjusting management techniques cross-generationally managers can hope to be more successful in achieving the results they desire for their Generation Y employees. REFERENCES Balda, J. B., & Mora, F. (2011). Adapting leadership theory and practice for the networked, Millennial

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The Case for Integrating Healthcare Management Courses into the Curricula of Selected Healthcare Providers

Peter G. Fitzpatrick

Clayton State University

Marcy Butler Clayton State University

Chris Pitsikoulis


Kendolyn Smith Clayton State University

Latrina Walden


The healthcare delivery system is becoming more complex in large part due to the new organizational structures and new reimbursement schemes. As such it is becoming increasingly more evident that healthcare practitioners must be well versed in these new complexities. Little evidence exists that this knowledge is being imparted by way of the curricula of selected healthcare providers. This paper presents this case by discussing these delivery changes and suggesting way to change this lack in the fundamental education of these providers. INTRODUCTION

With the ever increasing pressure to make our healthcare delivery system more efficient, less expensive, and provide better outcomes, both practitioners and administrators are being forced to approach their jobs differently. These focal points are not necessarily new, but they do necessitate the need to better integrate the clinical side with the managerial side.

Challenging this integration are the creation of new delivery models, new legislation, and new payment schemes. The healthcare delivery system is at a critical juncture as it transitions into the changes that will be produced by the full implementation of the Affordable Care Act (ACA) and attempts to bring the system in line with today’s economic realities. Foremost among these challenges will be the expansion of the Accountable Care Organization (ACO) concept, the ever increasing movement towards bundling payment schemes, the establishment of insurance exchanges to facilitate the purchase of medical


insurance by the uninsured, the elucidation of the implications of the still vague provisions of the ACA, and the growing use of case management.

Given the complexities of these delivery and payment schemes, it is essential that both managers and providers understand them and be well versed both academically and experientially in their application. ACCOUNTABLE CARE ORGANIZATIONS

A major assumption in the rationale for ACO’s is that they will improve the quality of care while simultaneously reducing costs. They contain an inherent de-emphasis on the volume of services and focus on coordination of care to improve quality. Their organizational structure consists of a variety of delivery providers and institutions sharing responsibility for treating a group of patients. On the financial side they incorporate new performance measurements and somewhat complicated reimbursement plans. These payment plans run the gamut from total organizational performance to a global budget model somewhat akin to capitation (Vujicic & Nasseh, 2013).

Historically the concept of ACO’s has existed for several years and generally referred to the responsibility of a variety of provider organizations to be accountable for cost and quality (Ronning, 2010). The passage of the Patient Protection and Accountable Care Act of 2010 (ACA) provided the framework upon which a much more formalized structure could be ascribed to the ACO concept. This structure was built upon the creation of Shared Savings Programs (SSP) within the Medicare Program by the Centers for Medicare and Medicaid Services (CMS). Essentially CMS, attempting to control costs and improve outcomes, developed the SSP to promote accountable provider organizations. To better define these organizations, the CMS classified them as ACO’s. If a provider group seeks to be a participating SSP using the operating principles of an ACO they must have primary care physicians who can demonstrate that can work together to improve outcomes by using the best practices within the ACO concept. Additionally they must:

Be accountable for quality, cost, and care of a population of Medicare beneficiaries. Participate for not less than three years. Belong to a legal structure that can receive and distribute bundles shared savings payments. Demonstrate that enough primary care physicians are included whose combined Medicare

patient population is at least 5,000. Have leadership and management and clinical administrative management systems in place. Promote evidence – based medicine, report quality and cost measures, and coordinate care

including the use of technological systems. Demonstrate patient-centeredness (Ronning, 2010).

Clearly, given the relative complexity of building an ACO around the conceptual framework of a SSP, both managers and providers will need a firm understanding of the costs, the operations of a SSP, the benefits of this concept, the risks, and the ability to develop and implement a strategic plan. This required skill set can either be acquired as on-the-job learning, or through a more didactic approach. Given the labor time constraints within healthcare delivery, we are recommending the latter approach.

BUNDLING PAYMENT SCHEMES

In considering how curricula are developed for healthcare professionals, there has to be a tremendous effort placed into the content, from introduction to the profession to the clinical application and practical experience that is necessary to embark upon working in healthcare.

It is often thought that management courses are an aside and have historically not been viewed as necessities, rather just good to know type of information. However, as the climate of healthcare evolves, it will be necessary for hospitals, physicians and other healthcare professionals (pharmacists, nurses and


administrators) to understand how to initiative steps for the collaboration of caring for the patients. In order to collaborate, there must be a process to establish a method of maximizing reimbursement and quality simultaneously.

According to the National Health Expenditure Projections (2011), the United States Government will soon pay more than 50% of the nation’s healthcare bill through Medicare and Medicaid. With the goal of reducing cost, the Center for Medicare and Medicaid Services (CMS) and the Center for Medicare and Medicaid Innovation (CMMI) have decided to partner with Accountable Care Organizations (ACO) and Share Services Providers (SSP) to create this system of an improved, efficient patient care experience while offsetting and sharing the cost burden between organizations and CMS/CMMI (Sultz, 2014). ACO’s consist of a group of providers and suppliers of health care, health-related services, and others involved in patient care working together to coordinate care for the patients they serve (Sultz,2014). The payment structure for ACO’s combine fee-for service payments with shared savings and bonus payments linked with specific quality performance standards for which all providers within the ACO are accountable (Sultz, 2014).

It is important for healthcare professionals to understand this process that will be a major component of how payments will be received for the services being rendered. The Bundled Payments for Care Improvement Initiative (BPCI) is designed to test whether bundled payments can align incentives for hospitals, post-acute care providers, physicians, and other health care personnel to work closely together across many settings to achieve improved patient outcomes at lower cost (Sultz & Young, 2014). Lower costs, improved quality and consistency in discouraging unnecessary services, tests, medications and other costly services which are able to be substituted is what is proposed by the BPCI. Bundled Payments, also called “episode payments” is a way that CMS and CMMI have proposed to accomplish their overall efficiency goals. The bundled payments method links a number of services together for an episode of care. Based on the episode of care and the appropriate services under the bundle, healthcare providers would be provided an upfront sum to manage the care of the patient (Sultz,2014). If the providers could manage the episode of care under the sum provided they could share the savings. As a result, providers are incentivized to coordinate care better and dis-incentivized from providing unnecessary services (Mirakhor, 2013). The facilities and the providers could be large beneficiaries if the process is done correctly. However, the bundled payment method does create complexities and will require specific skill sets that have traditionally been left to chance in the academic training of healthcare professionals or not addressed at all. Healthcare professionals of the next era must have some key skills, including the ability to collaborate beyond like professionals (working with other groups of professionals who have an overall interest in the positive outcome of the patient), an understanding of the requirements associated with making the payment process run smoothly and avoid issues that may ultimately minimize payments or require an out of pocket payout by the provider in order to accommodate for the improper balance of services provided and finally an understanding of how to manage the process of selecting the proper episodic-care or DRG that is most appropriate for bundling. Each facility will have unique considerations in every aspect of these considerations.

The objective of the BPCI is to improve the quality of Healthcare delivery for Medicare beneficiaries, while reducing the program expenditures by aligning the financial incentives for all providers (Sultz, 2014). There is great potential for the balance of expenditures to be achieved between CMS and providers, but there are some facets of the initiative that are imperative to review to be sure that the cost burden is shared. According to the American Health Associations’ Committee on Research’s Synthesis Report on Bundled Payments (2010), there are some key areas that must be considered by the providers. These include: 1. identifying and defining bundling inclusions (i.e. what standardized care plans should be included –ex. knee replacement, heart surgery, etc.) 2. establish a timeframe between “episodes”, 3. determine payment rates, 4. identify patient criteria (do patients require a significant number of additional services beyond the bundle?). Some examples of bundled payment programs that have been initiated are: Medicare’s Participating Heart Bypass Center Demo, Geisinger’s ProvenCare, Medicare’s Acute Care Episode Demo, PROMETHEUS Payment, Inc., Fairview Health Services and Dr. Johnson and Ingham Medical Center. Each one of these programs had to consider conditions, services, provider accountability,


a payment timeframe, administrator capabilities, how to set payments/discounts and also how to adjust payments if needed (AHA, 2010).

Each one of these standards requires a level of appreciate for the change in healthcare, balance of power in decision making and an understanding of the implications of the financial management process. BPCI will be a counterproductive method if institutions of professional learning rely on “on the job training” for new professionals. Examples of suggestions for course content could include: an introduction to reimbursement methods, bundled payments in and out, the Affordable Care Act addressing what will be the new responsibilities for future healthcare professionals and a collaborative approach to care and healthcare management.

Healthcare professionals will indeed have to manage patients as well as key components of their business, if they are going to be sustainable and reimbursed appropriately for the provided services. Therefore, they must be trained in a non-threatening, non-punitive environment, where the curriculum is enhanced to explore way to make this information relevant and specifics for each field or practice is able to have an applicable experience of learning healthcare management principles as they relate to daily practice and care of the patient. There are implications for physicians, nurses, pharmacists and administrators. The goal of training these professionals of the future should be to equip the knowledge and application of collaborating and understanding these implications of what the lack of preparation and on the job training can be. Lack of preparation in these pertinent areas of management will prove disastrous considering the vast changes to the healthcare system. INSURANCE EXCHANGES

The Affordable Care Act (ACA) includes a provision for each state to establish an American Health

Benefit Exchange (Exchange), an online marketplace to compare and shop for healthcare coverage. These Exchanges will initially serve individuals without employer-sponsored healthcare and small business employers with fewer than 100 employees. Inclusion of larger employees is expected by 2017. The goals of these Exchanges include: (1) to ensure sufficient choice providers, (2) to provide uniformity in enrollment and presentation of health benefits options, (3) to implement a quality improvement strategy and (4) to provide information on quality measures for health plan performance, which includes a rating system on quality and price and a satisfaction survey on enrollee satisfaction (Patient Protection and Affordable Care Act, 2010).

The Exchanges will also be utilized to reward quality through market-based incentives. This includes improving health outcomes through quality reporting, case management and use of the medical home model. In addition, there are incentives for preventing hospital readmissions, improving patient safety, reducing medical errors and health and wellness promotion. (Congressional Budget Office, 2012).

The Congressional Budget Office (CBO) estimates that 12 million individuals will purchase coverage through these Exchange through 2015, with 75% representing those who were previously uninsured. The enrollment through Exchanges is projected to reach over 29 million by 2021 (Congressional Budget Office, 2012). These Exchanges and additional provisions from the ACA will undoubtedly impact how physicians manage their practice and how they are reimbursed in the future.

Despite the major changes forthcoming from the ACA, a recent survey of physicians demonstrated that more that 50% were not at all familiar with how the new policies will affect their businesses. Furthermore, 70% were not familiar with how the claims process will operate. Finally, 55% expect their bad debt to increase as a result of the ACA (PR Newswire, 2013).

Exchanges will shift the role of consumers in the decision making process. Provisions under the ACA establish common rules regarding pricing and reporting and increased transparency about the quality of the provider (Patient Protection and Affordable Care Act, 2010; Orry & Eggbeer, 2012). The increased involvement of consumers in the buying process is expected to place downward pressure on price. This in conjunction with the ACA’s focus on new payment forms that incentivize health outcomes and reducing costs will shift from traditional fee-for-service payments to bundle payments, shared savings, and capitation (Orry & Eggbeer, 2012). Furthermore, quality of care will play a significant role in how


physicians negotiate with payers, which may lead to lower payments or even exclusion from the provider’s network (Bendix, 2013).

The increase in the number of individuals previously uninsured is expected to place additional strain on the country’s shortage of primary care physicians. This imbalance in supply and demand has led to government incentives in the form of increased reimbursement rates for primary care services. This increased demand will lead to a shift to non-physician providers, including nurse practitioners and physician assistants (Dageforde, 2013; Jocabson & Jazowski, 2011; Kocher, Emanuel, & DeParie, 2010)

The implementation of Exchanges, though its intentions to create transparency and improve access to health coverage, will impact physician practice. Increased consumer involvement and mandatory reporting will drive prices down changing the structure of payment systems. Payment systems will center on reducing costs and improving health outcomes. Therefore, financial planning should prepare for a shift from uninsured to increased utilization of exchanges, which will lead to changes in payer mix and decreases in payment rates (Orry & Eggbeer, 2012) CASE MANAGEMENT

With the continuing evolution of new scientific medical information along with medical technology,

people are living longer often with complex medical conditions which include single or comorbidity chronic diseases. In conjunction with an aging population, the concentration of healthcare expenditures in the United States (US) is escalading. Currently, US healthcare expenditures exceed 1.7 trillion dollars, which is approximately 15 % of the gross domestic product and 78% of people with single and multiple chronic conditions account for the majority of the utilization of these health care services and health care costs (Vogell et al 2009). Furthermore, a 2001 Institutes of Medicine (IOM) report, “Crossing the Quality Chasm,” states that 23% of Medicaid beneficiaries have five or more chronic diseases (CCMC, 2010). Controlling costs and managing chronic diseases has become an overwhelming concern for not only private and public insurance but also for healthcare policy makers. This has led to a widespread proliferation of case management programs to help slow healthcare costs and to improve quality and delivery of healthcare services in both private and public insurance programs. In 2004, 97% of private health insurance plans have disease management programs for diabetes, asthma, arthritis, heart disease, and HIV/AIDS (Vogell et al., 2009; Fetterolf, Holt, Tucker, & Khan, 2010). State Medicaid programs have also implemented such programs to help with the efficiency and cost-effectiveness.

There are several definitions for case management, but all have similar attributes. The Commission for Case Management Certification (CCMC) (2009) defines case management as a “Collaborative process that assesses plans, implements, coordinates, monitors and evaluates the options and services required to meet the patients or clients health and human service needs. It is characterized by advocacy, communication and resource management, and promotes quality and cost-effectiveness interventions and outcomes.” Central to the case management philosophy is that it is patient or client centered, whereby everyone benefits, including healthcare providers and payers, when patients or clients are navigated to the appropriate services, providers and resources in their communities to promote optimal outcomes of wellness, self-management and functional capability.

