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2010 Issue

The International Journal of Business and Management Research (IJBMR) is a peer reviewed publication. All Rights Reserved ISSN: 1938-0429 www.ijbmr.org

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Content

HRM Culture Waves at Workplace: From a Human Capital Perspective

Dr. Judith Anthea Washington ………………………………………………………….15

The Relationship of Interest Rate, Inflation Rate, GDP, and Real Economic Growth Rate in US MOHAMMED K. SHAKI ………………………………………………………………27

The Theoretical Framework of Ethnic Consumption Model of Financial Products Dr. Heryanto ……………………………………………………….……………...……..40

Managing Boundaries: The Case of Home-Based Self-Employed Teleworkers Dr. Mona Mustafa …………………………………………………..…………...……….55

Performance Evaluation in the United Arab Emirates: A Pro-Active Post-Recession Measure Dr. Robert Pech …………………………………………………………..………………65

Softnet Systems: Fraud or Expertise Dr. Bilal Makkawi ………………………………………………………………………79

Strategic Approach to Outsourcing the Research and Development Function Dr. Firend A. Rasheed ………………………………………………….……………….93

2010 The International Journal of Business and Management Research, Vol.3 Number 1

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Editorial Board Dr. F. Rasheed, Dr. C. Abid, Dr. A. Abualtiman, Dr. H. Badkoobehi, Dr. A. Ben Brik, Dr. I-Shuo Chen, Dr. J. Fanning, Dr. K. Ghali, Dr. K. Harikrishnan, Dr. Anthea Washington, Dr. Ahmad Jaffar, Dr. M Al Kubaisy, Dr. M. Khader, Dr. B. Makkawi, Dr. Mona Mustafa, Dr. R. Pech, Dr. K. Rekab, Dr. I. Rejab, Dr. M. Shaki, Dr. P. Moore, Dr. R. Singh, Dr. M. Shaki, Dr. B. Swittay, Dr. R. Wilhelms, Dr. Jui-Kuei Chen,


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HRM Culture Waves at Workplace: From a Human Capital Perspective

Dr. Judith Anthea Washington

Abstract

Effectiveness of people at work is largely dependent on the work culture and it is believed that people are more productive in a strong and healthy culture. Each organization has a unique culture and it is this culture that keep the employees blended and functioning effectively.

There has been a strong association between HRM, culture and people effectiveness. In this research, the authors have focused on the employees’ perceptions of their HR leaders’ performance, HRM department and the variables that underlie those perceptions. The researchers had constructed and standardized the scale on HRM culture which had 15 dimensions. The study population included 955 employees drawn from 12 industries. Quantitative techniques namely Chi-square, Mean, SD, Correlation and ANOVA were used to draw conclusions. The study reveals very interesting findings on perceptions on HRM culture.

Keywords HRM culture, Employee perception, HR department, HR managers

INTRODUCTION People are the most important and valuable resource of every organization or

institution. The achievement of the goals and objectives of the organization depends on the “people” in the organization, how they are made available, developed, motivated and sustained in the organization. The human resources are assuming increasing significance in modern organizations and managing human resource thus now demands increasingly more time of any progressive manager.

Furthermore, people’s expectations of the organizations for which they work are constantly changing and being changed. Today’s professionals are much more demanding than they have been in the past; the reason is they possess the capabilities to determine their performance. Gone are the days when people worked for money or mere employability.

Human Resources today look to the organization for competency development,


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employee motivation development and organizational climate development in a systematicand planned way. The people now consider their employment with the company as an opportunity to test their knowledge and use it at their work. Employees are no longer much concerned about job security; they would rather have flexible hour, benefits, development opportunities and empowerment at work place. The expectations of the employees (at all ranks in the organization) are high and complex and the successful organization would have to redesign its strategy and function in such a way that it is able to provide a challenging and fulfilling environment to its employees.

HRM CULTURE & ITS SIGNIFICANCE HRM culture is a relatively identical perception shared by people working in an organization. Each organization has a unique culture and it is this culture that keep the employees blended and functioning effectively. Culture in itself cannot be brushed over; it is integral for the success of an organization and if managed properly could provide a good source of competitive advantage.

Peggy Simonsen (2002) believes that the culture of organizations is changing as they redesign themselves to survive. Those who will succeed in the next century are the individuals and organizations that can read the trends, quickly adapt to new demands, and contribute to a positive though changing culture.

T.V. Rao (1991), is of the view that ‘an organization that has competent, satisfied, committed and dynamic people is likely to do better than an organization that scores low on these HRD outcome variables. Similarly, an organization that has better HRD climate and processes is likely to be more effective than an organization that does not have them.

HRM CULTURE – AS AN IMPORTANT AREA OF RESEARCH There has been a strong association between HRM and culture; with many HR specialists suggesting culture is in the domain of the HR manager. It has even been suggested that culture should be managed through HR policies, practices and systems. It is logical to assume organizational culture is inevitably entwined with HRM. It has been suggested that one of the major roles of the centralized HRM department is the development of culture.

Why would a company be interested in assessing its Culture?

Guest D & Hoque K (1994) strongly believes ‘HRM Culture can influence motivation, performance, and job satisfaction... The nature of employee expectations, the factors which motivate employees, the presence or absence of factors leading to employee satisfaction or dissatisfaction, factors which would increase employee commitment and loyalty can be understood only under the context of HRM culture assessment.’

HRM culture is very important to study because it conveys some important assumptions and norms governing values, attitudes and goals of the members of an organization. It also tells employees how to do the things and in what fashion. It also allows members to know what is important and what is not. It, thus, specifies what the acceptable behaviors are and what are not.

LITERATURE REVIEW A review of theoretical and empirical literature pertaining to this study was made by the researchers.

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Bernard Tyson (1996) in his study entitled ‘Kaiser's HR Services Get a Shot in the Arm” found that 31% of the respondents were satisfied with the HR and praised HR’s: General responsiveness to their needs - Timely resolutions, Customer orientation, Professional knowledge and expertise.

Linda Davidson (1999) in “The Official End-of-the-Millennium State-of-HR Survey” conducted among 360 professionals, explored how HR professionals viewed their role, the state of their progress and their perception of how they were viewed by others inside and outside the organization. The survey results suggested that HR’s role in the organization was in a metamorphic state, moving HR from an administrative support function to a strategic business partner role. Sixty percent of the respondents felt HR was at least somewhat better respected than before. The survey results indicated that HR was most concerned with employees, who they viewed as their primary customers.

Hitoshi Mitsuhashi et al (2000) in their study “Line and HR Executives’ Perceptions of HR Effectiveness in firms in the People’s Republic of China”, found that the line executives perceived HR performance effectiveness as significantly lower in these functional areas than HR executives do.

The HRM Consulting study (2000) of line managers’ perceptions of HRM found, inter alia, that: HR managers had a more positive view of their performance than do line managers. [Alan Nankervis, Robert Compton & Lawson Savery (2002)]

Empirical review has revealed the fact that though there are plentiful studies available in the areas of Human Resources Management and organizational culture, very little empirical information is reported on the subject of the employees’ perception about HRM culture. Evidently, there has not been much focus on the perceptions of lower segment of employees on HRM culture in industries. Therefore, there is a gap in the theoretical knowledge about the problem under investigation.

This research departs from the previous work by focusing on the perceptions of individuals, with special focus on shop floor workers and employees at the lower rung of the organization on HRM practices in their organization. Specifically, it focuses on employees’ perceptions of their HR leaders’ performance, HRM department and the variables that underlie those perceptions.

RESEARCH METHODOLOGY This is an analytical - descriptive study based on primary data. It is descriptive since different socio-economic characteristics and factors towards perceptions on HRM culture are described and analytical since important factors influencing the cause and effect relationship of HRM cultures are analyzed.

OBJECTIVES OF THE STUDY:

1. To understand the perception of employees about HRM culture of the organizations. 2. To examine the interrelatedness of socio-economic variables of the employees and

their point of view about HRM culture.

The researchers have analyzed the individual employee’s perception of HRM culture. For this analysis concepts like ‘HR Managers, Awareness about HR Roles, HR Department, Employee-Management Relationship, Discipline, Employee Welfare, Training & Development, Communication, Recognition, Growth, Respect, Compensation, Socialization,

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People Philosophy and Total Quality Management have been studied in different industries [Private, Public and Multinational] in selected districts of Tamilnadu, India.

In this study, stratified random sampling method was adopted. The study population included 955 employees drawn from 12 industries which constituted 31.41 from Multinational and Foreign collaboration (MNC & FC) companies, 18.85 from Public Limited companies and 49.74 from Private sectors in Madurai and Chennai. In addition to primary data, at the time of data collection, relevant case records, observation, interview and group discussion were also employed to obtain meaningful data.

The researchers had constructed and standardized the scale on HRM culture which had 15 dimensions. In addition to developing and exploring the 15 items, a number of variables relating to personal factors of respondents, and the organizational characteristics of their companies were considered. The HRM scale was checked for reliability and validity. The Cronbach Alpha reliability was found to be 0.8185 and the intrinsic validity was 0.9047. Statistical presentation was made, using the Statistical Package for Social Sciences [SPSS] software. Quantitative techniques namely Chi-square, Mean, SD, Correlation and ANOVA were used to draw conclusions.

TABLE – 1

ONE WAY ANOVA RESULTS OF DIMENSIONS OF HRM CULTURE PERCEIVED BY RESPONDENTS BY PRIMARY BUSINESS

IT & Comm

n=115

Manuf & Prod

n = 600

Service

n =240

Total

n =955

S. No.

Factors

Mean SD Mean SD Mean SD Mean SD

F Ratio

Result

Scheffe

Result

1. HR Managers 74..26 13..64 79..87 12..50 73.79 15.46 77.66 13.73 21.70 P<0.05 sig

GP1 Vs3, 2

2. Awareness – HR Roles

69..80 9.80 72.62 11..66 69.40 14..68 71.47 12..37 7.09 P<0.05 sig

GP2 Vs3

3. HR Dept. 64..26 8.06 68..58 9.09 66..23 10..39 67.47 9.44 13.16 P<0.05 sig

GP2 Vs1, 3

4. Emp-Mgt Relation

64.23 8.03 68.28 10.33 67.86 12.01 67.69 10.61 7.19 P<0.05 sig

GP1 Vs 2, 3

5. Discipline 61.98 9.69 67.95 12.20 69.72 13.22 67.68 12.39 16.04 P<0.05 sig

GP1 Vs 2, 3

6. Employee Welfare

71.94 9.32 69.05 13.02 69.19 14.53 69.43 13.06 2.43 P>0.05

Not sig

--

7. Ting & Devet 75.59 12.11 75.13 16.51 75.35 14.61 75.24 15.56 0.05 P>0.05

Not.sig

---

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8. Communication 75.17 8.83 74.90 14.88 73.19 17.27 74.50 14.95 1.26 P>0.05

Not.sig

--

9. Recognition 78.17 8.55 75.53 15.63 70.64 19.71 74.62 16.30 11.06 P<0.05 sig

GP3Vs 1, 2

10. Growth 74.81 8.03 76.33 14.78 72.76 16.85 75.25 14.78 5.08 P<0.05 sig

GP2Vs3

11. Respect 72.97 9.09 76.09 16.11 72.24 17.48 74.74 15.89 5.90 P<0.05 sig

GP2vs3

12. Compensation 75.88 8.77 72.81 16.85 69.04 16.58 72.23 16.14 8.13 P<0.05 sig

GP3Vs 1, 2

13. Socialization 75.34 6.14 75.38 14.41 73.08 14.21 74.80 13.66 2.56 P>0.05

Not.sig

--

14. People Philosophy

68.47 6.66 67.90 10.36 66.42 11.86 67.59 10.42 2.20 P>0.05

Not.sig

--

15. TQM 73.50 7.58 75.70 14.77 73.51 17.17 74.89 14.79 2.47 P>0.05

Not.sig

--

16. Total HRM Culture

71.76 4.69 73.07 10.57 70.83 13.28 72.35 10.86 3.88 P<0.05 sig.

GP2Vs3

Table 1 presents the One Way Anova results of the different dimensions of HRM culture based on the primary business. The organizations included in the study have been classified based on their primary business activities, namely IT and communication industries, manufacturing and production sectors and service organizations.

It is noticed that for ‘Dimension 1 – HR Managers’, the total mean value obtained was 77.66 (SD = 13.73). Strangely enough, only the respondents in the manufacturing and production industries had mean values (Mean= 79.87 ; SD = 12.50), which were higher than the total mean value, which has revealed that they had higher perception about HR Managers than the respondents employed in other sectors namely IT and communication and service industries.

Similarly for the ‘Dimension 2 – Awareness about HR Roles’, ‘Dimension 3 – HR Department’, ‘Dimension 10 – Growth’, ‘Dimension 11 – Respect’ and ‘Dimension 15 – Total Quality Management’, it is seen that only the respondents in the manufacturing and production industries had mean values higher than the total mean value (Mean= 71.47; SD = 12.37 ; Mean= 67.47; SD = 9.44 ; Mean= 75.25; SD = 14.78 ; Mean= 74.74; SD = 15.89 and Mean= 74.89; SD = 14.79 respectively).

While analyzing the total HRM Culture, it is seen that the total mean value obtained was 72.35 (SD=10.80). The respondents in the manufacturing and production industries alone had a mean value (Mean=73.07; SD=10.57), which was higher than the total mean value. The f-ratio value was 3.88, which indicated a statistical significant difference among the

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groups. The Scheffe result shows that the respondents from the manufacturing and production units differed significantly from those in the service organizations. The study results clearly indicate that respondents from manufacturing and production industries had higher perception of HRM culture in their organizations than respondents from IT and communication industry and service organizations.