Case management is not a new concept, as it originates from the disciplines of public health nursing and social work in the early 20th century (Gritzmacher & Sowell, 2010). Thus, the majority of case managers currently in the healthcare arena are nurses or social workers with advanced degrees. There are four categories of existing case management programs. These include hospital, traditional, direct-care and gap-filling (Gritzmacher & Sowell, 2010). The emphasis for hospital case management programs include discharge planning for patients or clients who are in the hospital for a short duration due to an acute care episode, which may include finding a suitable out-patient service or facility. Discharge planning helps the hospital contain costs by reducing the length of stay for individuals whose management of their medical conditions is better suited for out-patient services. The traditional case management program uses the customary model to assess a client’s health care needs in order to find appropriate services and providers that are available in the community and will help the client navigate through the intricacies of the


healthcare system. Persons with complex and or chronic diseases may require the direct-care case management model, where the case manager may be a provider for some of the needed services. The last category of the case management model is the gap-filling model. This model is similar to the traditional case management model but the case manager will also have the authority to purchase or seek out any additional healthcare services or resources that are appropriate and cost-effective for the patient or their family. The use of any of these case management programs can decrease costs and increase the quality of care and services provided, while avoiding duplication of services.

Case management model integrates some of the key components of the chronic care model, which emphasizes the coordination of a client’s care around their chronic illnesses. The utilization of a case manager is also useful for navigating through the two current models of healthcare delivery systems, the patient centered medical home (PCMH) and the accountable care organizations (ACOs). The emphasis on both of these models is to breakdown the medical silos to encourage various healthcare providers to work in tandem to decrease duplication of service, to increase the quality of care to patients and to increase cost-effectiveness.

To have an effective a case management program demands an interdisciplinary approach, which includes the use of available resources and services to increase the effectiveness of evidence-based treatment modalities, quality of care and cost-effectiveness. To have such a program, it is essential that all healthcare professionals understand the case management paradigm. Current professional programs do not include case management in their curriculum. Implementing a case management course into the various healthcare professions will increase the awareness and the knowledge of the healthcare professional’s role in achieving timely, necessary, and optimal healthcare services through collaboration, which will improve health outcomes especially among the chronically ill patients. In addition, this will also help with cost containment even with continued changes in the reimbursement levels by insurers.

MEDICARE PAYMENTS

Medicare in the United States is the largest public health insurance program of our time. As of 2010, Medicare covered 47 million people with an estimated spending amount of $524 billion dollars (Nemani, 2010). With the baby boomer population aging and thereby producing increases in the cost of healthcare, coupled with an economic downturn, the sustainability of Medicare comes into question. On March 23, 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act (PPACA) that becomes effective Jan 1, 2014. One of the things that the PPACA is slated to do is generate billions of dollars in Medicare savings and strengthen the care that our Medicare beneficiaries will receive (CMS office of the Actuary, 2010). In order to effectively execute the reforms that the PPACA is implementing over the next several years, providers will need to be educated on the management of healthcare to fully understand the various pieces that make up the PPACA. Being only clinically trained is no longer sufficient because healthcare delivery has become interwoven with intricate operational and payment schemes. In order to provide effective care and cost management to beneficiaries, clinicians will need to understand all aspects of the PPACA and particularly those that are related to Medicare. Fundamental to this understanding will be the incorporation of the new financial realities into the curricula of healthcare practitioners.

Part of the Medicare savings that our providers and clinicians will need to be aware of comes from several aspects of a delivery system overhaul via readmissions, health care acquired conditions and appropriately pricing premiums in Medicare Advantage plans. The idea is that healthcare in the United States is moving towards a value based system of care. Starting in 2013, physician payments have become closely linked to a “value-modifier” that rewards physicians who deliver better care for 5 of the most prevalent conditions – acute myocardial infarction, heart failure, certain surgical procedures, healthcare-associated infections and pneumonia (CMS office of the Actuary, 2010). In practice, physicians who provide better care to their patients will have beneficiaries who will have a lower readmission rate. Essentially the government is rewarding providers who provide quality care to clients with low cost; thereby, reducing unnecessary hospital readmissions which the PPACA states will have a substantial


projected Medicare savings. The Affordable Care Act created a hospital readmission reduction program, which is projected to reduce Medicare costs by $8.2 billion from implementation through 2019 (CMS office of the Actuary, 2010). Readmissions account for 80% of all Medicare enrollees; thus by addressing this key population the healthcare community there will produce a significant dent into the assumed Medicare savings (CMS office of the Actuary, 2010). If providers fail to provide quality care to clients, the reduction in their Medicare payments would be 1% for 2013, 2% for 2014 and 3% for 2015 and all subsequent fiscal years; which will apply to all admissions to the hospital (Barry, Luband, & Lutz, 2010) .

Not only will providers get penalized financially upon readmission of a patient, but they will also be penalized if a beneficiary incurs a hospital acquired condition (HAC’s). In the past, hospital acquired conditions were reimbursed at a higher rate due to being paid as a secondary diagnosis. According to the PPACA, hospitals will face an additional 1% reduction in Medicare payments if they fall into the top 25% of the national risk-adjusted HAC rates for all hospitals in the previous year (Barry, Luband, & Lutz). This provision will result in a $3.2 billion dollar reduction in Medicare costs over the next ten years (CMS office of the Actuary, 2010). The positive effect of this provision relates back to providing and being rewarded for quality care to all clients. As a result, a conversation among providers and clinicians will need to include some type of education that centers on the management and education of the team in providing quality care. If we have clinicians who are not accustomed to managing a team to implement the aspects of quality improvement processes, it is likely that some hospitals will struggle and be penalized financially for not meeting the new standards. Due to the lack of education that is found in various clinical healthcare programs across the country, it appears that the United States is doing a poor job at equipping our future providers and managers with the necessary skills to execute what the PPACA are imploring all healthcare providers do.

With the changes that are happening in our healthcare system due to the PPACA, it is even more important that providers at all levels have a clear understanding of how Medicare, Medicaid and commercial insurance operate. Medicare Part C, which is also known as the Medicare Advantage (MA) programs allows Medicare beneficiaries to receive benefits from private plans such as Health Maintenance Organizations (HMO’s), Preferred Provider Organizations (PPO’s), high deductible plans etc. Under the MA plans, there are more services covered then under the regular Medicare Part A and B plans. Medicare Advantage plan payments from the government are paid under a bidding process. Plans bid to offer Parts A and B (Part D coverage is handled separately) coverage to their Medicare beneficiaries; the bid is offered as the bid to cover an average, or standard, beneficiary and the bid is to include any plan administrative cost and profit (Davis, Hahn, Morgan, Stockdale, Stone, & Tilson, 2010). CMS bases the Medicare payment for a private plan on the relationship between its bid and benchmark. If a plan submits a bid below than the county level benchmark value, 75% of the difference is paid between the bid and the benchmark (Davis, Hahn, Morgan, Stockdale, Stone, & Tilson, 2010). If the plan bids above the benchmark, the plan is paid the benchmark and then must pass the cost off to the enrollee by charging a premium equal to the difference between the bid and the benchmark (Davis, Hahn, Morgan, Stockdale, Stone, & Tilson, 2010).

The problem with this is that the benchmarks amounts have resulted in higher payments to the MA plans than the Medicare Fee-for-service costs, which range from 100% to over 150% with no measured difference in outcomes (Davis, Hahn, Morgan, Stockdale, Stone, & Tilson, 2010). Thus, higher than normal payments have been being provided to MA plans, which has added to the high healthcare costs for 77% of seniors in the form of higher healthcare premiums (CMS office of the Actuary, 2010). For this reason alone, providers will need to have a thorough understanding of how healthcare insurance payments and plans operate. As a result of the changes, the provider may have an educated consumer who may refuse a battery of tests in an effort to reduce any costs that may be passed on to them. The realization of comprehensive care at a low cost will now take on a new meaning. As a result of realizing the overpayment to MA’s, the PPACA will phase in benchmarks that will be set at either 95%, 100%, 107% or 115% with the higher benchmarks being reserved for those counties with the lowest Fee-For Service costs (Davis, Hahn, Morgan, Stockdale, Stone, & Tilson, 2010). Some physician practices may have to acknowledge a possible cut in the revenue stream for their offices due to the changes in MA payments.


For example, if the revenue for the physician’s office received in 2009 quarter one was $575,000 with the proposed cuts this income would be $435,000. With the decrease in payment the physician’ s office may be confronted with laying off staff, readjusting the budget and/or increasing patient visits in order to make up for the deficit. Without having a firm grasp of the financial implications of the proposed changes, healthcare providers greatly jeopardize their chances for success. At the very least, clinical programs of all types need to implement education that will allow providers to have a working knowledge of healthcare management and insurance processes. Additionally, knowledge of the elements of a value-based healthcare system will allow providers to increase profitability by reaching benchmarks and putting forth quality plans in qualifying areas (Davis, Hahn, Morgan, Stockdale, Stone, & Tilson, 2010).

The last part of Medicare that has major changes is Part D. Medicare Part D currently has an exclusionary period, commonly known as the donut hole, during which most recipients are responsible for a significant portion of their prescription drug expenses. Often times, patients will ask the nurse or physician questions about their financial responsibilities and the nurse or physician will not have an answer. While they can explain the side effects and mechanics of the drug itself, explaining if the medication is covered by their particular benefit is not in the scope of most clinicians. With educated consumerism on the rise, clinicians will now need to be aware and educated of the operations of the PPACA on prescription drug benefits. Prescription drug coverage for enrollees are provided by prescription drug plans (PDPs), which offer only prescription drug coverage or through Medicare Advantage prescription drug plans (MA-PD’s) provided to beneficiaries who enroll under Part C (Davis, Hahn, Morgan, Stockdale, Stone, & Tilson, 2010). Prior to the PPACA, the Medicare Part D benefit had a deductible of $310 and 25% coinsurance up to the initial coverage limit of $2830 (Nemani, 2010). After beneficiaries reach this point, they end up in the so-called donut hole. The donut hole is defined as the gap in which there is no prescription drug coverage for the enrollee and they are now responsible for 100% of all prescription drug cost until they reach $6440 (Davis, Hahn, Morgan, Stockdale, Stone, & Tilson, 2010). In order to combat this large gap, the PPACA has developed a Gap Discount program that will be implemented in phases. In phase I starting in 2010, the Health and Human Services (HHS) Secretary will provide a $250 rebate to Part D enrollees who reach the donut hole (CMS office of the Actuary, 2010). In phase II, the manufactures of brand name drugs must enter into agreements with the HHS Secretary to provide enrollees a 50% discount off of the negotiated price of the brand name drugs on the enrollees Part D’s plan (CMS office of the Actuary, 2010). In the 2011, part III of the Gap discount phase in the PPACA required that generic drugs become covered in the donut hole by moving into an agreement with pharmaceutical companies (CMS office of the Actuary, 2010). Lastly in phase IV, which begins in 2013 and will run to 2020, the PPACA will require that some brand name drugs become covered in the gap with the enrollee co-insurance starting at 97.5% in the first year to 75% co-insurance in the last year of the phase in.

The PPACA’s major focus in the Part D benefit is to enhance the coverage provided to lower-income individuals who enroll in Part D. The subsidy available for the low income population would reduce beneficiaries’ out of pocket spending by paying for all or some of the Part D monthly premium and annual deductible and limiting copayment’s to a minimal amount (Davis, Hahn, Morgan, Stockdale, Stone, & Tilson, 2010). Part of the education of a clinician that can help them disseminate information to low income individuals is to understand the concept of health literacy and cultural competency. Part of the issue with several curriculum developments of clinicians is that we do not include – or include a minimal amount of necessary subjects such as these into our current educational systems. While healthcare professionals will have the capability to understand the numbers presented, knowing how to relay that information to the population in which many of us work may need to be a learned task. Incorporating courses into our health care curriculum that teach nurses, pharmacist and physicians techniques to relay such complicated information will allow us to present the material in a manner that is clear and concise to our clients.


METHODOLOGY

With the existent complexities of the challenges explained in sections above, we attempted to determine the level of the integration of healthcare management courses into the curricula of four major healthcare practitioner groups. We examined the curricula of at least eight geographically disparate programs from each of the professions of medicine, dentistry, nursing, and pharmacy.

We conducted on-line searches of the curricula from randomly selected programs and identified as many healthcare management oriented courses as possible. We initially looked at any course listed that from its title might suggest that it contained some component of healthcare management. Once these courses were identified, we then sought out more expansive course descriptions of them which would provide substantiation of the content we were seeking. RESULTS

In the basic curricula of the courses of the medical schools surveyed we found little evidence of discrete courses in healthcare management. The courses that were identified were typically courses that were introductions to either the healthcare system or environment. Additionally, some programs offered courses in healthcare policy, or healthcare economics, or business and healthcare (see Table One below). In many instances these courses were electives, and in some cases for no credit.

The investigation of dental programs yielded even scarcer results. Most of the programs investigated had only somewhat related courses in practice management. These courses were almost universally focused on career opportunities, human resources, payment arrangements, and location selection and financing a starting practice. There was little to no evidence of broader healthcare management related topics (see Table One below).

The nursing programs studied yielded similar results to the dental programs. The only significant appearance of healthcare management content was found in courses that provided an introduction to the healthcare delivery system. An occasional course in healthcare policy was identified as were some infrequent courses in trends in healthcare (see Table One below).

Pharmacy programs offered a similar pattern. In this cohort the predominant healthcare management related course was one addressing healthcare delivery or healthcare systems. Little else of direct relationship was identified (see Table One below).

TABLE ONE

Type of Program Number of Programs

Number of HCMG Courses

Average Number of Course per

Program Medical 11 18 1.64 Dental 8 8 1

Nursing 8 16 2 Pharmacy 9 13 1.44


MOST COMMON COURSES BY PROGRAM TYPE

Medical Free Clinical Longitudinal Outreach; Family and Community Medicine Research; Foundations of Clinical Medicine – Integration; Professionalism and the Practice of Medicine; The Practice of Medicine; Topics in Medicine; Public Health Integrative Cases; Healthcare Economics; Medical Finance; Public Policy; Population Health; and, Healthcare Policy.