TABLE - 2 ONE WAY ANOVA RESULTS OF DIMENSIONS OF HRM CULTURE PERCEIVED BY RESPONDENTS BY THEIR POSITION IN ORGANIZATIONAL HIERARCHY

Bottom

n=655

Middle

n = 227

Top

n =73

Total

n =955

S. No.

Factors


F Ratio

Result

Scheffe

Result

1. HR Managers 78.18 13.63 77.26 14.02 74.35 13.42 77.66 13.73 2.69 P>0.05 Not. sig

--

2. Awareness – HR Roles

71.44 12.47 71.89 12.15 70.41 12.25 71.47 13.37 0.40 P > 0.05

Not.sig

--

3. HR Dept. 67.36 9.39 68.11 9.57 66.47 9.49 67.47 9.44 0.91 P>0.05 Not. sig

--

4. Emp-Mgt Relation

66.31 10.38 68.71 11.32 67.89 10.35 67.69 10.61 1.49 P >0.05

Not. sig

--

5. Discipline 66.86 12.17 69.85 12.47 68.27 13.41 67.68 12.39 5.05 P<0.05 Sig GP2Vs1

6. Employee Welfare

68.81 13.06 70.59 13.67 71.42 10.60 69.43 13.06 2.47 P>0.05 Not. Sig

--

7. Ting & Devet 74.95 15.92 76.34 14.90 74.43 14.32 75.24 15.56 0.79 P>0.05 Not. Sig

---

8. Communication 74.03 15.19 76.20 13.98 73.49 15.58 74.50 14.95 1.97 P>0.05 Not. Sig

--

9. Recognition 74.20 16.34 76.78 16.08 71.64 15.98 74.62 16.30 3.46 P<0.05.Sig --

10. Growth 75.07 14.93 76.40 14.61 73.29 13.80 75.25 14.78 1.39 P>0.05 Not.sig

--

11. Respect 74.69 16.20 75.48 15.79 72.92 13.30 74.74 15.89 0.73 P>0.05 Not.sig

--

12. Compensation 71.94 17.03 73.19 14.07 71.83 13.92 72.23 16.14 0.52 P>0.05 Not.sig

--

13. Socialization 74.54 13.95 75.82 13.13 73.95 12.52 74.80 13.60 0.89 P>0.05 Not.sig

--


67.16 10.47 68.99 10.49 67.15 9.45 67.59 10.42 2.67 P>0.05 Not.sig

--

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15. TQM 75.00 15.05 74.92 14.51 73.80 13.42 74.89 14.79 0.21 P>0.05 Not.sig

--


72.10 10.80 73.37 11.10 71.42 10.63 72.35 10.86 1.44 P>0.05 Not.sig

--

One Way Anova results of the dimensions of HRM culture based on the level of employment, which have been divided into three categories, namely bottom, middle and top have been presented in the table 2.

While considering the ‘Total HRM culture’, it is seen that the total mean score obtained was 72.35 (SD = 10.86). Only the respondents in the middle level of management had mean values (Mean= 73.37 ; SD =11.10) which was higher than the total mean value, showing clearly that when considering the overall HRM culture, it was more the respondents in the middle level of management who held positive views about the HRM culture in their organizations than the other groups. The f-ratio value obtained was 1.44, and the groups did not differ significantly. This indicates a relationship between level of employment and HRM culture.

TABLE 3

‘t’ TEST RESULTS OF DIMENSIONS OF HRM CULTURE BASED ON HR Vs LINE

HR

n= 66

Line

n = 889

S. No.

Factors

Mean SD Mean SD

‘t’ value

Result

1. HR Managers 78.60 10.11 77.60 13.97 0.75 P>0.05

Not.Sig

2. Awareness 73.47 10.76 71.32 12.48 1.55 P>0.05 Not.Sig

3. HR Dept. 69.58 6.48 67.31 9.61 2.64 P<0.05 Sig

4. Emp-Mgt Relation

68.03 9.70 67.66 10.68 0.30 P>0.05 Not.Sig

5. Discipline 69.70 11.93 67.53 12.42 1.42 P>0.05 Not.Sig

6. Employee Welfare

71.41 11.77 69.29 13.14 1.40 P>0.05 Not.Sig

7. Ting & Devet 77.42 10.98 75.08 15.84 1.62 P>0.05 Not.Sig

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8. Communication 75.19 13.60 74.45 15.06 0.42 P>0.05 Not.Sig

9. Recognition 75.45 13.93 74.56 16.46 0.50 P>0.05 Not.Sig

10. Growth 76.79 10.51 75.13 15.04 1.20 P>0.05 Not.Sig

11. Respect 76.15 13.47 74.64 16.06 0.86 P>0.05 Not.Sig

12. Compensation 74.44 13.31 72.07 16.33 1.38 P>0.05 Not.Sig

13. Socialization 77.19 9.58 74.62 13.90 2.03 P<0.05 Sig


68.58 9.09 67.52 10.51 0.90 P>0.05 Not.Sig

15. TQM 76.33 12.06 74.78 14.98 0.99 P>0.05 Not.Sig


73.89 8.44 72.24 11.02 1.50 P>0.05 Not.Sig

Table 3 presents the‘t’ test results of the different dimensions of HRM culture taking into account the HR and Line personnel. A careful analysis of the data portrays that HR personnel have scored mean values in respect of most of the dimensions.

Further, considering the ‘Total HRM culture’, it is noticed that the HR personnel had scored a mean value of 73.89 (SD = 8.44), whereas the line personnel had scored a mean value of 72.24 (SD = 11.02). Here again, the HR personnel had higher mean value, indicating that they held better perception on HRM culture than their counterparts. The ‘t’ value being 1.50, the groups did not differ significantly.

In the present study the reason that line executives gave low ratings on HRM functions could be because of such reasons as - the HR department functions with skeleton staff who do all the work (as in many companies) and so there’s not much focus on HRM functions, yet another reason, may be the traditional line - staff conflict, with the line viewing HR personnel as ‘Bullying bureaucrats’. The other reason may be line executives not taking any responsibility of the HR functions, in cases where it may be essential, and passing the entire buck to the HR personnel.

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TABLE - 4

ONE WAY ANOVA RESULTS OF DIMENSIONS OF HRM CULTURE BASED ON TYPE OF COMPANY

MNC & FC n=300

Public n=180

Private n=475

TOTAL n=955

S.No

Factors


F Ratio

Result

Scheffe Result

1. HR Managers 79.22 13.08 74.54 14.37 77.87 13.72 77.66 13.73 6.70 P<0.05 Sig GP2 vs 3,1

2 Awareness-HR

Roles

71.44 12.60 69.35 12.70 72.29 12.02 71.47 12.37 3.73 P<0.05 Sig GP2vs 3

3. HR Dept 65.47 10.04 68.96 9.58 68.16 8.78 67.47 9.44 10.48 P<0.05 Sig GP1vs 2,3

4. Emp-Mgt

Relation

64.29 9.84 69.96 11.18 68.98 10.37 67.69 10.61 24.15 P<0.05 Sig GP1vs 2,3

5. Discipline 63.20 12.59 71.78 12.24 68.95 11.47 67.68 12.39 34.18 P<0.05 Sig GP1vs2,3

GP2vs3

6. Employee

Welfare

65.11 13.55 70.76 11.69 71.66 12.58 69.43 13.06 25.53 P<0.05 Sig GP1vs2,3

7. Training &

Development

69.09 18.01 76.70 14.50 78.57 12.94 75.24 15.56 37.82 P<0.05 Sig GP1vs2,3

8. Communication 69.93 16.53 74.83 14.75 77.27 13.21 74.50 14.95 23.26 P<0.05 Sig GP1vs2, 3

9. Recognition 70.92 17.40 73.94 15.47 77.21 15.41 74.62 16.30 14.25 P<0.05 Sig GP1vs3

10. Growth 71.31 16.21 75.18 14.80 77.76 13.22 75.25 14.78 18.21 P<0.05 Sig GP1vs2, 3

11. Respect 71.49 18.05 74.41 15.14 76.93 14.31 74.74 15.89 11.05 P<0.05 Sig GP1vs2, 3

12. Compensation 68.67 17.62 69.33 16.18 75.58 14.40 72.23 16.14 21.29 P<0.05 Sig GP3vs1, 2

13. Socialization 70.63 15.96 74.32 13.43 77.61 11.29 74.80 13.66 25.40 P<0.05 Sig GP1vs 2,

GP3vs1,2

14. People

Philosophy

64.88 10.71 66.02 10.26 69.90 9.76 67.59 10.42 25.12 P<0.05 Sig GP3vs1, 2

15 TQM 70.48 16.38 74.29 14.76 77.89 12.95 74.89 14.79 24.39 P<0.05 Sig GP3vs2,

GP3vs1, 2

16. Total HRM

Culture

69.07 10.91 72.29 11.58 74.44 10.03 72.35 10.86 23.53 P<0.05 Sig GP1vs2, 3

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The One Way Anova results of different dimensions of HRM culture based on the type of company have been presented in Table 4. The different companies selected for the study have been classified under three categories, namely Multinational & Foreign collaboration (n=300), Public limited companies (n=180) and Private companies (n=475).

It is noticed that Public limited companies had less favourable attitudes towards HR personnel and had not shown much awareness of HR roles. The result suggests that respondents from Private sectors had higher perception about HRM culture (considering the higher mean values in most dimensions), than those working in Public limited or MNC & FC companies and that they were the happiest and most satisfied with the prevailing culture.

The reason that respondents from MNC & FC and Public limited companies did not have as high perception about HRM culture may be because of internal reasons, fast growth, technological changes adopted, type and nature of product/services etc. Hence more than ownership, it is the organization’s HR policies, structure, market position, treatment of human resources and employer relationship which affect the HRM culture.

TABLE – 5

CORRELATION RESULTS FOR SELECTED SOCIO-ECONOMIC VARIABLES AND TOTAL HRM CULTURE

S. No Factors Total HRM Culture

1. V1-Age -.0288

2. V5-Total Experience -.0207

3. V6-Experience in Organization -.0068

4. V7-Salary -.0677

5. V13-No of Employees .0750

6. V14-No of Promotions .1520*

7. V15-No of Transfers .0055

8. V16-Training-Internal .2528**

9. V17-Training-External -.0207

10. V19-No of Children .0662

11. V20-No of Dependents .2631**

12. V21-Employed-Spouse .1289**

13. V22-Type of Family .0341

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Table 5 brings to light the correlation results of selected socio-economic variables and total HRM Culture. Looking at the correlation results of total HRM culture, it is observed that total HRM culture was positively correlated with ‘V14 – Number of Promotions, (r=0.1520, P<0.02 Sig). This clearly indicates that respondents who were offered more promotions had higher perception of the HRM Culture.

Total HRM Culture was positively correlated with ‘V16 – Training - Internal’ (r=0.2528, P<0.02 Sig). This confirms that when the organizations provide more number of training programmes within the organizations, the perception of employees would be higher.

It is also observed that total HRM culture was positively associated with ‘V20 – Number of dependents’ (r=0.2631, P<0.02 Sig) which indicates that more the number of children, more positive will be their outlook of HRM Culture.

Similarly, HRM Culture was positively correlated with ‘V21 – Employment of spouse’ (r=0.1289, P<0.02 Sig) which implies that more the number of respondents who have employed spouses, they would perceive positive HRM Culture.

However, there was no significant correlation between HRM Culture and the variables such as ‘Age’, ‘Total experience’, ‘Experience in the organizations’, ‘Salary’, ‘Number of employees’, ‘Number of Transfers’, ‘Training – External’, ‘Number of Children’ and ‘Type of family’.

MAJOR FINDINGS The results implied that employees from manufacturing and production industries have had higher perception of HRM culture than those working in IT and Communication and Service industries.

When considering the overall HRM culture, it was found that respondents in the middle level of management have had significantly higher perception of HRM culture in their organizations than the other groups, with respect to dimensions namely, awareness about HR roles, HR department, discipline, training & development, communication, recognition, growth, respect, compensation, socialization, and people philosophy.

The HR personnel had better perception of HRM culture in terms of all the dimensions included in the study which indicated that they held better perception of HRM culture than their counterparts. It stands to reason that the HR staff held positive views about themselves and the services they rendered than the line personnel.

The roles, services and functions performed by the HRM practitioners were appreciated by the employees at Multinational corporations [MNC] & Foreign Collaboration [FC] and Private companies, whereas the employees from Public Limited companies had less favourable attitudes towards the HR Overall, HRM culture was positively viewed by those working in Private companies.

HRM culture was positively correlated with ‘Number of Promotions’ indicating that respondents who were offered more promotions had higher perception of the HRM Culture. HRM Culture was positively correlated with ‘Training - Internal’, showing that when the organizations provided more number of training programmes within the organizations, the perception of employees would be higher.

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CONCLUSION HR in the ultimate sense is the spirit that permeates an organization. Concern for people, genuinely practiced at every level in the day-to-day transactions of an organization, is the real touchstone of HR. To succeed, however, the human resource function must shift from being merely responsive to being much more proactive; from “backroom to the front line”, from a “corporate to an operation’s” focus. This change should focus on transforming HR professionals into the primary structure, process and workforce consultants for organizations.

REFERENCES 1. Alan Nankervis, Robert Compton & Lawson Savery (2002). Strategic HRM in

Small And Medium Enterprises: A CEO’s Perspective? Asia Pacific Journal Of Human Resources . 40(2)

2. Bernard Tyson (1996). Kaiser's HR Services Get A Shot In The Arm. Personnel Journal. Vol. 75, No. 9: 87-90.

3. Guest D,.Hoque K. (1994). The Good, The Bad And The Ugly: Employment Relations In New Non-Union Workplaces. Human Resource Management. : 1-14.

4. Hitoshi Mitsuhashi, Hyeon Jeong Park, Patrick M. Wright, Rodney S. Chua (2000). Line And HR Executives’ Perceptions of HR Effectiveness in Firms in the People’s Republic Of China. International Journal Of Human Resource Management, Volume 11, Number 2 : 197 - 216

5. Linda Davidson (1999). The Official End-Of-The-Millennium State-Of-HR Survey. Workforce. Vol. 78, No. 8: P. 70.

6. Muhammad Aminu Bawa & Dr Juhary Ali (1999). The Challenges Of Globalization And The Role Of Human Resources. ICCC. Bangkok.

7. Peggy Simonsen (2001). Promoting a Development Culture in Your Organization -Using Career Development as Change Agent. Davies – Black Publishing. Palo Alto, California

8. Rao T. V (1991) Readings in Human Resource Development. Oxford & IBH Publishing Co Pvt, Ltd, New Delhi.


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The Relationship of Interest Rate, Inflation Rate, GDP, and Real Economic Growth Rate in US

MOHAMMED K. SHAKI National University/ San Diego

INTRODUCTION

Nominal interest rate is one of macroeconomic growth factors and its up and down is closely relative with inflation rate. Its high or low rate also impacts to economic boom or GDP and extending to influence economic growth rate. It is very important thing in business field that is how to accurately predict interest rate trend. Fisher (1930) suggests that inflation is the main determinant of interest rates as the inflation rate increases by one per cent, the rate of interest increases by one percent. This suggests that interest rates change in proportion to the changing inflation, or real interest rates are invariant to the inflation.

Fama and Gibbons (1982)、Huizinga and Mishkin (1984) and Mishkin (1981, 1988) indicated real interest rate is not fix and it has positive relation with nominal interest rate and negative with expected price index. Even though Summers (1983)、Huizinga and Mishkin (1984, 1986) and Barsky (1987) indicated interest rate has relation with inflation rate just only happen in period of time not always has it.

Prior studies often assumed time series data is stationary and ignores non stationary could exist in the variables. Nelson and Plosser (1982) and Rose (1988) reported price and interest rate could have existed unit root and many studies did not consider data stationary that could cause spurious regression. It has many ways to test unit root that include Dickey and Fuller (1979) Augmented Dickey-fuller (ADF) test and Phillips and Perron (1988) PP test. Except for considering unit root for variables time series study needs using cointergrative test to consider those variables which exist integer process I(d). It has two ways to test cointegrative relations that are Engle and Granger (1987) two-stage of cointegrated test and Johansen (1988) maximum likelihood approach. Granger (1969) reported Granger causality that indicated the question of whether X causes Y is to see how much of the current Y can be explained by past values of Y and then to see whether adding lagged values of X can improve the explanation.

The purpose of study tries to analyze interest rate with inflation rate, GDP, and economic growth rate relationship. The first step study discusses interest rate with inflation rate, GDP, and economic have existed long term equilibrium. Then second


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step uses Granger Causality to look at interest rate with other variables have cause and effect relative existence. Finally study adopts regression to test interest rate with variables’ relationship. And testing regression process considers ARCH effect existence or not. If regression exists ARCH effect that it needs to use GARCH to consider volatility of variables by conditional variance. This study adopts ADF unit root to examine variables’ stationary or not and it also considers Johansen cointegration approach to test long term equilibrium relations, then use Granger Causality to find those variables’ lead and lag relationship. Final study needs to run regression to find out the interest rate with other variables relationship.

LITERATURE REVIEWS The Fisher (1930) hypothesis suggests that expected inflation is the main determinant of interest rates as the inflation rate increases by one per cent, the rate of interest increases by one percent. This suggests that expected interest rates change in proportion to the changing expected inflation, or expected real interest rates are invariant to the expected inflation.

Mundell (1963) concluded that nominal interest rate with expected inflation rate do not have one for one adjustable relations. It is the Mundell-Tobin effect that nominal interest rates would rise less than one-for-one with inflation because in response to inflation the public would hold less in money balances and more in other assets, which would drive interest rates down.

Estrella and Hardouvelis (1991). Examining data over the period 1955 to 1988, they document that the spread between the yield on the ten year Treasury bond and the three-month Treasury bill is a useful predictor of both cumulative economic growth up to four years in the future and marginal economic growth rates up to seven quarters in the future. They also find that the spread contains information for future economic growth not already embodied in the current level of real interest rates, in current economic growth, in the current growth rate of the index of leading economic indicators, or in the inflation rate.

Haubrich and Dombrosky (1996) also find that over the period 1961:1 to 1995:3, the yield spread is a relatively accurate predictor of four-quarter economic growth but that its predictive content has changed over time. For example, they find that the yield spread was not a very good predictor of economic activity over the period 1985 to 1995.

Estrella and Mishkin (1998), for example, using data over the period 1959:1 to 1995:1, show that the spread between the yield on the ten-year and three-month Treasury securities is the best out-of-sample predictor of the probability of a recession occurring in the next four quarters. For shorter horizons, they find that adding movements in various stock price indexes improves forecast accuracy.

Berument (1999) indicated inflation rate influenced three month treasure bill rate by using conditional variance of inflation rate to represent risk index. The results showed inflation rate had positive influence to three month treasure bill rate.

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Engen and Hubbard (2004) determined that an increase in federal government debt equivalent to one percent of GDP, all else equal, would be expected to increase the long-term real rate of interest by about three basis points.

METHODOLOGY

The time series analysis observes data based on different time period. The method analyzes variable’s output and dynamic relationship, then test economic model and predict variable. It hopes to find the relationship between current and past data relationship. However most of time series cases have random phenomena. It needs use some of method to adjust random time series, otherwise study can’t predict by random data. This study adopts unit root, cointegration test, Granger Causality, and multiple-regression to test relations between interest rate with inflation rate, GDP, and economic growth rate. The data is collected by InfonWinners Plus 2000. The study period is from first quarter of 1990 to fourth quarter of 2007.

Unit Root

To distinguish data have stationary or not that have ACF or PACF figure diagnosis, DF, ADF, and PP methods. It is too arbitrary to use figure diagnosis to judge variable’s stationary. The study wants to use Augmented Dickey and Fuller test (ADF) that it is purpose to eliminate error term correlations. The model has three styles that show below.

A. no intercept and no time trend items:

B. intercept and no time trend item:

C. intercept and time trend item:

The study uses unit root process allowing for intercept and time trend to determine whether there is a unit root in the data series.

According to choose the lag length study adopts Reimers (1992) SBC (Schwartz Bayesian Information Criterion). The model is below:

Whereas p is volume of parameter, N is sample size, and SSR is sum of square residual.

Cointegration Test

The study adopts Johansen multivariate maximum likelihood method using this cointegrated process to test those variables have existed long term equilibrium relationship. First step uses first difference in the vector autoregressive model, the formula show below:

whereas is lag length n vector endogenous variable, then first difference changes below:

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whereas is a short term adjusting coefficient to

describe short-term relationship, is long term shock vector that includes long term information hint in the regression to test those variables’ whether existence long term equilibrium relationship or not. Meanwhile rank of decides the number of cointegrated vector. has three kinds of style:

a) , then is full rank. It means all of variables are stationary series in the regression ( )

b) , then is null rank. It means variables do not exist cointegred relationship.

c) , then some of variables exist cointegrated vector.

Johansen approach has used rank of to distinguish the number of cointegrated vector. To examine rank of vector that is testing how many of non-zero of characteristic roots existence in the vector. It could use below two statistic to process cointegration.

a. Trace test:

is sample size, is estimated of characteristic root. If test rejects that means variables exist at least r+1 long term cointegrated relationship.

b. Maximum eigenvalue test:

If test accept that means variables have r cointegrated vector. The method is starting test from variables do not have any cointegrative relationship which is r=0. Then test has added the number of cointegrative item till can’t reject that means variables have r cointegrated vector.

Granger Causality

Most of economic model often assume different hypotheses to discuss variables’ relationship. However they could not make sure variables’ cause and effect relationship. Granger (1969) first person brought up to define lead and lag relations based on role of predictability. He uses twin factors of VAR to find variables’ causal relationship. It assumes two series and that define those messages set.

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To test four coefficients find out variables’ relationship.

a) : It means Y lead X or X lag Y. b) : It means X lead Y or Y lag X. c) : It means both of variables are independent. d) : It means both of variables are interactive each other and

have feedback relationship.

Series autocorrelation

Ljung and Box (1978) brought up the Ljung-Box Q test to examine series has autocorrelation or linear dependence existence. The test statistic is:

whereas T is sample size and q is time lag

length. As model rejects that means series has correlative existence, the other thing is Ljung-Box also can test series has existed ARCH effect or not.

ARCH Effect

According to ARCH or GARCH model need to use very complicated processes to operate non-linear calculation. It has to adopt ARCH effect to make sure series regression that needs to run ARCH or GRACH model. Based on Engle (1982) and Bollerslev (1986) suggested using LM test to examine ARCH effect existent or not. The test hypothesis is:

Owning to above LM test indicates the statistic is . If then model needs to reject that series regression have to consider

ARCH effect existence. Whereas T is sample size and is regression’s coefficient. That two times together is ARCH LM test’s statistic.

Generalize Autoregressive Conditional Heteroskedasticity (GARCH) model

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Bollerslev (1986) brought GARCH model to consider lag length to be conditional variance. The conditional variance is influence past p period of residual error term and past q period of conditional variance.

Whereas is variable exogenous, is all collected messages till t-1 period, is conditional mean that is the linear portfolio of exogenous and endogenous variables, and is conditional variance that it influenced by past q period sum of squared error term and past p period of itself conditional heteroskedasticity.

FINDINGS

This study adopts data from InfonWinners Plus 2000 and research period from first quarter 1990 to fourth quarter 2006 total 64 quarters. The main purpose in this study tries to find out the relationship between interest rate (prime rate) and inflation rate, GDP, and real growth rate. Table 1 is five variables’ descriptive statistics and finds interest rate, inflation rate, and real growth rate are non-normal distribution except for GDP because J-B ratios are obviously significant. According to Kurtosis inflation rate and real growth rate appear leptokurtic phenomena.

Table 1 The Descriptive Statistics of Variables

Prime Rate GDP Inflation Rate Real Growth Rate

Mean 7.246569 8952.399 2.907059 2.860294

Maximum 10.03670 13458.20 6.223333 5.200000

Minimum 4.000000 5716.400 1.253333 -2.800000

Std. Dev. 1.768627 2261.705 1.003823 1.572159

Skewness -0.422404 0.306673 0.986973 -1.144340

Kurtosis 2.024061 1.976298 4.429626 4.617312

J-B

p-value

4.720781

(0.094)

4.035112

(0.133)

16.83082

(0.000)

22.25230

(0.000)

Table 2 indicates all of variables do not reject unit root null hypothesis. That means all of variables in the level stage are non-stationary existence. After variables run first difference I(1) that show all of variables achieve to 1% or 5% significant level. The lag length is interest rate for 0, GDP for 1, inflation rate for 3, and real growth rate for 0.

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Table 2 Unit Root Test Based on Augmented Dickey-Fuller test and Lag Length Based on Schwartz Bayesian Information Criterion

Level I(0) First Difference I(1) Lag Length

Interest Rate -2.705605

(0.2379)

-3.541475**

(0.0432)

I(1)

0

GDP -0.994989

(0.9373)

-3.542436**

(0.0432)

I(1)

1

Inflation Rate -2.809953

(0.1991)

-5.061850***

(0.0006)

I(1)

3

Real Growth Rate -3.229760

(0.0875)

-9.475824***

(0.0000)

I(1)

0

If interest rate with other variables has long term equilibrium relationship, formula needs to put this factor to regression. That means the variables need to extend to examine cointegration test. This study adopts Johansen test and the results show in the table 3. From the findings indicates no matter which is trace test or max eigenvaule statistic shows four equations have conspicuous significant existent 1% or 5%. It means all of variables have long term equilibrium relationship.

Table 3 Panel A: Unrestricted Cointegration Rank Test

Hypothesized Number of Cointegrating Equations

Eigenvalue Trace Statistic 5% Critical Value

1% Critical Value

None ** 0.574255 103.3003 47.21 54.46

At most 1 ** 0.377027 49.50364 29.68 35.65

At most 2 * 0.220177 19.68873 15.41 20.04

At most 3 * 0.061837 4.021376 3.76 6.65

*(**) denotes rejection of the hypothesis at the 5%(1%) level

Panel B: Hypothesized Number of Cointegrating Equations

Eigenvalue Max-Eigen

Statistic

5% Critical Value

1% Critical Value

None ** 0.574255 53.79669 27.07 32.24

At most 1 ** 0.377027 29.81491 20.97 25.52

At most 2 * 0.220177 15.66736 14.07 18.63

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At most 3 * 0.061837 4.021376 3.76 6.65

*(**) denotes rejection of the hypothesis at the 5%(1%) level

This study adopts five variables which are interest rate (prime rate), inflation rate, GDP, and real growth rate to discuss Granger Causality relationship. The findings indicate GDP Granger cause interest rate, real growth rate Granger cause inflation rate, and real growth rate and interest rate have feedback relationship that each one cause to the other (see Table 4). On the other hand, inflation with GDP, real growth rate with GDP, and interest rate with inflation rate are independent each other. And interest rate does not cause GDP and inflation rate does not cause real growth rate. Table 4 can use flow chart (see Figure 1) to show their lead-lag relationship.

Table 4 Pairwise Granger Causality

Null Hypothesis Obs F-test P-value

Inflation rate does not Granger Cause GDP

GDP does not Granger Cause Inflation rate

64

1.46247

1.39802

0.23440

0.25275

Interest rate does not Granger Cause GDP

GDP does not Granger Cause Interest rate

64 0.65354

5.18199

0.58403

0.00310

Real growth rate does not Granger Cause GDP

GDP does not Granger Cause Real growth rate

64 0.32158

1.01296

0.80972

0.39374

Interest rate does not Granger Cause Inflation rate

Inflation rate does not Granger Cause Interest rate

64 1.40731

0.92150

0.25002

0.43634

Real growth rate does not Granger Cause Inflation rate

Inflation rate does not Granger Cause real growth rate

64 3.80977

2.25754

0.01472

0.09146

Real growth rate does not Granger Cause Interest rate

Interest rate does not Granger Cause Real growth rate

64 2.45731

4.04843

0.07214

0.01117

Figure 1: Flow Chart for Granger Causality relationship

Interest rate

Real Growth rate

GDP

Inflation rate

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Volatility test for GDP, inflation rate, and real growth rate to interest rate

First step this study tries to realize what kind of relations between interest rate and other variables and it also needs to consider volatility phenomena. The regression shows below:

whereas is interest rate, is inflation rate, is GDP, and is real growth rate.

From table 5 Panel A indicates R square of interest rate to GDP, inflation rate, and real growth rate have 0.2989, 0.226, and 0.00045. From the regression to test interest rate with inflation rate relationship shows current and one lag of inflation rate have influence to interest rate that coefficients are 0.278233 and 0.300237 and t-test is 2.020930 and 3.172641. From the regression to test interest arte with GDP shows one lag of GDP has influence power to interest rate that its coefficient and t-test are 0.003890 and 4.006299. However from interest rate with real growth rate do not have any closely relations to influence each other. Finally the interest rate with inflation rate, GDP, and real growth rate together to run regression have the results that one lag of inflation rate and GDP have influence power to interest rate. After running regression study process needs to examine Ljung-Box and ARCH effect to check whether regression exists autocorrelation or heteroskedasticity phenomena. Table 5 panel A finds most of regressions’ exist significant that mean regressions exist autocorrelation situation. And all of regressions have ARCH effect existence that mean regression needs to adjust autoregressive conditional heteroskedasticity. After regressions run GARCH (1,1) indicates two lag of inflation rate and one lag of real growth rate have influence power to interest rate. And check the and ARCH find all of regression have no significant p value existence that means all of regressions have adjusted and coefficients are more accurate to reflect real situation.