Dental Practice Administration; Practice Management; Clinical Practice Management; and, Jurisprudence/Ethics/Dental Practice.

Nursing Transition, Leadership, and Management; Cultural Diversity in Healthcare; Introduction to Healthcare; Organization of Micro and Macro Healthcare Systems; Issues/Trends in Healthcare; and, Healthcare Systems and Policy

Pharmacy Healthcare Systems; Pharmacy Administration; Pharmacy Care Management; Pharmacy and the U.S. Healthcare System; and Healthcare Delivery.

DISCUSSION

It is our belief that a strong case can be made for the integration of healthcare management courses into the core curricula of healthcare practitioners. As healthcare delivery more and more evolves into a business model type operation, it will be necessary for practitioners to have working knowledge of the different organizational and payment schemes. We found little evidence that this is currently being done. The only exceptions are joint programs that give a healthcare practitioner’s degree along with a MBA and these programs are not widely subscribed.

There have been an untold amount of conversations and writings centered on the Affordable Care Act. Much of this dialogue has used to term healthcare reform. And yet, the reality is the ACA is not about healthcare reform, it is about insurance and who is going to pay for what healthcare services. Clearly, the focus will continue on the business and financial aspects of healthcare delivery. Healthcare providers need to be knowledgeable of these aspects promoting their incorporation into the curricula. REFERENCES American Hospital Association. 2010 Committee on Research. AHA Research Synthesis Report:

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Decoupling as a Sustainable Firm Response to Pressures for Convergence and

Divergence in Corporate Governance: The Case of Codes of Good Corporate Governance

Mario Krenn

Southeastern Louisiana University

Whether corporate governance systems, policies, and practices are converging to the Anglo-American model is an intensely debated issue. This article addresses the convergence-divergence debate in corporate governance in the context of the diffusion of codes of good governance. Rather than joining the “either-or” debate, a model is being presented in which drivers of convergence and impediments to convergence are simultaneously considered as determinants of the depth of convergence outcomes. The notion of sustainable strategic decoupling is introduced to address these dynamics at the firm level of analysis and to highlight that firms can actively respond to conflicting institutional pressures for change and continuity by making strategic choices. INTRODUCTION

Codes of good corporate governance have become an increasingly visible phenomenon over the past decades. The U.S. in 1978, and the U.K. in 1992, were the first major economies that have issued codes of good governance. By 2008, codes of good governance have been created in more than 90 countries around the world. A variety of transnational organizations like the World Bank, the IMF (International Monetary Fund), the EC (European Commission), and the OECD (Organization of Economic Coordination and Development), among others, have spurred this development and have actively promoted the development of these codes (Aguilera & Cuervo-Cazurra, 2009; Monks & Minow, 2004). These organizations have often been directly influenced by the U.S. and the U.K. which hold traditionally dominant positions within these forums.

Especially during its economic resurgence in the 1990s, the U.S. has attempted to establish its own domestic regulatory corporate governance framework as international best practice. At the same time the U.S. and the U.K. have also become benchmarks for best practices in corporate governance for other economies that perceived Anglo-American governance models as drivers for economic growth (Walter, 2008). As a result, current governance codes contain a wide variety of traditional Anglo-American best practice provisions regarding board composition, director and auditor independence, treatment of shareholders, executive compensation schemes, transparency in financial reporting and disclosure, among many other topics. Many of these provisions build upon agency theory logic (Fama & Jensen, 1983; Jensen & Meckling, 1976), which is the central and dominant tenet of the Anglo-American style of corporate governance. The specific content of every code varies across business systems, but ultimately, codes of good governance attempt to improve the quality of companies’ board governance and to increase


the accountability of companies to shareholders while maximizing shareholder or stakeholder value (Aguilera & Cuervo-Cazurra, 2004).

The worldwide proliferation of these codes raises the question, are corporate governance systems and governance policies and practices converging to the Anglo-American model? In searching for an answer to this question, several studies, on different levels of analysis (i.e., cross-country, country, firm-level), have focused on examining whether the phenomenon of convergence exists or not and have, in the context of codes of good governance presented moderately strong evidence of a convergence trend in their nature and content (see Aguilera, Cuervo-Cazurra, and Kim (2009), Guillen (2000) and Yoshikawa and Rasheed (2009) for reviews of this literature).

One line of reasoning in this stream of research is that through competitive pressures of global capital, product, and labor markets, governance systems and corporate governance policies and practices inevitably converge towards the Anglo-American shareholder value maximization model (Coffee, 1999; Hansmann & Kraakman, 2001; Khanna, Palepu, & Srinivasan, 2004). A contrasting perspective in this literature is that path dependence and the embededdness of corporate governance in a nation’s institutional context place strong limits on convergence (Bebchuk & Roe, 1999; North, 1990; Whitley, 1992). Others go beyond this convergence-divergence dichotomy and argue that governance systems neither fully converge to, nor fully diverge from, the Anglo-American model. Instead, the argument is that there are various degrees of decoupling from the Anglo-American model and firms actively influence, manipulate, and customize their institutional environment to fit governance policies to their own situations (Yoshikawa, Tsui-Auch, & McGuire, 2007). This approach in the analysis of convergence appears to be very useful because it not only directs attention to firm level governance choice and response within an institutional framework, but also simultaneously considers the drivers and impediments of convergence and the institutional pressures for continuity and change.

Although supranational (e.g., OECD, World Bank, IMF), regional (e.g., EU) and national regulatory agencies (e.g., governments, stock exchanges, manager-, director-, professional-, and investor associations) are able to enact pressure to adopt good governance codes at the transnational, national and firm level, firms – the ultimate targets of regulatory action – remain embedded in their specific business system and local institutional context. Drivers of convergence and change (e.g., global financial, product, and labor market integration, harmonization of accounting standards) and impediments to convergence (e.g., differences in property rights, rent seeking by interest groups, complementaries and multiple optima in business systems) simultaneously determine the nature and depth of convergence.

In response to simultaneous pressures for continuity and change, firms can make strategic choices, ranging from passive conformity to proactive manipulation (Oliver, 1991). Allowing for strategic choices at the firm level of analysis, the question regarding convergence becomes more complex. The issue of firm level convergence is now not only “either or”, but requires addressing the form of convergence and the firm strategy in the choice of convergence, culminating in the question, how deep does convergence go? In line with this reasoning, several firm level studies have found high levels of compliance with good corporate governance codes (Bozec, 2007; Collier & Zaman, 2005; Nowak, Rott, & Mahr, 2005; v.Werder, Talaulicar, & Kolat, 2005). However, there are also several descriptive studies that show that compliance with codes at the firm level may largely be in form rather than in substance (Ananchotikul, Kouwenberg, & Phunnarungsi, 2009; Buck & Shahrim, 2005; Romano, 2007; v.Werder et al., 2005). Despite this contradictory discrepancy, very few studies have sought to explain why some firms that have formally adopted a code of good governance, decouple this policy from actual use and why convergence may be in form rather than in substance (v.Ees & v.Witteloostuijn, 2007).

In this article, following Meyer and Rowan (1977), Oliver (1991), and Westphal and Zajac (1994), the notion of decoupling will be used as an operational definition for addressing the issue of convergence at the firm level. Decoupling is defined as the combination of outward appearance of compliance with codes of good governance together with hidden behavioral divergence, or in terms of Oliver’s (1991) typology of strategic responses to institutional processes as “…disguising nonconformity behind a façade of acquiescence” (p. 154).


I will show that addressing the convergence issue in the context of good governance codes with the notion of decoupling has three important implications for current research. First, research on codes of good governance may have underestimated that there are large gaps between formal rules and institutions, on the one hand, and actual firm policy and firm behavior, on the other hand. Second, it is important to allow for active firm behavior in response to institutional pressures. Firms can actively manage compliance and convergence pressures with a variety of strategies and have leeway for divergence through decoupling. Third, consistent with the varieties of capitalism argument that there is no single best model in governance (Hall & Soskice, 2001), pressures for continuity from domestic and local institutions continue to be of great influence on firm behavior, despite global capital, product, and labor market pressures for convergence and change. Based upon these arguments, I develop a model to explain and to predict under what circumstances compliance with codes of good governance at the firm level will be largely superficial, rather than substantive in nature. I argue that a decoupling strategy in the compliance with good corporate governance codes will be more attractive to firms, and also be more sustainable under the following conditions: (a) firms’ compliance costs are relatively high, (b) firms’ costs of outright and visible non-compliance are relatively high, and (c) outsiders’ compliance monitoring costs are relatively high. It can be expected that various firm level characteristics such as ownership structure, management orientation, firm strategy, global market pressure, as well as, institutional-level factors, affect firms’ choice to decouple policy from practice in the use of codes of good governance.

The remainder of the article is organized as follows. Section 2 of the article depicts the nature of codes of good governance and the functional assumptions underlying the “comply or explain” principle. Section 3 analyses the fundamental assumptions of codes of good governance in the context of different business systems. Section 4 links the phenomenon of decoupling to the convergence-divergence debate in corporate governance. Section 5 formulates a firm-level model of sustainable strategic decoupling in the compliance with codes of good governance. Section 6 closes the article with a conclusion.

THE NATURE OF CODES OF GOOD GOVERNANCE

A code of good governance can be considered a tool that includes a set of best practices designed to address deficiencies in corporate governance systems and to improve the quality of a firm’s corporate governance overall. Most codes have some recommendations on the following seven practices: (1) a strong, involved board of directors; (2) a balance of executive and non-executive directors, including independent non-executive directors; (3) clear division of responsibilities between the chairman and the chief executive; (4) timely, quality information for the board; (5) formal, transparent procedures for the appointment of new directors; (6) balanced and understandable financial reporting; and (7) maintenance of a sound system of internal control (O'Shea, 2005; OECD, 2004).

Aguilera and Cuervo-Cazurra (2004) found that in many business systems stock markets or the overseer of stock exchanges (i.e., securities and exchange commissions), associations of managers, and associations of directors played an active role in developing the initial corporate governance codes. Investors’ associations and governments played a secondary role in developing initial national codes of good governance.

The implementation of codes can be pursued through legislation (e.g., Sarbanes-Oxley Act of 2002) or through a voluntary “comply or explain” approach. Codes that are based upon the “comply or explain” principle, require companies to disclose a report including (1) a declaration of conformity that states how they have applied the principles in the code, and (2) in the cases that companies have not complied with the provisions, then they need to explain the reasons for any non-compliance (O'Shea, 2005). There are two important underlying assumptions of the “comply or explain” principle (OECD, 2004). First, the principle “comply or explain” assumes that it is not possible to adopt a “one-best-way” approach to corporate governance for all firms. Firms differ in a variety of organizational characteristics, and the principle allows self-regulation and the possibility of non-compliance with best practice provisions. The second assumption, related to the first one, is that an efficient capital market (including financial press, rating agencies, analysts, institutional investors, and stock exchanges) will monitor the compliance with a


code and penalize unjustified non-compliance with lowering share prices or accept justified non-compliance (Brunsson & Jacobsson, 2000; Cuervo, 2002; MacNeil & Li, 2006; Nowak et al., 2005). Besides these two assumptions, an implicit consideration that appears to underlie the focus of most codes is the concern with principal-agent issues (Fama & Jensen, 1983; Jensen & Meckling, 1976), reflected in the emphasis on board structure and composition, as well as, on improving companies’ accountability to shareholders.

These are strong assumptions and the questions that arise are how these widely diffused codes fit into different business systems with diverse institutional characteristics, and what kinds of business systems would most effectively support the codes’ intended functioning. The next section of the article seeks to answer this question by placing the fundamental assumptions of codes of good governance in the context of the characteristics of generic categories of business systems.

CODES OF GOOD GOVERNANCE AND THEIR INSTITUTIONAL ENVIRONMENTS

In finance and economics, a distinction is generally made between two systems of corporate governance: Bank-based systems and market-based systems (Edwards & Fischer, 1994; Shleifer & Vishny, 1997), although substructures can be identified between and within these systems (Gugler, Mueller, & Yurtoglu, 2004; Levine, 2002).

In bank-based systems, only small percentages of the total stock of large firms are in free float, trading volumes are relatively low (i.e., stock markets are relatively small in relation to the national economy), and information disclosure for outsiders is weak. Ownership is concentrated. Banks, companies, and families are large shareholders and exert control over firms. Boards are controlled by internal directors or external directors linked to large shareholders. Dual-boards are common and include labor representatives. Bank-based systems are prevalent in continental Europe and Asia (Cuervo, 2002; Juergens, 2000; Shleifer & Vishny, 1997).

In market-based systems, a high proportion of a firms’ stock is in free float, stringent accounting rules promote open information disclosure, financial markets are liquid (i.e., stock markets are relatively large in relation to the national economy), minority shareholders are well protected, ownership of corporations is relatively disperse, and markets for corporate control (e.g., takeovers) are active. Single board structures are most common and exist to represent the interests of shareholders and do not include labor representatives. Market-based systems predominate in Anglo-Saxon countries (Cuervo, 2002; Juergens, 2000; Shleifer & Vishny, 1997).

This distinction between market-based and bank-based system captures, of course, not all features of institutions in business systems. However, it takes into account many proximate and background social institutions related to the key institutional domains relevant for explaining the functioning of codes of good governance (Whitley, 1992).

Considering the differences along the market-based/bank-based dimension of governance systems, the “comply or explain” principle appears to function most effectively in capital market-based financial systems. While disclosure of compliance with a governance code is often a mandated legal requirement, monitoring and enforcement is expected to occur through self-regulation in conjunction with the capital market (Nowak et al., 2005). What is assumed is that a declaration of conformity with the code by a listed company would serve as a signal to national and international investors about firm-specific governance, and investors would take this information into account when they evaluate firms and make their investment decisions. It is generally assumed by code developers and issuers that cases of non-compliance will be monitored and sanctioned by an efficiently working capital market, or as the chairman of the German corporate governance code commission phrased it: “Those who dare not to comply with the code shall be punished by the capital market (FAZ, 2001, p. 13).”

Besides the assumption of efficient capital markets another unarticulated consideration in the formulation of codes of good governance is the concern with principal-agent issues (Fama & Jensen, 1983; Jensen & Meckling, 1976). Principal-agent conflicts are of concern in business systems characterized by dispersed shareholders and professional managers. Agency theory, which addresses this


conflict, is by far the dominant theory in corporate governance research and the principal-agent conflict is the primary conflict around which most of the U.S. corporate governance research has revolved (Chhaochharia & Laeven, 2008; Daily, Dalton, & Canella, 2003; Morrison, 2004). Agency theory informs most mechanisms and regulations of good corporate governance provisions in codes. For example, code recommendations regarding adoption of audit committees, age limits for members of the management board, disclosure of individualized executive compensation figures, performance oriented compensation for auditors, or director and officer liability are practices that come directly from principal-agent reasoning and are conceptualized to deter detrimental effects of self-interested top managers. However, in contrast to principal-agent conflicts, principal-principal conflicts arise between controlling shareholders and minority shareholders and result from concentrated ownership and control, family ownership, business group structures, pyramiding, and weak legal protection of minority shareholders. Principal-principal conflicts are prevalent and the basic governance issue in many developed and developing economies around the world (Almeida & Wolfenzon, 2006; Claessens, Djankov, & Lang, 2000; Denis & McConnell, 2003; LaPorta, Lopez-de-Silanes, & Shleifer, 1999; LaPorta, Lopez-de-Silanes, Shleifer, & Vishny, 1998). Clearly, resolving principal-principal conflicts requires different solutions from those offered by the mainstream agency perspective.

Taking into consideration the key assumptions underlying the functioning of the “comply or explain” mechanism in particular, and the subject matter of codes of good governance in general, it can be argued that codes may find a supportive institutional environment primarily in business systems characterized with strong investor rights, dispersed ownership structure (i.e., mainly principal-agent conflicts), and efficient capital markets.

Interestingly, as quoted above, the Chairman of the German governance code commission assumes in his statement in the year 2001 that the institutional environment of Germany’s bank-centered business system would support the functioning of the German code that strongly builds upon Anglo-American ideas of corporate governance. Very recent research, however, casts doubt on the effectiveness of the German code (Andres & Theissen, 2008; Nowak et al., 2005). Besides the concern that codes may not function as intended in bank-based systems, codes that draw heavily from the principal-agent perspective in agency theory – and de facto ignore institutional differences in business systems – may even prove counterproductive (e.g., promoting ownership concentration – a common agency theory prescription - in systems characterized by principal-principal conflicts) in many economies (Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Nevertheless, recent research shows that codes of good governance based upon the “comply or explain” principle have diffused widely around the world, and have been implemented and adopted by firms in bank-based, as well as, market-based business systems. By the end of 2005, 95 countries had issued codes of good governance, whereas only 13 countries had issued codes before 1998 (Aguilera et al., 2009; Zattoni & Cuomo, 2008).

This observation raises the question if this codification activity can be seen as evidence of a convergence trend of business systems towards the Anglo-American capital-market based model. Indeed, the chairman of the Baum commission, responsible for the development of the German code, argued that transferring typical Anglo-American corporate governance principles into the German business system would be a reasonable undertaking, because future convergence of investor protection standards in Germany and other continental European countries into the direction of Anglo-American company law can be expected (Nowak et al., 2005). However, there is a heated academic debate on the validity of this convergence hypothesis. The next section of the article will address this convergence-divergence debate and show that the observation of decoupling at the firm level can offer a way to visualize convergence processes.

DECOUPLING POLICY AND PRACTICE IN CORPORATE GOVERNANCE REFORM

Proponents of the convergence hypothesis, often found in the field of financial economics, typically argue that globalization in capital, product, and labor markets, the harmonization of accounting rules,


crosslistings, and a growing shareholder culture and ideology will inevitably lead to convergence towards the Anglo-American model (Coffee, 1999; Hansmann & Kraakman, 2001; Khanna et al., 2004).

Opponents of the convergence hypothesis, often scholars in the fields of sociology, political science, or law, put forward path dependence arguments and that as a necessary condition for convergence to occur, the potential benefits of the shift from one regime to another have to outweigh the actual benefits of control enjoyed by controlling shareholders (Bebchuk & Roe, 1999). Also, the embededdness of corporate governance in a nation’s institutional context (e.g., differences in property rights, level of economic nationalism, and differences in social norms) is argued to place strong limits on convergence (North, 1990; Whitley, 1992).

In the light of this divergence-convergence debate, Zattoni and Cuomo (2008), drawing from the law and finance literature (LaPorta et al., 1999; LaPorta, Lopez-de-Silanes, Shleifer, & Vishny, 1997; LaPorta et al., 1998), attempt to explain why codes of good governance are adopted in different business systems. The observation they make is that in contrast to countries with a common law system (i.e., proxy for strong investors’ rights, dispersed ownership structure, and active capital market), civil law countries (i.e., proxy for weak investors’ rights, concentrated ownership, and illiquid capital market) adopt codes later, issue a lower number of codes, and state more ambiguous and lenient recommendations. They arrive at the conclusion that the issuance of codes in civil law countries is driven more by legitimation or symbolic reasons than by efficiency reasons or intentions to substantively improve governance practices. This conclusion is supported by research on the politics of international standard setting in international relations and international political economy (Brown & Woods, 2007; Walter, 2008) that finds the adoption of corporate governance best practices issued by the OECD, the IMF, and the World Bank, organizations dominated by Anglo-American countries, to be frequently in form rather than in substance in many non Anglo-American countries. Especially after or during financial crises, the political and corporate elite in a country, national stock exchanges, and national financial authorities, concerned about the effectiveness and legitimacy of the national governance model, may import models of codes of good corporate governance from more successful business systems. However, firms within the domestic business system may either totally accept, fully reject, or as well modify these codes to fit them to their own situation in the local institutional context (Gordon & Roe, 2004; Walter, 2008). This implies that a focus on the divergence-convergence dichotomy at the country-level, and the research question of whether the phenomenon of convergence exists or not, falls short in taking into account the existing dynamics and underlying processes of simultaneous institutional pressures for change from external forces (e.g., global market integration or regulating authorities) and pressure for continuity from different corporate actors embedded in the local business systems (e.g., controlling owners, managers, influential shareholders and stakeholders). Only recently, a very limited literature has begun to address these simultaneous dynamics (Jackson & Moerke, 2005; Juergens, Naumann, & Rupp, 2000; Yeung, 2006; Yoshikawa et al., 2007). In the context of this article, it is important to recognize that the simultaneous and conflicting institutional pressures for change and continuity provide firms with some leeway in their strategic choice of compliance with codes of good governance. Supporting this argument, several firm level studies have found high levels of compliance with good corporate governance codes (Bozec, 2007; Collier & Zaman, 2005; Nowak et al., 2005; v.Werder et al., 2005), but other research also has found that firm compliance with codes may be merely in form rather than in substance (Ananchotikul et al., 2009; Buck & Shahrim, 2005; Romano, 2007; v.Werder et al., 2005). For example, Romano (2007) finds that 92 % of listed Italian companies adopt the corporate governance code of the Italian stock market and issue a declaration of conformity, in accordance with the “comply or explain” principle. However, after investigating the single provisions of the code, he finds that although firms formally follow the code by, for example, establishing audit committees, remuneration committees, and issuing a declaration to appoint independent directors, at the same time, in around 20 % of listed companies these committees did not hold any meetings and did not install independent directors. Similarly, Ananchotikul et al. (2009) characterize 12 % of listed firms on the Thailand stock exchange (SET) as “talk-only” firms regarding the compliance with codes of good governance. The authors define “talk-only” firms as firms that issue a declaration regarding their voluntary compliance with the SET code, based on the “comply or explain”


principle, but do not follow through in the adoption of policies related to shareholder rights and board independence. A similar observation could potentially be made for the German code of good governance. Although the German Ministry of Justice and the chairman of the code commission see evidence for the success of the code in its very high acceptance rate (i.e., declaration of conformity issued by well over 90 % of listed firms) (Nowak et al., 2005), several researchers are more skeptical and speculate that in the German case “…it cannot be entirely excluded that companies declare to comply with a certain standard, although their practice is actual different” (v.Werder et al., 2005, p. 185).

Despite these discrepancies, there is a lack of studies that go beyond merely descriptive analyses and seek to explain why some firms that have formally adopted a code of good governance decouple this policy from actual use (v.Ees & v.Witteloostuijn, 2007). Developing a theory to address this question is very timely because it “… directs the convergence-divergence debate not only to the formal institutional arrangements, but also to firm-level governance choice and response within the formal framework” (Yoshikawa et al., 2007, p. 983). As argued above, individual firms have some discretion in making strategic choices in response to institutional pressures for change and continuity. As the descriptive research depicted above shows, in the compliance with codes of good governance, some firms pursue a strategy in which they disguise nonconformity with codes of good governance behind a façade of acquiescence (Oliver, 1991).

The role of this behavior in corporate governance has been established by recent research (Fiss & Zajac, 2006; Fiss & Zajac, 2004; Wade, Porac, & Pollock, 1997; Westphal & Zajac, 1994, 1998, 2001; Zajac & Westphal, 1995). For example, Westphal and Zajac (1994) found that a large number of U.S. corporations adopt long-term incentive plans in CEO compensation but did not actually use them. Westphal and Zajac (2001) showed that in the U.S. decoupling is a common and a predictable occurrence in the domain of stock buyback programs. Fiss and Zajac (2004) found that firms in Germany proclaimed to support a shareholder value orientation but did not in fact do so. In this literature, decoupling is explained as an outcome of conflicting micro-political and macro-institutional processes.

This literature on decoupling provides an interesting perspective for the convergence-divergence debate and for the adoption behavior of codes of good governance on the firm level of analysis. Studying decoupling behavior on the firm level would also move the research focus from the binary convergence-divergence dichotomy at the country level to intracountry variation regarding substantial versus superficial convergence. The following section of the article will seek to identify and explain the antecedents of decoupling in the use of codes of good governance and to develop a model to predict under what circumstances firms are likely to pursue this strategy.

STRATEGIC DECOUPLING AS A RESPONSE TO CODES OF GOOD GOVERN NANCE

A firm’s adoption and implementation of a code of good governance can be explained by two main approaches: rationalist or efficiency and constructivist or legitimacy. Reasons of efficiency and legitimacy both compete with and also complement each other (Scott, 2001). Efficiency explanations of compliance with codes of good governance point to cost/benefit calculations by corporate actors. Legitimacy explanations suggest that codes of good governance are adopted because of their taken-for-grantedness, which makes adoption socially expected. These two explanations are not necessarily incompatible with each other because firms adopt practices for different reasons. There is evidence suggesting that both rationalist and constructivist reasons explain the adoption of organizational practices in corporate governance (Tolbert & Zucker, 1983; Westphal & Zajac, 1994). Tolbert and Zucker (1983), for example, note that efficiency appears to dominate the early adoption of practices, and legitimation, the late adoption. In the short to medium term it can be expected that cost/benefit calculations by corporate actors will drive the compliance behavior with codes of good governance. In the long term, it can be expected that shared norms among corporate actors and legitimacy reasons are the primary drivers of compliance with codes of good governance. This dichotomy between the efficiency rationale and the institutional rationale does, however, not mean that firms have no choice but to choose one or the other alternative. The notion of sustainable strategic decoupling introduces the potential for active firm agency


and recognizes that firms have discretion in making strategic choices in the compliance with codes. In taking into consideration the previously outlined functional assumptions and the subject matter of codes, the model presented below depicts under what circumstances firms may pursue a sustainable decoupling strategy in response to conflicting pressures in their institutional environment. I argue that firms formally adopt a code of good governance but decouple it from actual use when: (a) firms’ compliance costs are relatively high, (b) firms’ costs of outright and visible non-compliance are relatively high, and (c) outsiders’ compliance monitoring costs are relatively high.

FIGURE 1 THEORETICAL MODEL OF SUSTAINABLE STRATEGIC DECOUPLING

The following paragraphs will describe and explain the elements of the proposed model. Sustainable Strategic Decoupling

Strategic decoupling is defined here, following Meyer and Rowan (1977), Oliver (1991), and Westphal and Zajac (1994) as the combination of outward appearance of compliance with codes of good governance (i.e., issuing of a declaration of conformity) together with hidden behavioral divergence (i.e., not following through with recommendations). This strategy may be pursued by firms who seek to concurrently avoid the costs associated with outright and visible non-compliance with codes and the costs of substantive compliance with codes. External sources of pressure to adopt codes (e.g., global market pressure, official pressure, normative pressures) can make it very costly for firms and corporate actors to openly oppose compliance. At the same time compliance with codes can be very costly for firms and corporate actors (e.g., recommendations may restrict owners’ control rights or influence managers’ discretion or private gains). Firms caught between these contradictory pressures are likely to pursue a decoupling strategy. Strategic decoupling that is sustainable and viable over long periods of time places the strongest obstacles to deep and substantive convergence. Decoupling strategies are more sustainable when it is very costly for outsiders and market actors to monitor the quality of compliance and to use this information to discipline firms to follow through with the codes’ recommendations. This argument stresses that convergence in corporate governance codes may be far from a straightforward linear process and that the resilience of different varieties of capitalism may be significant. The following paragraphs will focus the antecedents of sustainable strategic decoupling. Firms’ Compliance Costs

The substantive compliance with codes can entail significant costs for firms (Aguilera, Filatotchev, Gospel, & Jackson, 2008). Code compliance, however, is a multidimensional concept as codes contain

Sustainable Strategic

Decoupling

Costs of Visible/Outright Non-Compliance are Relatively High

Outsiders’ Compliance Monitoring Costs are Relatively High

Compliance Costs are Relatively High


many different best practice provisions. Therefore, studying compliance costs at the aggregate level of the code would lead to mixed results. Instead, a more informative approach would be to separate costly and non-costly code provisions for firms. The costs of code provisions for firms can be examined regarding two characteristics: (a) direct systemic costs (i.e., out-of-pocket expenses associated with routine compliance with codes that demand human, physical, and financial resources including, for example, publication and dissemination of a declaration of conformity, webcasting meetings, hiring internal auditors) and (b) indirect opportunity costs that impact the strategic priorities, political influence, and discretionary decision making power of corporate actors (i.e., managers, directors, and controlling owners/shareholders).