The summary of this part uses regression to discuss the relations between interest rate and inflation rate, GDP, and real growth rate. The findings indicate one lag of inflation rate and GDP and two lag of inflation rate could have influence power to interest rate. All of regressions run GARCH model that variables are no volatility or spillover effect existence in the regressions.

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Table 5 Panel A The regression of interest rate with inflation rate, GDP, and real growth rate.

Model

Intercept

Inflation

Rate

Inflation

Rate(-1)

Inflation

Rate(-2)

Inflation

Rate(-3)

GDP GDP(-1)

Real

growth rate

AR

CH

Effect

1 coefficient

0.005548

0.278233

0.300237

0.090762

0.129344

t-test 0.071651

2.020930

3.172641

0.774574

1.527943

Q-Stat

15.890

F 2.491146

p-value

0.9431

0.0478

0.0024

0.4417

0.1319

0.226

p-v

0.196 p-v

0.069298

2 coefficient

-0.600726

0.001084

0.003890

t-test -3.012697

1.260046

4.006299

Q-Stat

29.318 F 11.05886

p-value

0.0037

0.2123

0.0002

0.2989

p-v

0.004 p-v

0.001475

3 coefficient

-0.026748

-0.009047

t-test -0.289769

-0.191616

Q-Stat

23.492 F 7.736041

p-value

0.7729

0.8486

0.00045

p-v

0.024 p-v

0.007103

4 coefficient

-0.508764

0.145924

0.248407

0.098552

0.013213

0.000844

0.003406

0.038146

t-test -2.583420

1.479598

2.687660

1.025981

0.145804

0.972584

3.482577

0.572188

Q-Stat

24.819 F 3.585447

p-value

0.0124

0.1446

0.0095

0.3093

0.8846

0.3349

0.0010

0.5695

0.4043

p-v

0.016 p-v

0.019101

Table 5 Panel B After using GARCH (1,1) to run the regression of interest rate with inflation rate, GDP, and real growth rate.

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Model Intercept Inflation Rate

Inflation Rate(-1)

Inflation Rate(-2)

Inflation Rate(-3)

GDP GDP(-1) Real

growth rate

ARCH

Effect

Error

Term

Variance

1 coefficient 0.054601 0.080385 0.283777 0.249891 0.169646 0.468235 0.087855

z-test 0.955415 0.523979 2.082503 1.946515 1.454801

Q-Stat

7.1373 F 0.068084

1.387740 0.225170

p-value 0.3394 0.6003 0.0373 0.0516 0.1457 p-v

0.848 p-v

0.976670 0.1652 0.8218

2 coefficient -0.523605

0.001122 0.003436 0.420145 0.051334

z-test -4.765346

1.326722 3.137174

Q-Stat

15.679 F 0.051837

1.649645 0.157159

p-value 0.0000 0.1846 0.0017 p-v

0.206 p-v

0.820635 0.0990 0.8751


0.002997 0.470495 0.089422

z-test -0.367047

0.049089

Q-Stat

12.995 F 0.101944

1.625841 0.321118

p-value 0.7136 0.9608 p-v

0.369 p-v

0.750549 0.1040 0.7481


0.013642 0.197623 0.244017 0.029033 0.000686 0.003390 0.041620 0.556024 0.106149

z-test -3.456926

0.111009 1.677477 1.986668 0.285964 0.475835 2.483501 0.679068

Q-Stat

5.2059 F 0.032612

1.130005 0.238320

p-value 0.0005 0.9116 0.0934 0.0470 0.7749 0.6342 0.0130 0.4971 p-v

0.951 p-v

0.992004 0.2585 0.8116

CONCLUSION

Fisher theory (1930) suggested that expected interest rates change in proportion to the changing expected inflation, or expected real interest rates are invariant to the expected inflation. Mundell (1963) concluded that nominal interest rate with expected inflation rate do not have one for one adjustable relations. Meanwhile prior studies had ignored time series data could have non-stationary situation and used non-stationary to run regression that could have spurious regression. The study tries to adopt econometric methods which have unit root, cointegration test, Granger Causality, ARCH effect, Ljung-Box Q statistic, and GARCH model that want to obtain accurate results to analyze the relationship between interest rate and inflation rate, GDP, and real growth rate.

From unit root method the study adopts ADF unit root to test the results which all of variables are belonging to I(1) structure and lag length in interest rate is 0, inflation rate is 3, GDP is 1, and real growth rate is 0.

From cointegrative test the study adopts Johansen cointegration test to examine five variables have long term equilibrium relationship. The findings indicate all of variables in this study which includes interest rate; inflation rate, GDP, and real growth rate have very significant existence in cointegrated vector. That means all of variables have long term equilibrium existence.

From Granger Causality the study adopts Granger Causality to examine the causal relations between interest rate and inflation rate, GDP, and real growth rate. The findings indicate GDP does cause interest rate and real growth rate does cause to inflation rate. Meanwhile interest rate and real growth rate have feedback relations existence. The results seem like Mundell theory that interest rate does not have the same pace with inflation rate. One thing is proved by this study that interest rate with real growth rate have lead and lag relationship each other.

From the regressions to test those variables relations indicate one and two lag of inflation rate have influence to current interest rate and one lag of GDP also has certainly influence power to current interest rate. According to all of regressions have ARCH effect existence and variables do not have the volatility or spillover risk existence after test GARCH (1, 1). However after testing the regressions indicate that interest rate with inflation rate have some kind of relations. Especially for the one or two lag of inflation rate have obviously significant power to explain interest rate.

REFERENCES

1. Barsky, R.B., (1987), The Fisher Hypothesis and the Forecastability and Persistence of Inflation, Journal of Monetary Economics 19, pp. 3-24.

2. Dickey, D.A. and Fuller, W.A., (1979), Distribution of the Estimators for Autoregressive Time Series with a Unit Root,Journal of American Statistical Association 74, pp. 427-431.

3. Engle, R.F. and Granger, C.W.,(1987), Cointegration and Error Correction: Representation, Estimation, and Testing, Econometrica 55,pp. 251 -276.

4. Estrella, Arturo, and Gikas A. Hardouvelis, (1991), “The Term Structure as a Predictor of Real Economic Activity,” Journal of Finance, vol. 46, pp. 555–76.

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5. Estrella, Arturo, and Frederic S. Mishkin (1998), “Predicting U.S. Recessions: Financial Variables as Leading Indicators,” Review of Economics and Statistics, vol. 80, pp. 45–61.

6. Haubrich, Joseph G., and Ann M. Dombrosky, (1996), “Predicting Real Growth Using the Yield Curve,” Federal Reserve Bank of Cleveland Economic Review, vol. 32 (First Quarter 1996), pp. 26–34.

7. Fama, E.F. and Gibbons, M.R., (1982), Inflation, Real Returns, and Capital Investment, Journal of Monetary Economics 9, pp. 297-324.

8. Fisher, I., (1930), The Theory of Interest, New York, Macmillan. 9. Granger, C.W.J., ( 1981 ), Some Properties of Time Series Data and Their Use in

Econometric Model Specification,Journal of Econometrics 16, pp. 121-130. 10. Granger, C.W.J., (1986), Developments in the Study of Cointegrated Economic

Variables, Oxford Bulletin of Economics and Statistics 48, pp. 213-228. 11. Huizinga, J. and Mishkin, F.S., (1984), Inflation and Real Interest Rates on Assets

with Different Risk Characteristics, Journal of Finance 39, pp. 699-712. 12. Huizinga, J. and Mishkin, F.S., (1986), Monetary Policy Regime Shifts and the

Unusual Behavior of Real Interest Rates, Carnegie- Rochester Conference Series on public Policy 24, pp. 231-274.

13. Johansen, S.,(1988),Statistical Analysis of Cointegration Vectors, Journal of Economics Dynamics and Control 12, pp. 231-254.

14. Johansen, S., (1991), Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models, Econometrica 59, pp. 1551-1580.

15. Mishkin, F.S., (1981), The Real Rate of Interest: An Empirical Investigation, The Cost and Consequences of Inflation, Carnegie-Rochester Conference Series on public Policy 15, pp. 151-200.

16. Mishkin, F.S., (1988), Understanding Real Interest Rates, American Journal of Agricultural Economics 70, pp. 1064-1072.

17. Mundell, R.,(1963), Inflation and Real Interest, Journal of Political Economy 71, pp. 280-283.

18. Nelson, C.R. and Plosser, C.I.,(1982), Trends and Random Walks in Macroeconomic Time Series, Journal of Monetary Economics 10, pp. 139-162.

19. Newey , W. and West, K., (1987), A Simple Positive Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix, Econometrica 53, pp. 703-708.

20. Phillips, P. and Perron P., (1988), Testing for a Unit Root in Time Series Regression, Biometrica 75, pp. 335-346.

21. Rose, A.K., (1988) Is the Real Interest Rate Stable?, Journal of Finance 43, pp. 1095-1112.

22. Summers, L.H., (1983), The Non-Adjustment of Nominal Interest Rates: A Study of the Fisher Effect, in James Tobin, ed. A Symposium in Honor of Arthur Okun ( Brookings Institution Washington D.C. )


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The Theoretical Framework of Ethnic Consumption Model of Financial Products

Dr. Heryanto Lecturer of Universitas Putra Indonesia

Faculty of Economic, Department of Management, West Sumatra, Indonesia

Abstract

This paper provides the theoretical framework of ethnic consumption model of financial products. In this paper divided by overview consumption theory of Classical and Post Keynes, List of Values (LOV), Service Quality (SERVQUAL) then implication for the construction of a conceptual model for financial products consumption and finally hypotheses development.

Keywords: Theoretical, Framework, Ethnic, Consumption, Model, Financial & Products

Introduction The Minangkabau and Chinese form the majority of financial customers, especially as financial service users at Bank Nagari. The Minangkabau is a faithful community to the kenagarian (regional) brand. This is proven by the opening of the Jakarta branch office. The bank can attract bigger savings from this community (“Salah Satu,” 2001). It means Minangkabau customers tend to be ethnic bonding. Conversely the Chinese tend to be business bonding.

The preferences for both ethnics are difference. The Minangkabau preference tends to value sense of belonging and security (“Salah Satu,” 2001; “Hebat, BPD” 2000). Sense of belonging of the Minangkabau customers support the Bank Nagari. Many Banks in West Sumatra offer simple products to consumers without putting much attention to the ethnicity. Generally, other banks has targeted all ethnics, whereas Bank Nagari focuses on the Minangkabau customers.

The value orientation makes Minangkabau customers loyal to the bank. The bank has given them financial services in personal basis and this has increased their feeling of security in using the Bank Nagari products. The security feeling further encourage them to use the Bank Nagari


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products consistently and continually.

The product security is part of security feeling. Consumer will not buy a product if they do not feel secure. The security feeling influences preference to buy. The security feeling is obtained from close consumer-business location, close to society, Bank Nagari commitment (to construct image to develop regional), and kenagarian.

The Chinese preference consisted of values regarding sense of achievement, self-fulfillment, and security (Roziqin, 1997). This is important values for Chinese customers. Chinese is immigrant ethnic, who should be survived in business activities. As a survivor, Chinese have to succeed in doing business. Chinese customers typically have of high sense achievement. Bank Nagari offers different kinds of financial products to support the business. Furthermore, Bank Nagari has network in each region in West Sumatra, which might encourage Chinese customers to use the bank.

Sense of achievement among the Chinese customers is influenced by the teaching of Han San Wei Yi, paternalistic family materialism philosophy and business organization concept. Han San Wei Yi’s teaching consists of Koh hu-tsu (Confucianism, Taoism and Buddhism). While guanxi operates on a good personal relationship. Guanxiwang Chinese is strong. Guanxiwang is attained when one set of separate, personal and total relationship between two individuals and another set are interlinked through a common agent acting as a witness and facilitator.

The self-fulfillment of Chinese customer refers to the feeling of having a good image. There are many ways customers could reach self-fulfillment. As Chinese customers have strong guanxiwang, they are reluctant to move to another bank. Thus self-fulfillment of Chinese customers depends on to who extend that the Bank Nagari fulfill their needs.

In terms of security of the product, Chinese customers like Minangkabau value security of the bank products. The consumers are more careful and they have a lot of information especially bank products. Guanxiwang is an information distribution media among Chinese customers. This makes them differ from Minangkabau customers.

The Chinese are the second dominant users of Bank Nagari’s products and services. The Chinese are the major credit customers compared to other ethnic groups. As shown in Table 1, credit mean per person of Chinese customers is higher than other ethnics (i.e., Rp.55.571.000,- and Rp. 21.703.000,- respectively).

Table 1: The Bank Nagari Credit Amount at End December 2000 by Ethnic

No. Ethnic Number of credit customer

(person)

Amount

(000.000)

Credit mean per person

(000)

1. Minangkabau 6.875 149.209 21.703

2. Chinese 69 8.975 130.066

3. Javanese 275 15.282 55.571

Total 7.219 173.466

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Source: Bank Nagari, West Sumatra.

Bank Nagari has different perception on Minangkabau and Chinese customers in providing credit facilities. Chinese customers have more knowledge and experience in doing business activities and they have very strong capital. Due to this reason Bank Nagari has minimum risk to distribute credit facilities to the Chinese customers.

Bank Nagari uses lower technology and provides simple products compared to other banks, it does not seem to be an influencing factor to the Minangkabau and Chinese in choosing Bank Nagari. It might be other factors of service quality that influence both ethnic such as prompt service, feel secure, interest rate, accuracy, dependability, and attribute.

Minangkabau and Chinese customers have different reason and benefit in using bank services. The benefit of the bank services to the Minangkabau is in term of security. On the other hand, the Chinese customers use the services for the purpose of supporting their business. For example, the Minangkabau are involved in retail trading, while the Chinese are involved in middle trading. On the other hand, Bank Nagari’s financial products distribution between ethnic groups is influenced by locations. Minangkabau traders in West Sumatra are commonly retail traders. Inversely the Minangkabau traders outside West Sumatra for example in Pekanbaru have become middle and big traders. The present study analyzes the Bank Nagari product preferences between Minangkabau and Chinese customers. Based on the problems discussed these questions need to be answered:

1. How does the preference of Minangkabau customers toward Bank Nagari financial product differ from that of Chinese customers?