Direct systemic costs may be relatively higher and more difficult to absorb for small firms with a small resource base and firms that face pressure to reduce operating costs compared to large firms and firms that perform well. However, for other provisions, costs may largely be dependent on the extent to which the provisions affect the controlling shareholders’, managers’ and directors’ political and discretionary decision making powers and mental models.

Substantive compliance with codes may be highly costly for those owners whose control over cash-flow rights exceeds their control over share ownership. The dominant form of corporate ownership outside the U.S. and the U.K. is family-controlled firms (Morck, Wolfenzon, & Yeung, 2005). Related to this, the literature on corporate finance shows that, non-financial firms and banks often are part of the same larger family-controlled groups (LaPorta et al., 1999). High ownership concentration may provide the controlling owner with the incentives and means to entrench himself and/or to exploit minority shareholders by diverting assets and profits (i.e., the principal-principal conflict). Insiders may find it very costly to substantively adopt code provisions that demand transparency and expose such exploitation. However, corporate law can promote the continuance of a business system’s corporate ownership pattern and codes may stand in open contradiction to hard law (Bebchuk & Roe, 1999). For example, the Austrian Code of corporate governance includes and restates the country’s “Squeeze-out of Shareholders Act” that, as research has demonstrated, clearly puts minority shareholders at a disadvantage ("Austrian Code of Corporate Governance," 2007; Gugler, 2001).

In examining ownership patterns it is important to take into account the identity of the owners (e.g., institutional investors, banks, families, other (non)financial companies, governments, foreign investors) as this can have implications for their assessment of costs regarding substantive code compliance (Thomsen & Pedersen, 2000; Wahl, 2006). For example, while perhaps the most important economic benefit of complying with codes of good governance is access to capital markets on better conditions, bank-owned firms have (at least partly) internalized their banking relationships and have privileged access to capital. These firms may perceive compliance as relatively costly if it does not significantly reduce the firm’s cost of funds.

Substantive compliance may also be highly costly to powerful executives (i.e., managers and directors) when provisions affect their political or discretionary decision making power. Van Ees and Van Witteloostuijn (2007) differentiate between managerially accepted provisions (e.g., supervisory board self-evaluation), managerially debated provisions (e.g., director independence), and managerially contested provisions (e.g., disclosure of individual executive remuneration or regulation of the length of top management team (TMT) contracts). Each category of provisions can be conceptualized in terms of costs that executives would perceive to incur when following them. Managerially contested provisions directly and negatively affect the executive and would be perceived as being costly.

However, it is important to recognize that the assessment of compliance costs has a subjective and cognitive underpinning (Fiss & Zajac, 2004; MacNeil & Li, 2006). The cognitive aspect of the assessment of costs related to the adoption of codes and the move towards shareholder value orientation may be reflected in corporate actors’ mental models of the corporation. The literature offers support for the importance and the persistency of mental models in influencing an actor’s assessment of novel governance models (Daft & Weick, 1984; Fiss & Zajac, 2004; Sanders & Tuschke, 2007). For example, top managers in Germany, Korea, Japan, or Taiwan who are socialized into firms through a highly developed system of vocational education and training may have formed a productionist, company-


centered management identity and value orientation. Those actors are likely to perceive code provisions that, for example, aim at increasing outsiders on boards as very costly and inefficient. Their mental models may favor reliance and trust in insiders with experience and information about the firm.

In sum, code provisions do not only represent direct systemic costs related to the amount of resources firms have to spend to comply with a code. Code provisions also represent costs related to the discretional decision making power and political influence and to the mental models of powerful corporate actors. Clearly, path dependencies and forces of institutional continuity influence the perceived and the real costs of compliance with codes of good governance for firms and corporate actors.

The question that arises here is that when compliance with codes can be costly for corporate actors, why and under what circumstances could high compliance rates with codes nonetheless be observed? An answer to that could be that firms adopt codes in form rather than in substance, if the perceived or the real costs of visible and outright non-compliance are relatively high.

The Costs of Visible and Outright Non-Compliance

Several studies have reported high levels of code compliance (i.e., dissemination of a declaration of conformity) by firms within different stock indices across a variety of business systems and have rarely presented examples of firms that adopt explicit strategies of non-compliance with codes (Bozec, 2007; Collier & Zaman, 2005; Nowak et al., 2005; v.Werder et al., 2005). Although it may be difficult to exactly quantify the costs of outright and visible non-compliance, it appears that firms generally perceive these costs to be high. Two of these cost sources that stem from pressures for compliance with codes are highlighted in this section of the article: (a) costs that stem from international market pressures for compliance and (b) costs related to domestic normative pressures for compliance.

Various researchers have argued that international market pressures push firms towards compliance with established Anglo-American international corporate governance practices (Coffee, 1999; Hansmann & Kraakman, 2001; Khanna et al., 2004). Compliance pressures can work through different mechanisms related to capital, product, and labor markets.

The roles of the U.S. and U.K. capital markets are often emphasized. Firms can raise capital in these highly liquid markets by directly issuing equity or by cross-listing their shares via different types of American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs). By listing in any of these countries’ stock markets, firms come under pressure to follow the markets’ SEC requirements and to comply with internationally recognized corporate governance codes to signal investors their creditworthiness and their intentions to pursue good corporate governance practices. Outright and visible non-compliance with codes would signal the exact opposite and would be costly in terms of failing to invoke investor confidence and to raise capital. Capital market pressures for compliance also arise when financial institutional investors from these markets are directly investing in foreign. These investors may pressure firms to comply with codes with which they are familiar. Outright and visible non-compliance with codes can also in this case be highly costly for firms if it deters investors to provide capital.

The roles of international product and labor markets as sources of pressure towards convergence are less emphasized (Khanna et al., 2004). If firms attempt to integrate themselves into a marketplace in which Anglo-American governance practices prevail, the cost of doing business would be greater if firms do not conform to these governance practices. Customers and suppliers may positively assess the creditworthiness of a firm if it declares compliance with a code of good governance that reflects domestic governance practices. Similarly, firms that seek to attract workers from business systems like the U.S. or the U.K. may provide code compliance declarations as a signal to prospective employees that the firm is governed in a manner with which they are familiar. Outright and visible non-compliance with codes may be very costly for firms that are engaged in cross-border product or labor market interaction with business systems close to the Anglo-American style.

Besides international market pressures, firms also can face and incur costs related to domestic normative pressures for compliance with codes. Once a code is issued it becomes a source of normative pressure in a business system and firms and corporate actors may incur costs by outright and visible deviation from the norm. Managers are inclined to comply with codes because they want their firm to


have a positive reputation and adhere to institutionalized organizational practices to maintain support from the environment (Meyer & Rowan, 1977; Pfeffer & Salancik, 1978). The declaration of conformity with a code is usually published in a firm’s annual report, which is a highly visible document. Stakeholders’ perception of a firm’s reputation is strongly influenced by this presentation (Laan, 2009) and creditors, shareholders, customers, employees, governments and others may support or not support the organization upon their perceptions. Outward and visible non-compliance with a code may lead a firm to a reputation of being not well-governed and consequently to lose stakeholder support that can negatively materialize. Also, if non-compliance with codes causes a conflict with a powerful stakeholder, this stakeholder can be expected to call for more hard law and costly and potentially intrusive mandatory legislation on the issue.

In sum, firms that explicitly resist compliance pressures for code adoption can incur substantial costs of non-compliance in a variety of ways. Clearly, forces of institutional convergence influence the costs of non-compliance with codes of good governance for firms and corporate actors. Although these compliance pressures might push firms to formally comply with codes, at the same time, compliance with codes can be very costly. Firms and corporate actors that are caught between these pressures may judge that they can avoid both the costs of substantive compliance and of outright and visible non-compliance by adopting a decoupling strategy. If, under such circumstances decoupling strategies are attractive, the question becomes: When will decoupling strategies be sustainable? This is a central question to be addressed in the convergence-divergence debate as it relates to the path and form of the convergence process and to the question of whether deep convergence is only a matter of time.

Asymmetries in Compliance Monitoring and Difficulties in Enforcement

Decoupling strategies will be more attractive and more sustainable when outsiders and market actors find it very difficult or costly (a) to monitor and observe the true quality of compliance and (b) to use this information to punish non-compliance behavior. While the disclosure of compliance is often a legal requirement, a fundamental functional assumption of codes is that monitoring and enforcement will occur through an efficient capital market (Nowak et al., 2005). As argued above, code acceptance may not necessarily be a proxy for actual compliance with provisions. It may merely be a costless box-checking exercise for firms if market actors find it difficult or incur high costs in monitoring actual compliance behavior (e.g., appointing independent auditors and convincing firms to let them do the audit). Given that firms may have strong incentives to conceal the real quality of compliance and to minimize both internal, as well as, external inspection and evaluation, observing actual compliance, is far from easy, even for relatively sophisticated market players (Walter, 2008).

As codes of good governance become instilled with value (i.e., why would codes of good governance be bad) and become taken-for-granted by the firms’ stakeholders (incl. capital market actors) in the institutional environment, their collective action will be governed by a “logic of confidence and good faith,” (Meyer & Rowan, 1977, p. 357) whereby they accept on faith that firms are behaving in accordance with the legitimate goals of the code. In such an environment, firms tend to avoid inspection and evaluation of code compliance because it could uncover deviations that undermine legitimacy. But also stakeholders who may themselves be actors in the same institutional environment avoid inspection and evaluation of code compliance because it would violate the assumption of the “logic of confidence and good faith”(Meyer & Rowan, 1977). There is evidence that investors “overlook” to evaluate the true quality of code compliance, if breaking with the prevailing institutional logic makes this attempt difficult and costly to pursue (Walter, 2008).

Even if non-compliance is observed by outsiders or market participants there are several factors that can impede the enforcement of the codes: For example, the type of jurisdiction within in a business system can limit the efficiency in the application of codes of good governance (LaPorta et al., 1998). In civil law countries, as opposed to common law countries, judges cannot enforce the application of the codes with the force of regulation. In civil law systems laws and practices can only be developed and codified in parliaments (Cuervo, 2002). Related to that, recent research shows that the U.S. SEC has rarely been able and willing to enforce U.S. securities laws against any U.S. cross-listed foreign firm


because of numerous legal and institutional obstacles (Siegel, 2005). This finding weakens the predictive strength of the functional convergence hypothesis (Coffee, 1999) and shows that firms have potential leeway for strategic and sustainable decoupling.

The implications of the arguments in this section are clear. When outsiders’ monitoring costs are high and code compliance cannot be enforced, decoupling in the compliance with codes of good governance can be a sustainable and viable strategy over time. This also implies that convergence in corporate governance codes is far from a straightforward linear process, and deep convergence may be not only a matter of time.

CONCLUSION

The question of convergence of corporate governance systems, policies, and practices has attracted much research attention and caused heated academic debates. This article suggests that an instructive approach to address this question, and to move the debate forward, would be to simultaneously consider the drivers of convergence and the impediments to convergence in theoretical models. In doing so, research will be moved away from an overly simple “either or” debate (Bebchuk & Roe, 1999; Coffee, 1999), to the more challenging question as to how to interpret firms’ balancing acts of continuity and change. Ultimately, to fully understand convergence processes in corporate governance it is important to address this issue at the firm level of analysis. The rapid diffusion of codes of good corporate governance offers researchers an opportunity to study convergence processes at the firm level. The notion of sustainable strategic decoupling - as a viable firm strategy in managing simultaneous pressures for continuity and change - suggests that convergence in regard to codes of good governance may in many instances merely be in form rather than in substance. The presented model seeks to explain this strategic choice in the compliance with codes and shows that compliance is not just an economic issue or an issue that is largely driven by macro-level (institutional) factors, but also shows that the issue touches on internal organizational dynamics. Further research building upon this framework will lead to a more differentiated and more skeptical view on convergence processes and will aid in preventing to mistake formal actions with substantive and deep changes in corporate governance.

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Borealis Software Case Study

Jay Ebben University of St. Thomas

Alec Johnson

University of St. Thomas

This case study details the potential acquisition of Borealis Software by two entrepreneurs. It is intended to be used as an in-class case study in an Entrepreneurial Finance course, after pro formas and valuation have been covered, to illustrate normalizing and projecting financial statements to arrive at an estimate of future firm value. Students are asked to use the financial information given to create their own financial projections for Borealis should the entrepreneurs make the acquisition. Students can then decide whether the company is worth purchasing for the $12 million asking price. INTRODUCTION

It was February 2007, and Chris Mackey and Dan Smith had just signed a letter of intent to purchase Borealis Software, Inc., a 25-year-old company located in a suburb of Minneapolis, Minnesota. They had been pouring through documents, conducting interviews, performing secondary market research, and myriad other tasks in their due diligence. They were currently analyzing company data they had compiled in preparation for a presentation to their private equity investor on the financial attractiveness of the acquisition. A big part of this task involved interpreting the numbers that were provided by Borealis along with making assumptions about how these numbers may change if they were to take over and operate the company. They would have to be able to defend their analysis in their presentation. BACKGROUND

Chris Mackey started his career in 1983 as an intern for Net60, a local software firm. At the time, Chris was pursuing his undergraduate degree from the University of St. Thomas in St. Paul, Minnesota. He stayed with the company after graduating in 1986, eventually moving from a programmer position to manager. He got in at the ground level of the company, and was part of its growth from 40 to 400 customers during these early years.

In the mid-1990’s, Chris went back to St. Thomas to pursue his MBA. He also moved up to executive roles, first becoming Director of Business Development and then President and CEO. During Chris’ tenure as President and CEO, the company changed its focus to supply chain management software and grew from $8 million in revenue to $34 million in 2003, when it was acquired by 3M. Chris continued in the President and CEO role until 2006 and the company continued to grow at a 25% annual growth rate.