2. What are the factors affecting the use of Bank Nagari credit facilities among Minangkabau and Chinese customers?

3. How does the model of Minangkabau dan Chinese consumption?

Consumption Theory Classical

In adopting this theory, considerable insight into the culture of other people, their general way of living, their point of view and their attitude need to be gathered before one can understand the significance of their experiences in using goods, or what their consumption means to them. What people get from their consumption depends partly on their point of view, as well as their general attitude toward life and living.

The common definition of culture is the mode of living that distinguishes one large group of mankind from another. Yet a culture is not a mere sum of beliefs, practices, and goods and services consumed (Hoyt, 1976); it is beliefs, practices, goods, service linked, and bound together, first by a mutual dependence on some common point of view, and second by a mutual interdependence on one another. A culture, in other words, is organic. A simple figure will illustrate this influence of culture as follows (Hoyt, 1976):

MAN

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Figure 1: Man and Nature

Source: Hoyt, Elizabeth Ellis (1976)

In this diagram, the lines between nature and man represent the course that is taken by the various factors, which enter their experience. Only the very simplest things proceed directly, as by the heavy black vertical line. Almost everything is deflected by cultural attitude, some things more and some things less, and therefore reach man by an indirect route.

The illustration above presents that culture plays an important role in explaining consumption behaviour. In this case, culture is one of the factors that determine consumption. Kyrk (1976) tried to relate that culture is drawn by habit and consumption as human behavior in the fulfillment of the standard of living. Reisman (1976) stated that:

“consumption patterns should be appropriate to the consumer as determined empirically by observing approval habitual associations in a given culture" (p.112).

According to Henry (1976) the values implicit in a culture affect consumption motives which in turn partially set the choice criteria used by individual consumer. Culture also may act as an intention inhibitor for specific products. Empirical evidence is provided to support the general theory that culture is a determinant of certain aspects of consumer behavior.

Post Keynes

Keynes’ (1936) said in the General Theory of Employment, Interest and Money:

“The fundamental psychological law, upon which we are entitled to depend with great confidence both apriori from our knowledge of human nature and from the detailed facts of experience, is that men are disposed, as a rule and on the average to increase their consumption as their income increase, but not by as much as the increase in their income “(p.96)

The theory stated above means that if C is the amount of consumption and Y is income (both measured in wage-unit) change in consumption (DC) has the same sign as change in income

CULTURE

ATTITUDE

NATURE

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(DY) but is smaller in amount, i.e., dc/dy is positive and less than unity. The consumption function can be rewritten as:

C = c (y) 0 < cy < 1……………………………………….………….(1)

where cy is the marginal propensity to consume. In linear form, this can be written as:

C = co + by 0 < b < 1 …………………..................................................(2)

where the marginal propensity to consume becomes the constant b, and co is autonomous consumption.

Since people do not spend all of their income, eight motives or reason for not doing so are identified. It is also subject to that partial individual choice. These eight motives might be called the motives of precaution, foresight, calculation, improvement, independence, enterprise, pride and avarice (Keynes, 1936). The theory also draws up a corresponding list of motives to consumption such as enjoyment, shortsightedness, generosity, miscalculation, orientation and extravagance (Keynes, 1936). It implies indirect culture relation in the list of consumption motives above.

An earlier analysis by Duesenbery (1949) emphasized an established habit patterns. This ‘relative income’ hypothesis can be illustrated by referring to Figure 3 and supposing that it starts with income Yo and consumption level e. It supposes also that Yo is the highest income level ever achieved, so presumably it is at the peak of the current business cycle.

Figure 2: Long run and Short-run Consumption Function

Y2 Yo Y1

CSo

CS1

CL

Disposable Income Measures

Aggregate of Family Consumption Measures

450

a

d

f

e

45

Source: Duesenberry, James S (1949)

According to this theory having become accustomed to a new living standard provided by growth of income, people also become reluctant to sacrifice that living standard in the face of income shrinkage. Therefore, when income declines to Y2, households maintain their consumption spending by moving along the short-run consumption function Cso to a point that the bulk of the income loss is absorbed by sharply reduced saving. When the economy recovers and income rises back to Yo previous peak consumption and saving level is sought, and so the movement is again along Cso . However, when income continues to rise beyond the past cyclical peak (Yo) , there is a break in the relationship, and the movement of consumption is then upward from e to d along the CL function, where increases in consumption and saving are proportional. If income then declines again, Y1 becomes the new past peak income level, and the process starts all over again; this time the recession movement is from d to f along Cs1. Thus, the relative–income hypothesis expects the short-run consumption function to ratchet upward as the result of the establishment of higher standards of living. Income, in this view, is important, but income relative to what one is accustomed to is also important in explaining consumption (Duesenbery, 1949).

Furthermore, Modigliani’s life cycle income hypothesis framework concerns optimal saving behavior that depends on and determines differences between current income and expected future income. In its simplest ‘stripped down’ form, the life cycle income hypothesis posits life cycle paths for consumption, saving, and wealth that depend on the length of the work life, retirement age, and expected age at death, as well as the age profile of earnings (Modigliani, 1986). Because utility maximization requires consumption smoothing over time, the path of wealth holding is hump-shaped. During the earning phase of the life cycle, households save to accumulate wealth that is later ‘spent down’ in retirement. Thus, the life cycle income hypothesis formulation holds that current consumption depends on the entire income stream across all ages. Even without transitory income variation, current income may differ substantially from the level expected in subsequent periods because of one’s particular age-earnings profile. Thus to examine Modigliani’s specification, the estimation equation includes both current and expected income variables. Additionally, annuitized net worth enters the life cycle hypothesis model as a separate predictor variable to account for the influence of existing wealth holdings on well-being.

The hypothesis of utility maximization (and perfect markets) has, all by it self, one very powerful implication – the resources that a representative consumer allocates at any age…will depend only on his life resources… and not at all on income accruing currently (Modigliani ,1986, p.299).

Therefore, the annual consumption is written as follows:

1 R

C =--- A + --- Y ………………………………………………………....(3)

D D

Where C, Consumption, A, Asset, D, Year Expectation to Die, R, Retire of the Working and Y, Annual Income from Work.

“Everyone probably has, more or less consciously formulated, an ideal standard of living, a level toward which he moves as income and other opportunities permit: he has also … a standard that he insists upon maintaining. To attain the first would be a highly desirable state of economic well-being, to attain the second is essential, and to fall below it is intolerable” (Kyrk, 1953, p. 374).

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Kyrk (1953) in her resource deficit hypothesis suggested that the greater the discrepancy between one’s resource level aspiration and actual experience, the less satisfied one becomes. In her view, individuals form expectations about their desired living standard based on personal experience and goal orientations, such that the relevant comparisons are between current income and a hypothetical, desired income level (Kyrk, 1953). Although salient experiences for developing an income goal could include observing peers’ consumption, the distinctive feature of Kyrk’s idea is that consumers ultimately set and seek to meet their own income standards rather than the standards of others. Thus Kyrk’s hypothesis is unique in that it accounts for variation in ambition or indifference about material well-being that would operate quite apart from what ‘the Jones’ households do.

Both of the theories use wealth as a variable in determining a long-term consumption model. Wealth is welfare. The present study will formulate a short-term consumption model. Duesenberry has drawn the short-term consumption habit of income. Duesenberry stated that:

“From the viewpoint of preference theory or marginal utility theory, human desires are desires for specific goods; but nothing is said about how these desires arise or how they are changed. That, however, is the essence of the consumption problem when preferences are interdependent.” (Duesenberry, 1949, p.19).

This is a reason that researchers do not consider in their research. Moreover, consumption analysis uses basic need analysis as a part of its theory (Kyrk, 1953). The current research assumes that ethnic income is higher than basic need values.

According to Kyrk (1976) consumption is usually taken to signify the use of goods in the satisfaction of human wants or the use of a thing or employing of it for the purpose of enjoyment or the wealth-using as opposed to the wealth-getting activities of man. Moreover, Hirschman (1990) distinguished the three positions of consumption ideology i.e., secular, sacred and mediating consumption.

Secular consumption imagery typically is centered on technology, urbanism, personal achievement, and man’s mastery over nature. Sacred consumption ideology is in many respects the antithesis of secularness. It embraces familial bonding, friendship, ecological concern, and nurturance. Product most consistent with a position near the sacred pole of meaning are those linked to nature or which signify love and caring. Finally mediating consumption ideology is found in commercials where the semiotic structure proposes the virtues of both the sacred and secular aspects of products. The means by which these bipolar oppositions are interwoven harmoniously within a single message are varied and enlightening.

Based on the classical and post Keynes consumption theories discussed, some conclusions can therefore be derived. Classical consumption theory states that culture influences consumption through the relationship between nature and man, and post Keynes theory indicates that consumption is determined by income.

The current research defines consumption as how customers use financial products in business activities, or it is also known as business consumption. The current consumption is differently defined from Kyrk (1976) and Hirschman (1990), and is construed as daily good consumption and spatial consumption i.e., city, town and region consumption. The current consumption is measured by culture, Service Quality (SERVQUAL) and income variables. It means Consumption is a dependent variable and a function of independent variables i.e., culture, SERVQUAL and income.

List of Values (LOV)

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Researchers have developed culture value inventories by studying particular cultures, identifying their values, and then determining whether these values are widely held (Assael, 1998). The best know inventory is the Rokeach Value Survey established in 1968 as cited in Schiffman and Kanuk (1991).

According to Assael (1998), the Rokeach Value Survey is based on a study of American culture. Then Kahle et al. (1986) developed another widely used cultural inventory called the LOV.

“LOV was developed from a theoretical base of Feather’s in 1975, Maslow’s in 1954 and Rokeach’s in 1973 work on values in order to assess adaptation to various roles through value fulfillment. Beside that, LOV has been related to a number of important measures of mental health, well-being, and adaptation to society, roles, and self in Kahle, 1983, as well as geographic dispersement in Kahle, 1986” (Cited in Kahle et al., 1986, pp.406-407).

The LOV development was as an alternative to Rokeach’s Value Inventory because the terminal values identified by Rokeach were too abstract and difficult to apply to marketing situations (Assael, 1998). Therefore, a study by Kahle et al. (1986) proposed that the LOV inventory measures nine values:

1. Self-fulfillment

2. Excitement

3. Sense of Accomplishment

4. Self-respect

5. Sense of Belonging

6. Being Well Respected

7. Security

8. Fun and Enjoyment in Life

9. Warm Relationships with Others

LOV theory also notes the importance of people in value fulfillment. The value can be fulfilled through interpersonal relationships, personal factors and personal things (Kahle et al., 1986). Values in relation to interpersonal relationships, such as warm relationships with others mean that the consumer wish for a personal approach or service of personal characteristics from the bank personnel. Sense of belonging explains one’s conformity to something and nostalgic associations. Each value generate different behaviors for example, people who value a sense of belonging especially like group activities and people who value warm relationships with others give gifts for no particular occasions.

Meanwhile, personal factors consist of self-respect i.e., politeness (courteous, well mannered), being well-respected i.e., appreciation towards the consumers, and self-fulfillment i.e., feeling prestige or having a good image. Finally, personal things consist of sense of accomplishment i.e., feeling dependable and reliable; security i.e., being freedom from danger, risk or doubt; excitement i.e., being open-minded and fun and enjoyment in life i.e., working for the welfare of others. Culture is construed as the combination of interpersonal relationships, personal factors and apersonal things.

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Kahle et al. (1986) compared LOV and VALS and concluded that LOV significantly predicts consumer behavior trends more often than does the VALS scoring system. In other words, LOV has greater predictive utility than does VALS in consumer behavior trends.

As global competition increases, understanding the cultural impacts of services becomes more critical for service firms (Riddle, 1992). Because culture provides the framework for social interactions, social rules and consumer expectations that are related to service encounters are likely to vary from culture to culture (Pucik & Katz, 1986).

Service Quality (SERVQUAL)

SERVQUAL has been described as a form of attitude, related but not equivalent to satisfaction that results from the comparison of expectations with performance (Bolton & Drew, 1991; Parasuraman et al., 1988). The most common explanation of the difference between the two is that perceived service quality is a form of attitude, a long-run overall evaluation, whereas satisfaction is a transaction-specific measure (Bitner, 1990; Bolton & Drew, 1991; Parasuraman et al., 1988). Parasuraman et al. (1988) further suggested that the difference lies in the way disconfirmation is operationalized. They stated that in measuring perceived service quality the level of comparison is according to what a consumer should expect, whereas in measures of satisfaction the appropriate comparison is based on what a consumer would expect. However, such a differentiation appears to be inconsistent with Woodruff, Codotte, and Jenkins’ (1983) suggestion that expectations should be based on experience norms i.e., what consumers should expect from a given service provider given their experience with that specific type of service organization.

As SERVQUAL instrument’s expectation statement relate to the service level that consumers believe they should get from the service provider, its expectation components reflect the desired service construct. According to Parasuraman et al. (1994) that desired service is the level of service representing a blend of what consumers believe “can be” and “should be” provided and adequate service is the minimum level of service consumers are willing to accept. However, to incorporate the recently revised conceptualization of expectations they modified SERVQUAL’s structure in order to capture not only the discrepancy between perceived service and desired service - labeled as measure of service superiority (or MSS) - but also the discrepancy between perceived service and adequate service or minimum service - labeled as measure of service adequacy (or MSA). Thus, expectation service quality as conceptualized by Parasuraman et al. (1994).

Expectation SERVQUAL

Adequate Service Desire Service

Perceptions Ratings

Reliability

Responsiveness

Assurance

Empathy

Tangibles

Reliability

Responsiveness

Assurance

Empathy

Tangibles

Reliability

Responsiveness

Assurance

Empathy

Tangibles

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Figure 3: Expectation Service Quality as Conceptualized by Parasuraman et al. (1994)

Source: Parasuraman, A., Zeitham, Valarie A & Berry, Leonard L (1994)

SERVQUAL’s dimensions or as Parasuraman et al. (1994) called if the SERVQUAL Battery consist of five sub-dimensions namely reliability, responsiveness, assurance, empathy, and tangibility. Every SERVQUAL Battery has elements serving as indicators that measure the battery. The set of battery items are as in Table 1.

Table 2: SERVQUAL Battery

Dimension Component

Reliability

Providing service as promised.

Dependability in handling consumers’ service problems.

Performing services right the first time.

Providing service at the promised time.

Maintaining error-free records.

Responsiveness

Keeping consumers informed about when service will be performed.

Prompt service to consumers.