Dan Smith had spent his career in finance roles for various firms. He spent ten years as an accountant for Deloitte & Touche, and then moved into finance at Honeywell. One of his positions at Honeywell was CFO of a $1.8 billion business unit that undertook several acquisitions. He left Honeywell to become CFO of Contingency Software, which was sold in January 2003 for $160 million. He then joined Net60, where he and Chris worked together for the first time and helped to lead Net60 in the 3M acquisition (see Exhibit 1 for Net60 operational performance). THE NEXT VENTURE

After their post-acquisition commitments to Net60 were up, Chris and Dan discussed teaming up on “the next venture.” From their experience in pursuing acquisitions at Net60, they had noticed a trend toward consolidation in the software industry. However, private equity firms needed to deploy too much money to take an interest in smaller software firms with less than $20-25 million in revenues. With over 11,000 software firms under $20 million in revenue, they believed there was ample opportunity to pursue a consolidation strategy with smaller software firms. They could acquire 3-4 smaller software firms in a similar vertical market, resulting in revenues over $50 million and a potential exit to a private-equity or strategic buyer. They believed that such a sale would command a price of between 8 and 14 times EBITDA.

In early 2007, they formed NextMove LLC, which would be the entity that would search for and acquire each firm. They approached a large capital firm, with whom Chris and Dan had established a close professional relationship, to fund the search. The firm invested $1.98 million in preferred stock, and Chris and Dan were in business (see Exhibit 2 for deal summary). BOREALIS SOFTWARE

At the time they were forming NextMove, Chris and Dan were introduced to Borealis Software through an investment bank they had approached in beginning their search. Borealis had been founded in the mid-1980’s and the founder was now 65-years-old and looking to retire. After an initial look at the business, Chris and Dan submitted a letter of intent to purchase the stock of Borealis for approximately $12 million. This equated to about 1x revenue and 2x recurring revenue, which was low for software firms in general, but fairly consistent with acquisition multiples for very small, mature software companies (see Exhibits 3-8 for select data on Borealis).

Borealis sold Computer Telephone Integration (CTI) software to specific vertical markets, with its main focus on the healthcare industry. Borealis’s CTI software unified telephone, paging, and computer information systems, and provided emergency notification and response capabilities. The software enabled organizations to reduce call center staff by 50% and to increase customer service via aspects such as increasing the likelihood of finding on-call staff.

Chris and Dan were immediately attracted to Borealis’s market space. The CTI market was approximately $100 million, large enough to make money, but too small to attract large competitors like Cisco. Borealis was one of four market leaders, none of which held a dominant position. Healthcare organizations, and hospitals in particular, were what Chris and Dan referred to as “sticky”: they were unlikely to switch communications systems.

Borealis had 80 employees and was on pace to generate $12 million in revenues for fiscal year 2007 (year ending May 2007). The company had approximately 200 active customers, with the top ten customers accounting for 31% of revenues, and a 99.5% customer retention rate. Borealis generated revenue through four activities: 1) Software licensing, which included Borealis products and the resale of third party software; 2) Services, which included software installation and training; 3) Maintenance/Customer Support; and 4) Equipment. Its software consisted of four main products:

• Smart Console: Smart Console was the company’s main operator automation product, providing caller information on the operator’s computer screen for incoming calls, complete directory information, and single-button transfers. This product represented 50% of software revenue.


• Smart Web: This product allowed people to find information for themselves via the web rather than contacting an operator. Directory information from the same database used by all Borealis applications was accessible through this platform. Smart Web represented 25% of software revenue.

• Smart Speech: This was a voice-recognition product that allowed incoming calls to be answered by the system rather than a live operator. The system could then direct callers to the proper extension without human intervention. Smart Speech represented 15% of software revenue.

• eNotify: This product was an emergency notification system in which users in a pre-defined group could be notified in a particular emergency situation. This product represented 10% of software revenues.

Despite the company’s success, it had inconsistent growth and profitability and was performing less

than optimal in many areas. There had been little in the way of software releases and no upgrades over the previous three years. The different software products had little consistency, with different looks and fonts. Additionally, although the company did not track expenses by revenue stream, it appeared by Chris’ and Dan’s estimates to be losing money on its professional services segment; from their due diligence, they attributed this to the company performing a significant amount of post-installation service for free rather than billing customers for it (see Exhibits 5 and 6). At the same time, these presented opportunities for Chris and Dan to add value if they were to take over the business. GO FOR IT?

All of this had happened very quickly, and Chris and Dan wondered if this was the right opportunity or if something better might come along if they waited. Right now, their task was to figure out what the company might look like moving forward if they were to take over. Could Borealis alone provide an attractive return on $12 million in equity, even if they were unable to make subsequent acquisitions in this industry? And what upside existed if they could execute their consolidation strategy? Was this better than potential alternative acquisitions they might find?

EXHIBIT 1

SELECTED NET60 OPERATING RATIOS

Revenue Source % of Total Revenue License 24.3% Services 39.1% Maintenance 18.4% Hardware 18.1% Cost of Sales % of Rev. Source License 4.3% Services 68.3% Maintenance 16.9% Hardware 80.6% Operating Expenses % of Total Revenue Product Devt 12.4% Sales 14.2% Marketing 6.7% G&A 4.1% Total Operating Expenses 37.3%


EXHIBIT 2 CIBC DEAL SUMMARY

Total Investment Ownership % Type CIBC $1,980,000 79.2% Preferred Stock Management $20,000 0.8% Preferred Stock Carried Interest Pool 20.0% Common Stock

EXHIBIT 3

BOREALIS PAST INCOME STATEMENTS

FY07 $ (000) FY05 FY06 8 Months 12 Months (est.) Gross Sales 9,474 11,915 7,778 13.255 Net Sales 8,668 11,027 7,145 12,355 Growth Rate 27% 6% 12%

Gross Profit 5,235 7,073 4,354 7,810 Gross Profit % 60.4% 64.1% 60.9% 63.2%

Operating Income (929) 660 49 899 Operating Income % (10.7%) 6.0% 0.7% 7.3%

EBITDA (631) 1,000 289 1,259 EBITDA % (7.3%) 9.1% 4.0% 10.2%

EXHIBIT 4

BOREALIS PAST BALANCE SHEETS

$ (000) 5/31/05 5/31/06 1/31/07 Est. Closing 2/28/07 Cash 1,512 1,680 2,397 1,887 Accts Receivable 1,767 2,780 2,465 2,464 Inventory 429 419 677 675 Other Current Assets 157 237 307 295 Total Current Assets 3,885 5,116 5,846 5,321 Net Fixed Assets 591 615 688 688 Other Assets 74 36 45 59 Total Assets 4,530 5,767 6,579 6,068 Current Debt 71 152 109 0 Accts Payable 211 238 287 250 Accrued Income Taxes - 38 20 20 Accrued Liabilities 257 323 269 300 Due to Call Connect 216 216 102 102 Customer Deposits 1,296 1,606 2,381 2,400 Deferred Income 3,208 3,406 3,334 3,636 Total Current Liab. 5,259 5,979 6,502 6,708 Long-Term Debt 83 66 148 0 Owners’ Equity (812) (278) (71) (640) Total Liab. & OE 4,530 5,767 6,579 6,068


EXHIBIT 5 BOREALIS REVENUE BY CATEGORY

FY07 $ (000) FY05 FY06 8 Months 12 Months (est.) License 3,450 4,723 2,648 5,473 Growth Rate (35%) 37% 16%

Services/Training 1,496 1,953 1,211 1,881 Growth Rate (23%) 31% (4%)

Maintenance 3,670 4,431 3,329 5,109 Growth Rate 20% 21% 15%

Equipment 858 808 379 792 Growth Rate (45%) (6%) (2%)

EXHIBIT 6 BOREALIS COST OF SALES BY CATEGORY

FY07 $ (000) FY05 FY06 8 Months 12 Months (est.) License 256 357 231 468 Services/Training 1,900 2,284 1,772 2,752 Maintenance 678 720 520 780 Equipment 599 593 268 545

EXHIBIT 7 BOREALIS EXPENSE ADJUSTMENTS

$ (000) FY06 FY07 – total (est.) Projected Expense Owner Salary/Bonus/Benefits 461 892 240 Trade Show Expenses 150 120 75 Legal Fees 130 130 100 Hiring Expenses 100 85 65 Consultant Expense 0 20 0 Marketing Brochures 0 10 0


EXHIBIT 8 BOREALIS SALES BY CUSTOMER

Customer FY06 (000’s) % A 775 7.03% B 430 3.90% C 357 3.24% D 336 3.05% E 333 3.02% F 289 2.62% G 251 2.28% H 232 2.10% I 211 1.91% J 211 1.91% Total Top Customers 3,425 31.06%

TEACHING NOTE Purpose

This case was written to fill a gap in case studies for entrepreneurial finance courses: one that puts students in the position of projecting financials to make a decision. The case provides financial details for a software company that two entrepreneurs are looking to acquire, and students are asked to normalize and project financials and to project an exit value to assist them in evaluating the opportunity. A major point of learning for students is in the fact that there are many directions they can take in their projections, so they are forced to make their own assumptions. This is a level of ambiguity with which most students are unfamiliar and uncomfortable, and it provides the instructor an opportunity to demonstrate how approach is more important than coming up with the “right” answer. Case Questions

1. Using the information given in the case along with the estimated 2007 income statement numbers, prepare an adjusted/normalized 2007 income statement for Borealis. What is the EBITDA multiple based on your adjusted EBITDA?

2. Using the information given in the case, project five years of income statements using the Excel spreadsheet. What assumptions did you use?

3. Estimate an exit value in Year 5. What is the total accumulated cash over the five-year period? At a $12 million purchase price, what is the projected IRR?

4. Should Chris and Dan move forward with the acquisition? Why or why not? Classroom Strategy

An effective strategy for this case is to have students read the case before class and then work in groups for 45-60 minutes during class to do the analysis. It is best to provide students with an Excel spreadsheet template (see Exhibit TN-1; this is an example of a completed spreadsheet, but the instructor can easily create a blank spreadsheet in Excel with just headings and no numbers). However, the instructor should give few instructions at the beginning of class on how to approach making adjustments to the 2007 income statement and developing pro formas. It will generally take the groups ten or fifteen minutes (along with a question or two for the instructor) to figure out the approach they will take. The instructor can monitor progress and leave about 30-40 minutes to go through the projections and other discussion points with the class. Instructors can expect to spend approximately 75-90 minutes total on the case if it is done as an in-class case study.


Case Analysis There is a lot of information given in the exhibits, some of which is relevant to this analysis and some

of which is not. This is intentional, as it gives students the challenge of sifting through the numbers, just as they would have to do if they were performing due diligence on an actual acquisition target. Additionally, it is important to point out to students (even before they begin their analysis) that there isn’t one correct answer; it is their approach that is important. To that end, the analysis that follows in this teaching note provides one set of assumptions and the logic behind them, but instructors and students can certainly come up with and justify other approaches as well. Question 1: Adjusted/Normalized 2007 Income Statement

Looking at the exhibits in the case, the two most glaring adjustments that need to be made are in the gross margin on Service (Exhibits 5 and 6) and in the Operating Expenses (Exhibit 7). From their previous experience at Net60 (Exhibit 1), Chris and Dan knew that software firms should generate an approximately 30% margin on service. What Chris and Dan found in their due diligence is that Borealis was that they didn’t realize they were losing money on this; they were simply not charging for most post-installation service even though the expense of service was being incurred. While this would take time to correct, they thought they could eventually do so. Pricing service to generate a 30% margin on $2,752,000 of costs would increase the service revenue from $1,881,000 to $3,931,000 (see TN-1).

Looking at Exhibit 7, Chris and Dan expected to reduce operating expenses by $777,000. This is something that can take immediate effect if they go ahead and purchase the business. The instructor can note here how common it is in small business for an owner to either over- or under-compensate herself/himself and accumulate other expenses that would not be there with more professional management in place. These added expenses essentially reduce the acquisition price by decreasing EBITDA.

Together, these adjustments would increase EBITDA by about $2.8 million and EBITDA percentage from 10.2% to 28.4%, which is far closer to the 34% average among software firms noted in the Stern School of Business study on margins1. At an EBITDA of $4 million, the acquisition multiple goes down from 12 to 3, indicating the potential for Chris and Dan to create significant value in Borealis simply by implementing changes in pricing and spending to reflect more normal industry practices.

Of course, there are other changes that could be made and that students will ask about. One is that the proportion of revenue generated by Net60 through licensing, service, maintenance, and equipment is significantly different than Borealis. Some students will want to adjust revenues to those percentages, which is okay. However, we don’t know if it is reasonable to expect this given that Borealis operates with a different customer base. Another is that Net60’s costs for licensing and equipment (4.3% and 80.6%) are also different than Borealis’s (8.6% and 68.8%). It would certainly be reasonable to change these, but they would have minimal impact as they result in relatively small changes in dollars and more or less offset each other. Question 2: Pro Formas

Once students have made assumptions about what “normal” operating performance would be, they can start to build out income statements for the next five years. In Exhibit TN-1, the main assumptions used in the pro formas are as follows:

• Revenue Growth = 10% per year. It can be debated whether this is optimistic or conservative, but given revenue growth over the past two years of 27% and 12%, along with Chris’ and Dan’s track record, it could be argued that this is a reasonable assumption (and, of course, anything higher would create a more attractive scenario). This growth rate was assumed for the License, Maintenance, and Equipment revenue streams.

• The Service revenue stream takes five years to get pricing to a 30% gross margin. At a growth rate of 10% per year, cost of service in year 5 would be $4,432,000, and service revenue would be $6,632,000 to achieve a 30% margin. For lack of a better assumption, the growth in Service revenue was split equally among the five years.


• Cost of sales for Licensing, Maintenance, and Equipment remained constant as a percent of each revenue stream (so each one increased by 10% per year).

• Operating Expenses were based on a percent of net sales. This was set to the percent from the adjusted 2007 income statement ($6,134,000/$14,405,000 = 42.6%).

• Depreciation/Amortization remained constant each year at $360,000 (based on 2007 numbers). While these assumptions are relatively simple, the instructor can stress to students that in reality,

assumptions don’t need to be overly complex – they just need to be justifiable. The instructor can also show the students how to perform sensitivity analysis by assuming different growth rates, different growth in pricing of services, and/or different operating expenses. This will show students the level of risk in missing target growth rates, etc. Question 3: Accumulated Cash, IRR

If we use EBITDA as a proxy for cash, the total accumulated cash from Exhibit TN-1 over the five-year period is $24.3 million. If we assume an exit value of 12 x EBITDA, the exit value in year 5 would be 12 x $6,233,000 = $74.8 million, for a total of $24.3 + $74.8 = $99.1 million. At an investment of $12 million, this comes out to a projected IRR of 53%.

The instructor can demonstrate different scenarios here as well. For instance, even at only a 3% revenue growth rate, the accumulated cash is $74.6 million and the IRR is 44%; this illustrates how significant the opportunity is for implementing pricing changes in service and changes in operating expenses. Additionally, if Chris and Dan are able to make a second acquisition in this industry with similar financial potential, there is even more upside to acquiring Borealis. Question 4: Should They Make the Acquisition?

There isn’t a right or wrong answer here either, but with the potential financial upside and Chris’ and Dan’s experience, it seems like a good bet. Also, with the limited information given in the case, Borealis is in an attractive market with products that add significant value to its customers, has high customer retention, is somewhat protected from competition, and has revenues spread out among customers (see Exhibit 8). If Chris and Dan can implement the changes in service pricing and the changes in operational expenses and simply maintain the customer base Borealis currently has, they can create significant value without growing the company at all. And, if they are able to make additional acquisitions that have the same type of upside, this could be an even larger opportunity. Epilogue

Chris and Dan decided to close the deal and took over Borealis in March of 2007. Between March 2007 and February 2009, Borealis acquired four additional companies (including Borealis, these companies generated $41 million in revenue at the time of acquisition). They invested a significant amount of capital into technology upgrades and product consistency. They also spent a great deal of effort on employee morale post-acquisition, through surveying employees, implementing employee suggestions, and offering all employees stock options.

In early 2010, they introduced a product called Borealis Connect, which was created as a pager replacement. This product allowed pages to be sent to a mobile phone and would disable the phone until the user acknowledged that he/she received the page (eliminating the possibility for someone to claim they didn’t receive a page when in fact they did). This product caught on quickly with hospitals and also caught the eye of strategic partners who needed a product to supersede actual pagers.

In March of 2011, Borealis was acquired for $162.5 million. At the time, the five acquired companies that were now Borealis were generating $60 million in revenue and approximately 22% EBITDA margins.


EXHIBIT TN-1 PRO FORMA WORKSHEET

2006 2007

(est.) 2007 (adj.)

2008 2009 2010 2011 2012

Sales: License Services Maint. Equip. Total Discounts Net Sales

4,723 1,953 4,431 808 11,915 888 11,027

5,473 1,881 5,109 792 12,355 900 12,355

5,473 3,931 5,109 792 15,305 900 14,405

6,020 2,771 5,620 871 15,283 1,038 14,245

6,622 3,661 6,182 958 17,424 1,183 16,241

7,285 4,552 6,800 1,054 19,690 1,337 18,353

8,013 5,442 7,480 1,160 22,094 1,500 20,594

8,814 6,332 8,228 1,276 24,650 1,674 22,976

COS: License Services Maint. Equip. Total

357 2,284 720 593 3,955

468 2,752 780 545 4,547

468 2,752 780 545 4,547

515 3,027 858 600 5,000

566 3,330 944 659 5,499

623 3,663 1,038 725 6,049

685 4,029 1,142 798 6,654

754 4,432 1,256 878 7,320

Gr. Profit Gr. Profit %

7,072 64.1%

7,808 63.2%

9,859 68.4%

9,245 64.9%

10,741 66.1%

12,304 67.0%

13,490 67.7%

15,656 68.1%

Op. Expenses Op. Profit Op. Profit %

6,413 659 6.0%

6,911 897 7.3%

6,134 3,725 25.9%

6,066 3,180 22.3%

6,916 3,826 23.6%

7,815 4,489 24.5%

8,769 5,171 25.1%

9,784 5,873 25.6%

EBITDA EBITDA %

999 9.1%

1,257 10.2%

4,085 28.4%

3,540 24.8%

4,186 25.8%

4,849 26.4%

5,531 26.9%

6,233 27.1%

ENDNOTE

1. New York University, Stern School of Business (2013). “Margins by Sector.” http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html.


Assessing the Impact of Vehicular Traffic on Energy Demand in the Accra Metropolis

John Mensah

Cape Coast Polytechnic

Jonathan Annan Kwame Nkrumah University of Science & Technology

Francis Andoh-Baidoo

Kwame Nkrumah University of Science & Technology

Traffic congestion is a great concern to many nations especially the developing ones. In this paper we examine the road traffic congestion construct. Mixed methods were used and analyzed using the Statistical Package for Social Scientists. Using the data from Ghana, we found that congestion has two main dimensions (i) narrowing of roads and (ii) artificial blockage of roads. From the analyzed data, it was established that, the congestions on our roads are being influenced by four-phase traffic theory, called BAM theory. This theory is the best used when dealing with intelligent traffic management systems. INTRODUCTION

Traffic congestion in urban areas at crest hours has numerous repercussions on our national economy;

one of them is augmented energy demand on transportation. Some potential elements in urban planning are transport and energy consumption. Reducing energy demand on transportation is a topic which is becoming increasing important as efforts to attain millennium goals and sustainable life styles as well as sustainable travel behaviour are being sought, yet proving intractable to achieve here in Ghana (Hickman and Banister, 2007).

Without well-developed transportation systems, logistics could not convey its return into full play. However, a good transport system in logistics activities could provide better logistics efficiency, reduce operational cost, and promote service quality. The improvement of transportation systems needs the effort from both public and private sectors. A well-operated logistics system could increase both the competitiveness of the government and enterprises (Tseng and Yue, 2005).

The transport sector plays a key role in economic development. In West Africa, the sector generates about six percent (6%) of total Gross Domestic Product (GDP) and about 4.8 percent of Ghana’s GDP (Ghana Statistical service, 2007). However, inefficiency prevails due to the high cost of vehicle operation. In Ghana, roads are the predominant mode of transport accounting for about ninety-four percent (94%) of freight and ninety-seven percent (97%) of passenger traffic movements. The subsector is the most viable alternative apart from rail to transport, bulk commodities like manganese, bauxite, timber and cocoa. The railway network operates at limited capacity with low efficiency (Last, 2008). All the same, among the


benefits that trains are expected to deliver to cities are capacity expansion of the current congested transportation infrastructure; reducing the geographical isolation of the towns within region; improving cohesion and quality of life in the city by stimulating the Ghanaian economy; and reducing the external costs of transportation in the region. Road transport presently represents sixteen percent (16%) of worldwide energy demand and forty-six percent (46%) of worldwide demand for petroleum products. Traffic information is incontestably important to all and sundry particularly for businesses in Ghana. With precise and current traffic information, a better traveling arrangement can be prepared which will translates to reduction in time and energy consumption (Poolsawat et.., al., 2009). The underlying issue for conducting this research was to find out how to minimize traffic and its adverse, yet fulfilling the demand for accessibility in support of the efficient distribution of goods and services in Ghana. This is to enhance economic and social goals. Thus the study aimed at assessing the impact of efficient logistics on urban transport energy demand. The rest of the paper is organized as follows: The next section present relevant review literature, following, we present our research methods and then continue with the presentation of the results and discussion. Finally we conclude the paper highlighting the findings, implications and potential recommendations. LITERATURE REVIEW

Traffic congestion is a condition on road networks that occurs as use increases, and is characterized

by slower speeds, longer trip times, and increased vehicular queuing. The most common example is the physical use of roads by vehicles. When traffic demand is great enough, that the interaction between vehicles slows the speed of the traffic stream, this results in some congestion. As demand approaches the capacity of a road (or of the intersections along the road, extreme traffic congestion sets in (Downie, 2008). Palma and Lindsey, (2011) found that, Traffic congestion is common in large cities and on major highways and it imposes a significant burden in lost time, uncertainty, and aggravation for passenger and freight transportation cost which is esteemed at around half the wage rate (Small, 1992).

Traffic congestion occurs when a volume of traffic or modal split generates demand for space greater than the available road capacity. There are a number of specific circumstances which cause or aggravate congestion; most of them reduce the capacity of a road at a given point or over a certain length, or increase the number of vehicles required for a given volume of people or goods.

According to Baskar, (2009), owing to the ever-increasing traffic demand, modern societies with well-planned road management systems, and sufficient infrastructures for transportation still face the problem of traffic congestion. This results in loss of travel time, and huge societal and economic costs. Constructing new roads could be one of the solutions for handling the traffic congestion problem, but it is often less feasible because of political and environmental concerns.

According to Baskar (2009), Traffic congestion in highway networks is one of the main issues to be addressed by today’s traffic management schemes. Automation combined with the increasing market penetration of on-line communication, navigation and advanced driver assistance systems will ultimately result in intelligent vehicle highway systems (IVHS). Due to this, an extension to the current traffic control approaches, advanced technologies in the field of communication, control and information systems have been combined with the existing transportation infrastructure and equipment.

D‟Este (2000) concedes the importance of integrating congestion into the modeling of freight movements in urban areas, particularly as that is where congestion delays are concentrated. Taniguchi et al (1999), industrial a representation for determining the optimal size and position of these public logistics terminals which incorporates a „travel time performance function‟ on ordinar y urban roads and expressways.

According to Baskar et al., (2009), congestion management and control methods are used to control the traffic flows and to prevent or reduce traffic jams, or more generally to improve the performance of the traffic system. Potential performance measures in this circumstance are throughput, travel times, safety, fuel consumption, emissions, reliability etc. Currently implemented traffic management approaches primarily make use of roadside based traffic control measures (such as ramp metering, traffic


http://en.wikipedia.org/wiki/Queueing_theory�

http://en.wikipedia.org/wiki/Mode_choice�

signals, dynamic route information panels and dynamic speed limits) and infrastructure-based equipment (including sensors and traffic control centres).

Transport in Ghana is consummate by road, rail, air and water. Ghana's transportation and communications networks are centered in the southern regions, especially the areas in which gold, cocoa, and timber are produced. The northern and central areas are connected through a major road system; some areas, however, remain relatively isolated (Wikipedia 2007). Earlier research by Tiwari (2002) found that, travel distinctiveness of big cities in high-income countries vary from those in low- and middle-income countries in the use of mass rapid transit and commuter rail systems. According to Tiwari et al., (2007) there are two kinds of traffic - homogeneous and non-homogeneous. Homogeneous traffic has stern lane control and has traffic entity types whose physical dimensions do not vary much.

According to APEC (2006), Japan prediction shows that, by 2030, oil is likely to continue to be the major energy source for the transport sector Whiles by that same duration road transport is projected to account for about eighty percent (80) of total transport energy demand. APEC’s net oil import dependence will jump from the current 36 percent to 52 percent by 2030. Over the outlook period, energy demand in the transport sector is projected to grow at an annual rate of 0.4 percent per year, compared with the previous two decades at 2.5 percent per year. Energy demand for road transport is projected to increase by an annual rate of 0.2 percent, maintaining the largest share at around 78 percent of the total transport energy demand. Gasoline for passenger vehicles is expected to increase by 0.5 percent per year, compared with that of 2.6 percent in the previous two decades. METHODOLOGY

The population of the study included all drivers in Accra Metropolitan Area as well as officials of

Urban Roads, National Petroleum Authority, Driver Vehicle License Authority and Ghana Statistical Service. A convenience sample 500 personnel were interviewed out 1,658,937 being the population the metropolis. Both primary and secondary data were used in this study. A combination of various data collection techniques were utilized in this study including interviews, observation, documentary analysis and questionnaire administration. To gain a deeper understanding of the system, semi-structured interviews were used for the drivers. In other words, a series of questions were asked to cover specific interested areas without necessary following the pre-set questionnaire. Given the nature of the issues that were being investigated, a combination of quantitative and qualitative methods was used in the analysis of the study; with the qualitative tools being used more extensively. Data collected were analyzed using Microsoft Excel 2007 and Statistical Package for Social Scientist (SPSS). RESULTS, PRESENTATION, ANALYSIS AND DISCUSSION Causes of Road Traffic Congestion in Accra Metropolis

Form the data gathered it was found that congestion in Accra Metropolis are as a results of eight routes causes which is best grouped into four categories called ‘’BAM FACTORS’’ of road congestion. BAM FACTOR 1- Horizontal Causes of Congestions

Poor road network; Transportation engineers have long studied and addressed the physical capacity of roadways—the maximum amount of traffic capable of being handled by a given highway section. Capacity is determined by a number of factors: the number and width of lanes and shoulders of roads; merge areas at interchanges; and roadway alignment (grades and curves). These things are completely absent on the five highways understudied.

Road checkpoints; The several road checkpoints erected by Police officers also contribute to serious traffic congestions and further restrict the flow of the traffic on our roads.

Pedestrian obstruction; The missing crosswalks sometimes forces pedestrians to cross the roads at many different parts which eventually leads to congestions in different parts of the same road.


BAM FACTOR 2- Vertical Causes of Road Congestion (i) Trading obstruction; are events that disrupt the normal flow of traffic, usually by physical

impedance in the travel lanes. In addition to blocking travel lanes physically, events that occur on the shoulder or roadside can also influence traffic flow by distracting drivers, leading to changes in driver behavior and ultimately degrading the quality of traffic flow.

(ii) Narrow traffic lanes; Construction of roads with narrow lanes several years ago is now causing serious congestions in Ghana. With the width of most of our roads in Ghana, many of the modern heavy vehicles has a wider width reducing the lane widths on our roads. This can sometimes makes it impossible for some of the vehicles to overtake each other’s and this tend to slow down the speed of vehicles on the roads especially in central Business Areas, Malam Road, Ofanko Road and the Sprintex road. On urban roads, where speeds are limited to 50kph, this can sometimes be slow down the speed of the vehicles to 5kph or lesser than that.