Willingness to help consumers.

Readiness to respond to consumers’ requests.

Assurance

Employees who instill confidence in consumers.

Making consumers feel safe in their transactions.

Employees who are consistently courteous.

Employees who have the knowledge to answer consumers’ questions.

Empathy

Giving consumers individual attention.

Employees who deal with consumers in a caring fashion.

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Having the consumers’ best interest at heart.

Employees who understand the needs of their consumers.

Convenient business hours.

Tangibles

Modern equipment.

Visually appealing facilities.

Employees who have neat, professional appearance.

Visually appealing materials associated with the service.

Source: Parasuraman, A., Zeitham, Valarie A & Berry, Leonard L (1994)

Furthermore the refined measurement design included three alternative questionnaire formats, one incorporating the difference-score formulation and the other two incorporating direct measures of service quality. Each of these formats also incorporated the expanded conceptualization of expectations to obtain scores for the measures of service superiority (MSS) and service adequacy (MSA) defined earlier in theoretical framework. Three alternative service quality measurement format are illustrated by Parasuraman et al. (1994) as follows:

1. Direct measures of MSS (i.e., perceptions relative to desired service) obtained from the one-column format questionnaire.

2. Direct measures of MSS and MSA (i.e., perceptions relative to adequate service) obtained from the two-column format questionnaire.

3. Difference-score measures of MSS and MSA obtained from the three-column format questionnaire.

Study of Parasuraman et al. (1994) were found that validity test of the different scale formats of SERVQUAL found from six separate regressions for overall service quality and overall value the following scores as independent variables: MSS scores from the one-, two-, and three-column formats, MSA score from the two- and three-column formats, and perceptions-only scores from the three-column format.

Whereas the determinant coefficient (R2) findings for the quality regressions were generally high across companies (e.g., computer manufacture, retail chain, auto insurer and life insure) and questionnaire formats, attesting to the convergent and predictive validity of all service quality scales. Perceptions-only indicated R2 higher than MSS and MSA across companies. This superior predictive validity of the perception-only scale was similar to findings from some previous studies (Cronin & Taylor, 1992; Parasuraman et al., 1991).

According to Parasuraman et al. (1994), in the diagnostic value of the three questionnaire formats investigated, only the three-column format was capable of specifically indicating the position of the zone of tolerance and the perceived service level relative to the zone. The one-column format provided no information about the zone of tolerance. The two-column format scores could indicate whether the perceived service level was above the tolerance zone, below the tolerance zone, or within the tolerance zone. However, the two-column format scores could not identify the tolerance zone’s position on a continuum of expectation level.

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This limitation, coupled with the two-column format’s higher response error, suggested that its scores might be less useful and trustworthy that the scores from the three-column format.

Implications for the Construction of a Conceptual Model for Consumption

Duesenbery (1949) asserted: ”In every case the kinds of activities in which people engage are culturally determined; nearly all purchases of goods are made … either to provide physical comfort or to implement the activities which make up the life of our culture “ (p.25)

Moreover, purchase motivation may influence how people feel in service encounters. Consumers come into service consumption situations with different service-specific goals (Bitner, 1992; Lawson, 1997) that influence their pre-consumption expectations, including their affective expectations (Dube, 1990).

A study about culture-service relation to consumption has been considered by McCracken (1986), Riddle (1992), Pucik and Katz (1986), Mattila (1999), Bitner (1992), Lawson (1997), Dube (1990) and Tan and Farley (1987). Several studies have examined about ethnic consumption. Tan and Farley’s (1987) study examined how cultural elements influence relationships between attitudes and intentions in a non-western culture i.e., Singapore. This study was concerned with product origins (local/foreign) of goods i.e., men’s clothing, women’s clothing and face cream, and it used two cultural variables i.e., family orientation (affection for family, interaction with family members, parental influence on thought and tendency to compromise subject needs with family needs) and conformity, defined as the sum of two scales: behavior according to what others expect and the sacrifice of personal desires to conform to social norms. Donthu and Cherian (1994), observed the Hispanic retail shopping behavior. Their study explored the differences in retail shopping behaviors of strongly and weakly identified Hispanics. The result showed that strongly identified Hispanics are more likely than weakly identified Hispanics to be loyal to product brands used by family and friends, to be influenced by the media, and to be less concerned about economic value.

Furthermore, the relationship between purchase intentions and consumer satisfaction has been addressed in several studies, including those by Bearden and Teel (1983), Oliver (1980), and Oliver and Swan (1989). LaBarbera and Mazursky (1983) investigated the relationship between actual purchase behavior and customer satisfaction. There have also been a number of recent empirical attempts to validate the specific nature of the relationship between service quality and consumer satisfaction in the formation of consumers’ purchase intentions (Bitner, 1990; Cronin & Taylor, 1992).

Beside that Taylor and Baker (1994) stated that the results of empirical efforts to validate the specific nature of the relationship between service quality, consumer satisfaction, and purchase intentions have supported both possible relationships among the constructs (i.e., SERVQUAL, satisfaction, purchase intentions; satisfaction, SERVQUAL, purchase intentions).

Conceptual Model for Consumption

Based on a preceding study by Tan and Farley (1987), Donthu and Cherian (1994) affirmed that studies about ethnic consumption had been limited customer goods e.g., clothing, and food. Studies on the consumption of financial goods according to ethnic groups were rarely done before it.

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The conceptual model of this study is based on strongly postulate relationships of culture-income and culture-service. Customers’ indifferent cultures may have different levels of service expectation, because cultures differ in their patterns of behavior and attitudes (Donthu & Yoo, 1998). Income is independently influenced by culture. Household consumption is always maintained even though its income decreases (Duesenberry, 1949), because household consumption is a habitual expenditure. Below is the conceptual model for consumption:

Culture

Service Quality Consumption

Income

Figure 4: Conceptual Model for Consumption

Culture, SERVQUAL, and income are independent variables. Culture, service and income variables are measured using LOV, SERVQUAL and consumer expenditure per month.

Hypotheses Development A set of hypotheses is developed based on consumption factors for financial products. LOV, SERVQUAL, and consumer expenditure per month are endogenous variables that influence financial products consumption.

Ha1. There are significant differences in LOV, SERVQUAL and consumer expenditure per month between the ethnic customers with relevance to consumption.

Ha2.There is a positive relationship between consumption and SERVQUAL. SERVQUAL has a positive relationship with financial products consumption, meaning that an increase in SERVQUAL increases product consumption. Service has a two-way relationship with product consumption. In other words consumption changes due to changes in the SERVQUAL expected by customers.

Ha3.There is a positive relationship between consumption and expenditure per month. Income through expenditure per month influences financial products consumption i.e., the extent to which consumption

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changes is determined by changes in expenditure per month. It has a positive and two-way relationship with product consumption.

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Managing Boundaries: The Case of Home-Based Self-

Employed Teleworkers

Dr. Mona Mustafa Institution: Royal Holloway, University of London

Abstract

The process of negotiating and maintaining boundaries between work and non work is the concern of a body of literature that can be termed ‘boundary theory’. Boundary theory is a relatively new strand within work-family research that addresses the linkage between work and home by focusing on the boundaries that divide them.

Managing both work and non work boundaries is a critical challenge facing workers and is certainly a growing issue in the management literature. More and more individuals today feel the pressure to fulfil the needs of both paid and home duties. This is due to the increase in the number of women working and the number of single households.

This paper looks at self-employed home-based teleworkers and examines how individuals handle the integration between work and non work activities when work takes place in the location of the home. Teleworkers have to rely on their own boundary management and willpower to separate work from home since the nature of the job does not provide clear time and space division.

The research collects data via interviews as well as photographs from participants based in the UK, France and the US. The research findings indicate that for individuals working from home, creating physical boundaries is essential to avoid interruptions. Individuals working from home may have to re-design their boundaries to achieve a suitable balance. Many individuals may struggle to re-design their boundaries while working from home, in particular those who don’t have a separate work location in the house.

Understanding how home-based teleworkers manage their boundaries has essential implications on a wide range of disciplines. In home-based telework, work is relocated from a traditional office space to a private sphere. As the domains overlap and boundaries of time and space become blurred, new situations arise for both individual teleworkers and their co-residents which should be examined.


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Introduction Working from home is often associated with flexibility and freedom which can be a great benefit for structuring the working day. Nevertheless, it is evident that flexibility and freedom may be challenging to manage as the work and home boundaries become increasingly integrated. The present paper aims to understand how individuals manage this flexibility and re-establish the boundary between life and work. Boundary theory is utilised to help examine how individuals handle the integration between work and non-work activities when work takes place in the home, and looks at the factors affecting the way individuals choose to manage the boundaries.

Managing the boundary between work and non-work activities determines how the two can be balanced. Researchers explain the issue in the following way: workers develop boundaries between their work and their personal domains, and the strength of these boundaries has a strong influence on their ability to achieve a balance between the domains (Ashforth et al., 2000).

Research questions 1- How do self-employed home-based teleworkers manage the flexibility which they experience and the interaction between work and home domains. 2- How do self-employed home-based teleworkers re-create and manage their physical boundaries?

Literature review Understanding how individuals create boundaries is essential to the present study since it helps to shed light on the way individuals cope with the blurred boundaries associated with working from home. A boundary in this context can be described as ‘a structural phenomenon that involves spatial, temporal, psychological and social separation between work and family life’ (Standen et al., 1999, in Hartig et al., 2007: 236). Individuals create boundaries, described by Zerubavel (1991) as ‘mental fences’, around their different roles to help maintain order and simplify the environment (Ashforth et al., 2000). Some individuals maintain a strong boundary between work and personal domains in an attempt to keep them separate, but others form boundaries which are less strong and allow a degree of integration between the two domains (Nippert-Eng, 1996). Boundaries are characterised by permeability and flexibility. Bulger et al. (2007) explain permeability and flexibility as:

Actual interruptions or intrusions from one domain into the other, over which the employee may have little control. [Permeability] relates to being physically located in one domain, but actually behaviourally responding to the other domain. For example, a work boundary is permeable if the employee is contacted by family while at work… A boundary is flexible if it could be relaxed to meet the demands of the other domain. For example, if the employee perceives that he or she could leave work to attend to a family matter’ (Bulger et al., 2007: 367). This is illustrated in Figure 1 (Ashforth et al., 2000).

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Figure 1 Boundary management: Integration versus segmentation

(Ashforth et al., 2000: 476)

There are benefits associated with either flexibility (integration) or rigidity (separation) of a boundary. Boundary integration allows a smooth transition between two domains, and the boundary becomes blurred. Separation gives clarity to the boundary and keeps the domains separate (Ashforth et al., 2000). Segmentation and integration of boundaries can be summarised as follows:

Segmentation exists when there is low flexibility to leave one domain to attend to the other and low permeability of the domain boundaries. An individual at this end of the continuum would maintain work and personal life as separate domains. For example, such as individual would not interrupt work to attend to personal matters… In the case of integration, there is high flexibility and high permeability of domain boundaries. At this end of the continuum, an individual would maintain work and personal life as freely interacting domains. Such an individual would be likely to bring work home or leave a family event to attend to work matters (Bulger et al., 2007: 367).

Nippert-Eng (1996) explains that full integration exists when:

No distinction exists between what belongs to ‘home’ or ‘work’ and when and where they are engaged. ‘Home’ and ‘work’ are one and the same, one giant category of social existence, for no conceptual boundary separates its contents or meanings. Within this integrated paradigm, all the components we usually associate with these different realms are intertwined and understood with the same mental framework (Nippert-Eng, 1996: 567).

The diagram in Figure 1, above, illustrates that the more the boundary is segmented the higher the contrast in role identity and the less ‘contamination’ and spill-over there is between roles. As the boundary in the segmented role is impermeable and inflexible it does not permit cross-role interruptions and there is minimal overlap between the physical location of the role sets. Tight boundaries allow little room for values, identities and beliefs to ‘leak’ into the other (Ashforth et al., 2000).

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Ashforth et al. (2000) give the example of working at home as a highly integrated type of boundary. Since home is also the physical location for work, the boundary between the two becomes blurred. This blurring of roles may lead to frustration and confusion. The roles become weakly differentiated and are easily interrupted (permeable), for example when a person works and at the same time looks after a child, and flexible in terms of physical location and time. These characteristics of an integrated boundary (permeability and flexibility), together with the low contrast between role identities, can be an advantage in being able to switch between one role and the other. Time and stress are reduced as one enters or exits the other role. Furthermore, the low barrier to change simplifies and eases the process of crossing boundaries, and this is the key benefit of integrated boundaries.

A foucus on home-based individuals Home-based teleworking combines work and family life under one roof. This inevitably means that work boundaries are blurred. There is no clear division of either space or time, in the sense that there is no particular set location for work, nor are there signposts marking the start and the end of the working day. Home-based workers therefore rely on their own boundary management in reconciling the relative demands of work and home.

In this section the impact of home-based telework on the management of this boundary is examined. The existing literature is reviewed, highlighting how home-based workers respond to the blurring of their boundaries due to the characteristics of this type of work.

Salmi (1997) points out that in the case of homeworkers flexibility in structuring the working day determines how it can be managed. She points out:

The thought of an eight hour ‘9-5’ normal workday hardly restricts homeworkers. Working begins and ends at different times on different days, and work is done in short periods throughout the day. In most cases the daily working hours differ remarkably from one day to the next (Salmi, 1997: 103).

De Mann et al. (2008) focus on the influence work characteristics have on the permeability of boundaries. They state that teleworking makes regular working hours unlikely and this has an impact on the permeability of the boundaries. As teleworking facilitates the integration of home and work, the boundary becomes blurred. They point out that the more hours an individual telecommutes, the more permeable the boundary will be. Working from home therefore requires a strategy to be developed by individuals as to whether to integrate or segment their boundaries. Ashforth et al. (2000) propose that the main challenge of integration lies in creating and maintaining boundaries between the roles. For example, studies such as those conducted by Ahrentzen (1990) and Mirchandani (1998) suggest that home-based workers may create a physical boundary between work and home by conducting the work in a separate room, or at least by moving furniture around to create an informal physical boundary. Temporal boundaries are also established by rescheduling home activities and setting clear times when people are permitted to visit or talk.

Olson-Buchanan and Boswell (2006) support Ashforth et al. (2000), in that individuals who integrate their boundaries may find difficulty in separating the two domains. Empirical evidence suggests that individuals who work from home do in fact attempt to separate their roles and create boundaries between them (Kylin and Karlsson, 2008; Loscocco, 1997; and Mirchandani, 1998). The following section examines how home-based teleworkers create distinct boundaries to cope with their increasing blurriness.

Re-establishing the boundaries: Home-based workers

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Home-based teleworkers clearly find it necessary to create some boundaries. Social factors, such as family responsibilities, childcare and the perception of friends and neighbours, who may not regard a home worker as actually working, all make it necessary to distinguish the boundary between work and home. The literature supports the idea that home-based workers strive to create such a boundary to deal with interruptions and to legitimise their form of work (Ahrentzen, 1990; Mirchandani, 1998; Felstead et al., 2005; Hartig et al., 2007; and Kylin and Karlsson, 2008).

In addition, teleworkers in Mirchandani’s study (1998) found that they were required to legitimise their home-working activities to friends and family, who variously describe them as ‘having a day off,’ ‘being on holiday,’ ‘goofing off,’ ‘getting away with something,’ ‘watching soaps,’ ‘doing a woman’s thing,’ ‘being in weekend mode,’ ‘being on vacation,’ or ‘cheating’. Mirchandani’s respondents found that there were a number of reasons for them to constantly reinforce the boundary between work and family activities. Firstly, they needed to prevent work intruding into their family life and other non-work activities, as some respondents felt that they were always available to colleagues in the office. Furthermore, a boundary was necessary to legitimise their paid work, as working from home was not looked upon as serious work by their colleagues. To cope with these conflicts with families and friends, studies indicate that home-based workers need to create clear boundaries for themselves when working from home. These include physical and temporal boundaries.

Findings: Creating physical boundaries During the interviews conducted in this study, respondents were asked to describe how they coped with the high degree of integration they experience between their work and home. A key finding was the creation of physical boundaries. It is evident that individuals preferred to have a separate location for their work by having a dedicated room where only work took place. Out of the 20 respondents interviewed, 16 had succeeded in doing this. For respondents who did not have a separate office location this was usually because they had no alternative – there was nowhere else available in the house. Some were in shared accommodation and had no choice other than their bedroom.

Having a clear separate physical location for work was necessary, even though for most respondents no one else was in the house when work took place. Creating a physical boundary helps to re-create and re-establish the separation of work and home when these have inevitably become integrated by being in close proximity. Respondents clearly planed and organised their working location rationally and with considerable care.

Various themes emerged when analysing the responses concerning the work location, and these are discussed below using narratives from a range of respondents to illustrate the key points. The findings of the present study point out that the creation of physical boundaries includes a number of strategies in addition to simply having a separate location for work. Respondents mention keeping everything related to work in this area, including equipment and materials as well as all the activities concerned with work. A boundary is thus created, described as an ‘equipment boundary’. It helps if work is not allowed not stray into the rest of the house, and by restricting work activities exclusively to the office this provides an ‘activity boundary’.

Many respondents deliberately create an ambiance in the office which makes it feel different, including an office-like décor. The presence of books, shelves, a desk and a computer act as a reminder that this is a place for work and not for socialising. The ambiance of the office is deliberately different from the rest of the house, and this is termed an ‘ambiance boundary’. These terms (equipment, activity and ambiance) were given to these boundaries by the present study as they emerged from analysing the data.

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Equipment boundary In discussing their physical boundaries, 14 out of the 20 interviewees had separate location where only work takes place. These respondents appreciated having proper work equipment such as an office desk, computer and chair, and felt it obligatory to keep all work-related materials in this location. Furthermore, the ability to just leave everything as it is at the end of the working day without having to tidy up is seen as one of the benefits of a separate work location.

Lesley lives on her own and has created a work location in her spare bedroom. Everything related to work remains in that room and she makes sure that no work-related documents are left anywhere else in the house:

Papers are always kept in the office. I used to have a habit of going into the kitchen, because the fire is in the kitchen and the heating in this house is from one wood burner in the kitchen and so all the doors are open and the heat filters through, but I used to go on the kitchen table to sort papers out, I gave up doing that because I had a tendency of just leaving them on a pile and you get people come in and you realise they have been looking at your papers, and I thought no no no I am not having that so it is basically the other half that does that because he is nosy.

Another participant, Nancy, explains how she likes to have all her work material in one place:

No I don’t do any work anywhere else. I don’t like to work outside. I mean I know some people take their laptop in the garden. The sun is too bright, or too windy especially if you are working with paper. I like my office chair and I have everything at eye level. I don’t like working on the laptop. I prefer to have everything in a fixed place. I like to keep all my stuff in the office so it does not go anywhere else.

Analysing participants’ responses, it is apparent that they all attempt to separate their work equipments from the rest of the house. This helps them to separate their work and home domains by not allowing work to spill over into the rest of the house.

Activity boundary: The creation of work and non-work zones Keeping work equipment in a separate dedicated place means that this is where work is carried out. Despite the fact that most respondents had the house to themselves during the day, they still did their work in that location. In the same way, respondents indicated that they tried not to use the office for non-work activities such as socialising. It was also evident from respondents that creating working and non-working zones in the house helped them psychologically to switch work on and off. Three-quarters of respondents mentioned that they strove to keep their office strictly for work and the rest of the house available for family and social life.

Keeping a clear demarcation between the office and the rest of the housmeans that the office space is not really part of ‘home’. Leaving the office, one then feels to be ‘at home’. This is illustrated by Fred, who comments: ‘It is nice to be able to leave everything and go downstairs and be at home’.

Liz, whose husband also works from home in a separate office upstairs, describes when he leaves his office room and moves downstairs as ‘coming home’.

Another respondent, Lesley, has also created a specific work zone, which she finds psychologically helps in the transportation from work mode into non-work mode. Once she enters the bedroom it is a no-work zone, where no work-related activities are conducted:

I try not to leave papers around just in the office and never never ever in the bedroom. I like to read something to unwind before I go to sleep to clear my brain and it would not

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be anything to do with work so I have books I read for pleasure so I have always got something to read that has nothing to do with work. I deliberately relax and read to clear my head around anything that has got to do with translation.

Nancy mentions that she does not like to socialize in her office and prefers to keep that space only for work:

There is a small chair in my room where people can sit on when they come in but I don’t really encourage them to. If my daughter comes to see me I don’t see her in the office I go downstairs to see her, and we are in the kitchen or whatever. I mean I did have one client who came round so that was fine. I don’t really want anyone in my office unless we are discussing work.

Robin explains how having a separate location for work helps him to be in a different frame of mind. The only activity that takes place in this room is work-related:

It is part of the house where different things take place so you want to be in a different frame of mind and you feel this is the point and it is the place where you come to work so it is not confusing the issue. My office is away from the living room and I walk upstairs to the office and once I am in the office I am almost automatically in a work mode anyway. I cannot get into this room without starting to think about work so as soon as I come in I expect to sit down and do work you just keep out of the room if you don’t want to do any work I guess.

Individuals therefore attempt to separate the kind of activities that take place in the office from the rest of the house. This helps to maintain a physical barrier separating work from home.

Ambiance boundary An attempt is made to keep the atmosphere of the office different from the rest of the house. This is evident from respondents’ quotes and from photographs of their office which they have submitted. Fred speaks about the environment he has created in his home office:

I decided to build a studio in my loft which cost me a lot of money, but it has added to the value of my house, it is a very nice space, it has got a proper staircase and nice big windows and it is very separate from the rest of my house, and very functional. It has not got carpet on the floor, it has liner on the floor, it is quite utilitarian. The atmosphere in the office is very different from the rest of the house and it is done on purpose.

Robin describes the atmosphere in his office space:

The atmosphere is different to the rest of the house. When I first set up in business I took a lot of care in thinking about the design of the room and built in office furniture and fixed furniture, lots of book cases and open plan desk and redecorated so it does have this feeling about it, it is designed as a work space.

The photographs further help to understand and analyse how individuals manage their boundaries when working from home. Eleven out of the 20 respondents sent photographs of their work space at home. Eight of these indicate a complete separation of the work location from the rest of the house. Two photographs show work taking place in the bedroom and one in the living room.

The photographs sent by respondents, illustrate work locations clearly designed to be functional, equipped with traditional office furniture such as letter trays, files, filing cabinets, office chairs and purpose-designed desks. It is also clear that respondents try to personalise their work location by including family photographs, children’s toys, and sometimes actual

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pets. Apart from these exceptions, other items unrelated to work are excluded. The atmosphere of the work location generally resembles that of a traditional office, with an ambiance quite distinct from the rest of the house. Even in the two photographs which showed people working from the bedroom, there was a space set apart for work containing the office equipment. Non-work related items such as clothing, toiletries or jewellery were not present in the area designated for work.

One of the main features distinguishing home working from any other form of employment is the location where it takes place. In traditional office-based employment, the home is entirely dedicated to family space, both physically and socially. However, when the work location is in the home, individuals are left to create their own working area. It is evident that a separate location for work is regarded as essential so that work does not encroach on home and family. Participants have created a separate environment and atmosphere in the office by restricting their equipment to that location and conducting only work-related activities in it.

Liz works in her bedroom but has found it necessary to divide her room into work space and sleep space so that she is able to stop thinking about work while trying to sleep:

Currently I work from the bedroom, and I have a room divider because I find it helpful not to be looking at the bed. I wanted to divide my sleeping space from my work space, it was more that I did not want to be trying to go to sleep and kind of looking at my work, I wanted to have some kind of physical separation of work from sleep, I have trouble sleeping, I thought if I am kind of lying there and looking at it oh my god I did not get enough work done, and I would be constantly thinking about it. And in fact because I have to get up, like last night I left something on the computer, and it was making a noise and to actually get up and to get out of the bed and go round the end of the room divider it is just harder than if I had to get up, get out of bed and go straight across the room so it does actually sometimes stop me from getting up and doing that so it is quite good.

Discussion and conclusions This study has drawn together some important findings in the literature with regard to the way individuals manage the blurred boundaries which occur when work takes place at home. The findings support earlier studies which pointed out that separation is the most common way individuals working from home manage their physical boundary (Baker, 2002; Felstead, 2005; and Kylin and Karlsson, 2008). Separating the work space from the rest of the house is necessary to help individuals manage the integration between the boundaries. This research has examined physical separation in more depth and has added to the existing literature by introducing specific categories of physical separation. These categories emerged from both the respondents’ comments and the photographs sent which added visual evidence.

Respondents are aware of the danger of work taking over their lives, and they adopt strategies to keep things under control. Setting clear physical boundaries was essential for coping with the increased flexibility and permeability of their boundaries.

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Flexibility causes work and home boundaries to become blurred, leaving individuals to create their own boundaries to manage the flexibility. The literature points out that home-based teleworking is associated with the integration of boundaries; home and work become weakly differentiated and the boundary is easily breached. The findings of this research show clearly that respondents find it necessary to create boundaries around their work, and as Ashforth et al. (2000) describe it, they adopt ‘mental fences’ to simplify the environment and create order. It is clear that respondents in the present study strove to create physical boundaries to manage the integration and blurriness of their home and work roles.

In an attempt to separate their boundaries, the majority of respondents in the sample strove to have a separate physical work location to conduct work. This research refines the notion of physical boundaries by deeply examining and introducing categories. These included activity boundary, ambiance boundary and equipment boundary. These boundaries helped create a separation of the physical boundaries of respondents. Respondents tried to keep a certain degree of separation between their work and non work activities. This research unpacks the notion of physical boundaries and includes further components which helped create work and non work zones in the house. This was supported by the photographs that respondents sent where it became visually clear how individuals manage their physical boundaries.

The findings of the present study are confirmed by the literature, which points out that work characteristics have an important influence on the strategy needed for managing working boundaries. Working from home automatically integrates home and work boundaries, and individuals have to manage this by identifying and separating these boundaries (Ashforth, 2000; Ahrentzen, 1990; Mirchindani, 1998; Felstead et al., 2005; Hartig et al., 2007; and Kylin and Karlsson, 2008). Despite the benefits commonly associated with home working, the management of flexibility, and how individuals deal with the blurriness of boundaries, are not easy when work and home are in same physical location, this is where boundary management plays an important role. Flexibility may be challenging to manage and could cause frustration if not managed appropriately. The integration of boundaries as solution to work life balance needs to be further examined as it is not a panacea without challenges.

Bibliography 1. Ashforth, B., Kreiner, G. and Fugate M (2000) ‘All in a day’s work: boundaries and

micro role transitions’. Academy of Management Review, 25(2): 472-491. 2. Ahrentzen, S. (1990) ‘Managing conflict by managing boundaries: How professional

home workers cope with multiple roles at home’. Environment and Behavior, 22: 723-752. Gender and Society, 12(2): 168-187.

3. Bulger, C., Hoffman, M. and Matthews, R. (2007) ‘Work and personal life boundary management: Boundary strength, work/personal life balance, and the segmentation-integration continuum’. Journal of Occupational Health Psychology, 12(4): 365-375.

4. De Man, R., De Brujin, J. and Groneveld, S (2008) ‘What makes the home boundary porous? The influence of work characteristics on the permeability of the home domain’, in Warhurst, C., Eikhof, D. and Haunschild, A. (2008) Work less, live more? Critical analysis of the work-life boundary. London: Macmillan.

5. Felstead, A., Jewson, N. and Walters, S. (2005) ‘The shifting location of work: New statistical evidence on the spaces of employment’. Work, Employment and Society, 19(2): 415-431.

6. Hartig, T., Kylin, C. and Johansson, G. (2007) ‘The telework tradeoff: Stress mitigation vs. constrained restoration’. Applied Psychology: An International Review, 56(2): 231-253.

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7. Kylin, C. and Karlsson, J. (2008) ‘Re-establishing boundaries in home-based telework’, in Warhurst, C., Eikhof, D. and Haunschild, A. (2008) Work less, Live more? Critical analysis of the work-life boundary. Basingstoke: Palgrave Macmillan.

8. Loscocco, K. (1997) ‘Work-family linkages among self-employed women and men’. Journal of Vocational Behavior, 50: 204-226.

9. Mirchandani, K. (1998) ‘Protecting the boundary: Teleworker insights on the expansive concept of work’.

10. Nippert-Eng, C. (1996) ‘Calendars and keys: The classification of “home” and “work”.’ Sociological Forum, 11(3): 563-582.

11. Richter, J. and Meshulam, I. (1993) ‘Telework at home: The home and the

organisation perspective’. Human Systems Management, 12: 193-203.