(iii) Reserved Parking lots; It was observed from most of these arterial roads that the various shops, offices and churches along it had either no or inadequate parking spaces. As a results of this, a lot their customers tend to park their cars along the shoulders of the road. Lack of pullouts, or designated stopping points for jitneys results in numerous interruptions to flow of the vehicles, even within non-conflicting streams of traffic which seriously contribute to the road congestion. BAM FACTOR 3- Traffic Control Devices

Traffic control congestion; Intermittent disruption of traffic flow by control devices such as railroad grade crossings and poorly timed signals also contribute to congestion and travel time variability. BAM FACTOR 4- Loading

Picking of Passengers along the road; In Accra most of the taxi and commercial minibuses (trotro) do not have permanent terminals and routes. They move around picking passengers along the routes. Landmarks may serve as route names or route termini. These taxis and trotro can also be boarded anywhere along the routes which is obviously causes road traffic congestion in the city. URBAN TRANSPORT STRUCTURE

It is interesting to note from the data gathered that the cars (which consist of Private Motor Vehicles

(PMV) and Commercial Motor Vehicles with their Consumption Capacities (CC) up to 2000 constitute about 95 percent on our roads whereas the buses and coaches which are able to pick an average of six times the number of passengers for the cars constitute only 4 percent (see Figure 1and Table 1 ) contributing to the traffic congestion on our roads which also resulting in high energy (fuel) demand and the delay in distribution of goods and services. Urban congestion is set to get worse under current trends of increases in these categories of cars for growth in traffic.


FIGURE 1 URBAN TRANSPORTATION STRUCTURE

Source: Field Survey, 2009

From Figure 1 and Table 1 (See Appendix), public transport buses and train services have declined in the face of increasing ownership to the use of personal cars, reducing the mobility of disadvantaged groups and the use of more fuel by these cars. The reasons accounting for this, is that, large municipal buses have been unable to compete effectively for trips to the Central Business Area (CBA) of Accra due to high levels of delay and inability to maintain any semblance of a regular schedule. Thus the traffic flow comprises of multitudes of “mini buses” type of public transportation vehicles intermingled with private saloon cars, trucks and taxis. USAGE OF ROAD INFRASTRUCTURE

There are about 775 km of paved roads and 658.37 km unpaved roads (Table 2) and 75 km of the paved roads are the main arterial whilst the rest are minor arterial, collectors and local roads. These have been estimated to be 300 – 400kms.

TABLE 2 LENGTHS AND NATURE OF ROAD SURFACE

Paved Roads Unpaved Roads Total % % Accra 775 km 54 658.37 km 46 1433.37 km Country 1935.10 km 47.6 2128.85 km 52.4 4062 km

Source: Department of Urban Road, 2002

According to classification of Department of Urban Road forty- five percent (45%) of Accra roads are in poor condition. This figure is higher than the national average of forty- three percent (43%). The primary road network in Accra radiates out from the Kwame Nkrumah Circle to Accra Central, Ofanko barrier, Medina, Spintex road, Malam Junction Road corridors. It is estimated that about eighty percent (80%) of vehicular traffic in Accra Metropolis has these road corridors as their destination. Peak hours Traffic is when the road network is heavily loaded and in the mornings it was found to range between


6:30 – 10:00 GMT. This is the most loaded morning period of traffic in the Accra Metropolis. Evening Peak Hour (EPH) traffic matrix in Accra metropolis was also found out to be ranging between 16:00 and 20:00 GMT and which is slightly longer than the morning period traffic.

FIGURE 2 ROAD OCCUPANCY OF VEHICLES

Source: Field Survey, 2009

Considering the usage of roads, figure 2 show the eleven year (1997-2007) period ratio of “the number of motor vehicles over total length of roads” in Accra Metropolis. For the (x-axis) – Numbers (1-11) in Figure 3, represent the years 1997-2007 whiles the vertical axis depicts the length of road, with most of these traffic occurring between, 2000-2007. The numbers of vehicles within that period (2000-2007) were much higher than 180 unit/Km, which were been taken as the highest limitation of the above ratio and this confirms that there are severe traffic congestion on the five arterial principal roads under study in Accra Metropolis. This is due to the growth of motor vehicles which were not controlled in Accra Metropolis and for that matter Ghana as a whole by the Driving and Vehicle Licensing Authority (DVLA) and this account for the congestion on our roads in Ghana.

Though each day there are more vehicles which are not driven on our roads in the Metropolis, the load on roads in the city is still very high as shown by the figure 2. Something has to be done to check this increasing passenger car per kilometer trend otherwise severe traffic congestion is going to occurred on our roads and this will be resulting in high fuel consumption, which is not due to an expansion of our economy but inefficiency in our logistics system.


URBAN TRANSPORT SERVICE LEVEL

TABLE 3 COMPARISON OF URBAN TRANSPORTATION SERVICE LEVEL

ROADS DISTANCE FROM

NKRUMAH CIRCLE (KM)

AVERAGE TRAVEL TIME WITHOUT TRAFFIC (MINUTES)

AVERAGE TRAVEL TIME WITH TRAFFIC (MINUTES)

CONGESTION COST

CBA 3.4 30 70 40 SPINTEX ROAD 16.4 45 105 60 MADINA 13.0 60 180 120 OFANKOR BARRIER 7.7 20 55 35

MALAM JUNCTION 8.7 75 148 73 Source: Modified from Urban Roads –Accra (2009)

Analysis of travel speed survey for the purposes of calibrating the traffic model and traffic management aspects, floating vehicle journey-time surveys were conducted in the five arterial-roads. Results for the average morning and evening peak hours are schematize in table 3 and detailed analyses of travel times for all road links are summarize in the Table 3. From Table 3, the distances of the five principal arterial roads under study and the congestion costs which is the difference between the times taking to travel in non-congestion route and time taking to travel on congested route. Looking at congestion cost is really significant cost for the metropolis and is consistent with the work of Small, (1992). Additional impacts of these congestion on motorized travel, includes the delay and the travel foregone, which are usually ignored, although they are often significant compared with costs that are considered, particularly in urban areas (Tiwari, 2007). SUMMARY OF KEY FINDINGS

In summary, it is significant to note that without well-developed transportation systems, logistics

could not bring its advantages into full play. Besides, a good transport system in logistics activities could provide effective distribution system in the economy, drastically reducing business operational costs, and promote service quality. The improvement of transportation systems needs the effort from both public and private sectors. A well-operated logistics system could increase both the competitiveness of the government and enterprises. From the above analysis it was established that, traffic congestions in Accra metropolis are influence by BAM theory which constitute eight root causes- Poor road network, Road checkpoints, Pedestrian obstruction, Trading obstruction, Narrow traffic lanes, Reserved parking lot, Picking of passengers and Traffic control congestion.

Also the absence of rail based transport system and inadequate city buses in Accra Metropolis has led to frequent use of cars leading to congestion in city roads. Public transport buses and train services have declined in the face of increasing use of cars, reducing the mobility of disadvantaged groups and causing extremely unpleasant traffic congestions leading to high energy demand.

The rapid increase in vehicles on roads without corresponding increasing in road space is causing heavy congestion in many parts of the city. During the past 10 years (1997-2007), the length of road has not seen any significant increase, while the number of road worthy vehicle registrations increased by more than double (Table 1). The imbalance in growth of road length and vehicle registration has resulted in most of the serious traffic congestion we see in our roads. The effect of this is more consumption of


fuel energy on our roads which also have a negative effect on the economy because of government subsidy.

The cost of oil dependency are essentially a huge cost to a national economy (specifically that of Ghana) of various features of the world oil market that cause problem to a nation relying heavily on oil imports. There is a considerable scope to improve the fuel efficiency of vehicle fleets, not mainly through technological changes but also to some extend through consumer choices among the number of vehicle in system, vehicles size and types, maintenance culture and the use of right fuel. As a result, we should not expect to see dramatic changes in modal shares or in the nature of transport system. Furthermore, this unresponsiveness suggests that it is costly to reduce energy use in transport, relative to other economic activities, and thus the efficient policies will probably not extract as much energy savings (in percentage terms) from transport as from other sectors. CONCLUSION AND RECOMMENDATION

Traffic congestion in the urban areas are one of the main logistics issues to be addressed by today’s

traffic management schemes. Congestion in the Accra Metropolis is translated into lost time, missed opportunities, lost worker productivity, distribution delay, and a general increased cost of energy in logistics activities. According to Baskar et al., (2009), constructing new roads could be one of the solutions for handling the traffic congestion problem, but it is often less feasible because of political and environmental concerns. An option would be to make more proficient use of the accessible infrastructure. Automation pooled with the rising market dissemination of on-line communication, routing and advanced driver support systems are some of the solution that will help us to achieve efficient logistics in urban areas.

Again, implementing these Automations in our transport systems will eventually result in intelligent vehicle highway systems (IVHS) that share out intelligence between roadside infrastructure and vehicles and in the longer term the most hopeful solutions to the traffic congestion problem found here in Ghana. Based on the extent to which the roadside and vehicle could work together (devoid of human driver involvement), we recommend the following different types of Automated Highway System (AHS) to be used on our roads to reduce the congestions as well as energy used to save cost in businesses and the nation as whole;

Autonomous vehicle systems: there should be a policy for all vehicles to be equipped with sensors and computers to operate without roadside infrastructure assistance and without coordination with neighboring vehicles.

Cooperative vehicle systems: Vehicles use sensors and wireless communication techniques to coordinate their maneuver’s with neighboring vehicles without any roadside intervention.

Infrastructure-supported systems: Vehicles will communicate with each other and guidelines for decision making purposes are provided by the roadside infrastructure.

Infrastructure-managed systems: This will help vehicles indicate their desired actions such as lane changes, exits and entries to the roadside infrastructure. The roadside system then provides the instructions for inter-vehicle coordination of these maneuvers.

Infrastructure-controlled systems: This help the roadside infrastructure to takes entire control of the vehicle operations, monitors the traffic, and optimizes the vehicle operations in such a way that the network is utilized as well as possible.

Decongestion: It is a known fact that traffic is a function of land use. The implementation of a policy geared towards decongestion of the Central Business Area (CBA) through relocation of certain trading activities which attract considerable traffic will be a step in the right direction.

All these will enhance easily movement of transport and for that matter improve logistics activities in the Accra metropolis. Urban transportation efficiency is the key factor which determines the capacity of urban transportation systems and the balance between transportation demand and supply. The transportation input (i.e. construction of transportation facilities) cannot increase within a short period of time, but the demand of transportation is growing rapidly from the study. Therefore to improve the


efficiency of urban transportation systems is the best way to effectively utilize the existing inputs, enhance the capacity of the systems and relieve traffic congestion in the Accra Metropolis. REFERENCES Asia Pacific Energy Research Centre (2006). APEC Energy Demand and Supply Outlook 2006 Available

at: www.ieej.or.jp/aperc/2006pdf/Outlook2006/Whole_Report.pdf Baskar et al., (2009), Traffic control and intelligent vehicle highway systems: a survey. Published in IET

Intelligent Transport Systems D’Este, G. (2000), Urban Freight Movement Modelling in „Handbook of Transport Modelling’ eds. Fazio J, and Tiwari G (1995) Non-motorized-motorized traffic accidents and conflicts on Delhi streets.

Transportation Research Record 1487, National Academy Press, pp. 68–74. Fowkes A.S., Firmin P.E., Tweddle G., Whiteing A.E., (2004), How highly does the freight transport

industry value journey time reliability – and for what reason?‟, International Journal of Logistics Research and Applications, Vol. 7, No. 1, pp. 33-43.

Ghana Statistical Service, Accra, (2007), Economy of Ghana. Golob, T.F. and Regan C. A. (2003),Traffic congestion and trucking managers, use of automated routing

and scheduling, Transportation Research Part E, Vol.39, pp.61-78. Guy, B. (2002). The Cs of Congestion‟ Logistics and Transport Focus, Sept 2002. Hickman and Banister (2007), Transport and reduced energy consumption: What roles can urban planning

play? [Online] Working paper no 1026, Transport Studies Unit, Oxford University Centre for the Environment. Available at: www. Tsu.ox.ac.uk/ [Accessed 16 July 2009].

Kuipers, B. and Rozemeijer, S. (2006). Strategies by Shippers and Transport Companies in Response of Decreasing Reliability of Travel Times‟ TNO, Delft.

Last A., (2008). Mid-Year gauge Stanbic Bank Infrastructure development to support growth, Stanbic research economic paper, June 2008. www. Modernghana.com [Accessed 20 July 2009].

McKinnon, A.C. (1999). The effect of traffic congestion on the efficiency of logistical operations‟ International Journal of Logistics: Research and Applications, Vol 2, No 2.

Mansell, G. (2004). UK road congestion is freight‟s pressing issue‟ Logistics and Transport Focus, April 2004.

Poolsawat, A., Na Ayutaya, K. S., & Pattara-Atikom, W. (2009). Impact of intelligent traffic information system on congestion saving in bangkok. Pp.153-156.

Sankaran, J., Gore, A. and Coldwell, B. (2005). The impact of road traffic congesion on supply chains: insights from Auckland, New Zealand. International Journal of Logistics: Research and Applications, Vol. 8, no. 2.

Small, K.A. (1992). Urban Transportation Economics. A volume in the series, Fundamentals of Pure and Applied Economics, Regional and Urban Economics section. Chur, Switzerland: Harwood Academic Press.

Taniguchi, E, Noritake, M., Yamada, T and Izumitani (1999) „Optimal size and location planning of public logistics terminals‟ Transportation Research E., Vol 35.

Tiwari G. et al., (2007). Traffic planning for non-homogeneous traffic, sadhana, vol.32, part 4]. Tseng Y and Yue L.W. (2005). The role of Transportation in Logistics chain, proceedings of the Eastern

Asia Society for Transportation studies, [Internet] vol. 5, pp1657-1672. Wikipedia (2007), Transport in Ghana.


http://www.ieej.or.jp/aperc/2006pdf/Outlook2006/Whole_Report.pdf�

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