12. Salmi, M. (1997) ‘Autonomy and time in home-based work’. In Gendered practices

in working life, ed. L. Rantalaibo and T. Heiskanen. London: Macmillan.

13. Zerubavel, E. (1991) The Fine Line: Making distinctions in everyday life. Chicago:

University of Chicago Press.


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Performance Evaluation in the United Arab Emirates:

A Pro-Active Post-Recession Measure Robert Pech

Abu Dhabi University

[email protected]

Abstract There are indications that the UAE economy is beginning to improve and that employees are once again becoming mobile, moving from one company to another to enhance their pay and conditions. Management most want their best employees to stay. To reward employees who have good qualifications, experience and commitment, management can respond by assessing their performance and judging their work contribution by a well designed evaluation instrument. Whilst many organizations claim to implement an evaluation, many measurement distortions occur through a lack of communication between management and employees, through expediency and a lack of respect for due process. A government evaluation instrument is analyzed and showcased in sections, as one example that has balance and strives for fairness as a means of recognizing good work and motivating employees to aspire to greater goals within the organization. This can be done by assessing their work and discussing future training and development prospects. On the other hand, underperformers can also be identified using the same instrument and options to remedy their shortcomings are also discussed.

Keywords Performance management, performance evaluation, pre-determined performance standards, interview

Is the recession behind us?

The recession which had its beginnings in the USA in 2008 reverberated around the industrial world, and impacted with a number of negative effects in the UAE over the next two years. However, by the middle of 2010 the popular perception in the UAE had become more optimistic. The National newspaper, (2010, Aug 17), published its business sentiment survey “Spotlight on the Economy”, in which it revealed that whilst many companies experienced the pain of layoffs, the future appeared to look more promising than the past. Asked about the number of employees over the past 12 months, 38 percent of respondents replied that this had decreased, but 24 percent said it had increased, 27 percent said it had stayed the same, and 12 percent were not sure. Asked about hiring within the next 12 months, 40 percent said that they expect their company to hire more staff, 33 percent said it was most likely that they


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would keep the same number of staff, and only 13% believed that conditions would make some employees redundant. Those who were not sure comprised 15 percent. Therefore, the majority of respondents displayed confidence that the job market was going to be more secure.

The results of respondents’ sentiment are interesting. In light of the anticipation of increased stability, 61 percent of 426 respondents in work, were expecting a salary increase: Twenty-four percent expected their salary to rise by more than 10 percent, 19 percent expected a rise of between 5 and 10 percent, and 5 percent expected a rise of less than 5 percent. Yet, in relation to job security, a significant minority, 30 percent, said they were “extremely concerned,” while 45 percent were “somewhat concerned” and 25 percent were “unconcerned.” While there is a degree of caution, these results are consistent when they are put side by side with the predominantly optimistic results of the economic outlook from the general public from the same survey: although 35 percent believed that “things will get worse before they get better,” 47 percent maintained that “things are improving”, and 9 percent believe that “the UAE has already recovered.”

It is outside of the scope of this survey to explain how UAE employees might deliver to justify a salary increase, let alone the size of it; how they might play a part in securing their jobs; and of course, the explanations underlying the 47 percent who said that “things are improving” are complex and probably unclear. But what is clearly implied by the survey is that the means to improvement is not within the scope of the individual employee; implicit is the notion that improvement is a corporate preserve in which players such as UAE employees, probably like employees everywhere, are marionettes and that global financiers, bankers and governments are pulling the strings. We are therefore exposed to market forces in both good and bad times. It is clear that the UAE suffered some exposure to recessionary global forces in which the individual employee or the individual company could show little resistance. But during a time of recovery, such as we are experiencing in late 2010, exposure to market forces should not make us vulnerable – on the contrary – industry now has an opportunity to become more competitive by scrutinizing output and operations from within in order to seize the initiative and become more productive.

Competitive nations

From the experience of a recession, we should have learned that being more productive is an imperative. By extension, we should also have learned that sound industrial relations and staff motivation through training to enhance productivity can lead to stability and harmony not just in the present but in the future – they are a long-term investment. This is because being more productive and more willing to invest in the long-term leads to a company, an industry, or for that matter a whole nation, being more competitive. The UAE is ranked 25th in the world in the Global Competitiveness Report issued by the World Economic Forum out of 139 countries. (Gulf News, 2010, Sep 9). However, this ranking puts the UAE behind Qatar, (17th) and Saudi Arabia (21st) (Gulf News, 2010, Sep 10). There is then no room for complacency.

In connection with this, Dr Tommy Weir wrote an article in the Gulf News (2010, Aug 11), in which he focused on UAE employee-employer relations. He foresaw a “great scramble as those who survived the redundancies will now be looking to ditch their employer and move on.” He speculated that the recession could incite adversarial relations in the future: “Consensus seems to be that employees are not satisfied with the way their employers handled the reduction of the workforce and as a result they are going to vote with their feet as the job market improves.” A situation in which employees and their management work in an

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adversarial and frustrating environment should rarely arise. There is a need for pro-activity in the UAE in which employees’ efficiency and effectiveness must be nurtured. The lead here needs to be taken by management. The good work that results then needs to be measured and rewarded fairly and regularly. Dr Weir’s advice echoes this sentiment: “The Action Point is to immediately start investing in your employees, be visible and give them the attention they desire and deserve.” (Gulf News, 2010, Aug 11). In other words, whilst the UAE is buffeted by recessionary winds, companies can uplift their employees in a number of ways to ensure against anxiety and mediocrity. If they are the kind of employees who were retained due to the value they added to the company, then they are the kind who need to be motivated to stay and not migrate to another company when the economic coast is clear.

At the same time, there is also another kind of sentiment that runs through companies. It is not unusual to hear managers describe their workforce as “complacent” and “unproductive.” For example, two companies in Abu Dhabi, both with a workforce between 5,000-6,000, have anecdotally described their employees’ problems as including unprofessional behavior such as a lack of cooperation, assuming little (if any) responsibility, a lack of punctuality, not meeting deadlines, and ignoring management directives. Is there a way in which the anxious and frustrated on the one hand, and the complacent and irresponsible on the other can be reconciled under one managerial umbrella? Is there a motivational tool that can make a workforce look beyond its most immediate needs?

Performance Management and Evaluation

There is no “quick-fix” but Performance Management, and its single most important element, the Performance Evaluation, can go a long way towards dealing with the issues that have been mentioned so far. That is because it is a catalogue of accountabilities: objectives, activities, achievements, performance from strength as well as functions that have been identified as needing improvement or development. This paper focuses on the Performance Evaluation because it can be an area of contention in many companies. Many companies will say that they already employ a Performance Evaluation. But the problem is not with the concept; it is with the way it is implemented. If it is not performed with objectivity or fairness, it can lead to considerable friction between management and employees. For example, one of the two large Abu Dhabi companies mentioned before has a system which it believed was effective, although the Human Resource Section responsible for implementing the Performance Evaluation admitted that it did not appear to be fulfilling its motivational function very well. The Head of Human Resources was concerned about employee “attitude.” One of the elements which disturbed him the most was the long-standing evaluation process which appeared to be deficient somehow. He explained that firstly, management staff recorded their comments and judgments on their subordinates’ performance. Once management had written down their comments, they completed all other details in the forms and signed them, after which the documentation was passed to the Human Resource Section and then to the Finance Section. With the lack of communication often associated with the top-down management style, the record was then sealed. Employees either received no increase, or a bonus of varying sizes, or a merit increase. But what became clear in his explanation was that since the introduction of this process, no employees had ever read what had been written about them. What was management’s opinion of their performance? If there was no salary increase it had to be assumed that there were reasons for that, but none that was ever raised between management and employee - but he did understand that one or more behaviors were being penalized. On the other hand, if there was an increase, no one ever questioned it, but as a means of providing positive reinforcement, management might leave an employee wondering which behaviors were being rewarded. Either way, the Human Resources Section had identified a significant problem: the company was missing an

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opportunity because the workforce had come to believe that the ways of management were institutionalized, beyond question and unchangeable, and perhaps even irrelevant. There were no measurements against set criteria. And with this lack of transparency, and an ever widening gulf between management and employees, productivity would be difficult to increase. The Director understood that commitment and productivity go hand in hand. But employee loyalty cannot thrive on a diet of secrecy; likewise, strategies whose outcomes cannot be measured do not have closure, and therefore they cannot be effective.

The Pro-active Approach

Clearly, a pro-active approach is required, that is, an approach whereby management makes a bold initiative to create change so that the company controls productivity and its place in the commercial environment, before its competitors achieve the same aim, namely driving its competitors onto a back-foot position where planned counter-measures are likely to be compromised through lack of time and the human instinct to react rather than respond. A Performance Evaluation of employees can be conciliatory and productive – but it has to be conducted in such a way as to produce trust and fairness, be supported by advice and well structured training, and be communicated with clarity. This also means that communication becomes a two-way street. To avoid collisions, differences of opinion must be given voice to drive towards a mutual solution.

According to Bloisie, (2007, p.252) a performance appraisal “specifies which aspects of performance are relevant to the job […] measures the relevant aspects of employee performance, [and] provides feedback to employees so that they can adjust their performance to match the organization’s goals.” That means that there must be an instrument that makes a fair judgment of performance, and there must be a process that every employee is familiar with. It should be an annual or bi-annual routine for every company; however, with new entrants to the company, Al Futtaim Carrillion conducts assessments every six weeks. This company uses a performance appraisal as a means of identifying deficiencies in the performance of their least experienced employees to train, develop or coach them to effectiveness. Of course, deploying an instrument that way should be the aim of larger companies too. One other function it should serve is the strategic function: if a company is looking to its future needs, it must have a way to identify personnel with a particular type of education and experience who will fulfill future functions. This raises questions: should they come from within the company by developing their potential? Or do the new skill-sets have to be imported? And would the complacent employees who coast their way through the workday, improve?

To determine what sort of features a successful evaluation instrument should have, it is necessary to examine one. To what extent should an employee measure his or her own performance? It is generally accepted that self-ratings of performance are usually higher than ratings provided by others who view them more objectively. Yet Stone (2005, p.286) cites research evidence that indicates that self-evaluation leads to more satisfying and constructive performance review discussions, makes employees less defensive and enhances job performance as well as greater commitment to meeting the goals of the organization. In an increasingly global age, employees want to be participants and not mere bystanders. And at a time when job security is paramount, they want to be counted as stakeholders with a voice. As such, they know well how their jobs can be improved; let them make their own recommendations for managerial consideration. Within reason, no amount of input on how to enhance productivity is too much.

Performance Evaluation: Scrutiny of One Example

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To consider an evaluation instrument’s features and qualities, one has been included. It should be stressed that the one used is an example, not an exemplar: it is very sound but has some shortcomings. This one has been demonstrated with approval from a government department in Abu Dhabi and their aim was to introduce it for the first time in 2010. Please see Appendix 1. It has been used with their permission on the condition that the Department concerned remain anonymous. It begins with the statutory details, including appraiser’s name and position. The individual concerned here has to be accountable for his or her opinions to a superior, on the performance of a subordinate. The rater, that is the person who makes the performance judgments, has to have sufficient familiarity with the job’s responsibilities, has to have sufficient opportunity to observe the performance, and has to be able to make a judgment about whether the output is effective or not. (Stone, 2005). Part 1 focuses on “Work and Achievements”, which comes in four categories:

1. List the job duties, major tasks and objectives assigned to the employee during the year;

2. General comments on the employee’s ability to do their job and complete the tasks listed above;

3. List significant achievements that the employee has accomplished this year (if any); 4. List disciplinary action taken during this year (if any).

Part 1 is closely allied to pre-determined performance standards, which usually means that there should be a strong correlation between the job description and the performance. It requires the rater to make an overall evaluation in #2, and then to point out strengths and weaknesses. One of these, or both, may or may not have been in evidence, but the instrument aims for balance as part of its overall objectivity. In each exhibit, “space provided for comments” means that the instrument left more space than could be replicated in this article.

Exhibit 1

Part 2 focuses on “Elements of Assessment and Evaluation.” Its eight criteria use a Likert, or graded, Scale for measurement, extending from 1, meaning weak, to 5 meaning excellent. In order to maintain accuracy and consistency across many raters, the topic criteria for measurement have sub-criteria. For example, Question 2, Communication, lists Oral Communication, Listening Skills and Written Communication all with brief explanations. This has been done to standardize the criteria from one organizational division to another, and it also enhances transparency for employees.

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Similar descriptors have been included in other major points to be evaluated in Part 2. Specifically these include self-motivation, relationships with colleagues, relationship with customers, decision making, self-management, and creativity and innovation. Every organization should encourage the latter because work flows consisting of procedures and systems, can be best improved by the people who operationalize them.

Exhibit 2

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Part 3 is a section reserved for management, and focuses on four important aspects of their

work: leadership, managing and developing staff, business/divisional planning and strategic

planning.

Exhibit 3

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One of the problem areas that management has identified is that of keeping abreast with employee achievements or fallibilities. Part 4 therefore allows them to make up to four entries at opportune times during the year to act as reminders of performance issues at those times. Since it requires both management and employee signatures, it also serves to enhance communication between them.

Exhibit 4

Still with the focus on the employee, he or she also gets chances to attend training and development courses during the year, and these can be planned for in Part 5. This is done with an eye to the employee’s future career interests, with space allocated to include comments about likely future directions.

Exhibit 5

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Part 6 allows the employee to make final comments about the appraisal; the last part, Part 7, is reserved for management. Here, employees receive a points allocation which is translated into five descriptors “Excellent, Very Good, Good, Fair, Weak.” Instructions are included for the appraiser to include a rationale as to why an employee rates “excellent”, or why he rates “weak.” One of the key aims of the exercise is to identify the “stars” and the “dogs”. The former is headed for greater responsibilities, possibly promotion, and the latter may need remediation or termination. Furthermore, the ratings as a whole enable line management and HRM to make decisions such as promotions, bonuses, discipline and redundancies. It is also going to assist in making decisions about an organization’s future performance because it identifies skill levels and training needs to maximize work-force potential.

Exhibit 6

Exhibit 7

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In making a judgment of this organization’s evaluation instrument, it is clear that management has strived for transparency, balance and fairness with respect to both themselves and the employee. The employee is involved, has room to comment and will appreciate being evaluated on past performance as well as being invited to focus on the future. This gives it a degree of objectivity as well as acting as a motivation for future endeavor. However, one way in which it might have been improved is in its structure. For full transparency, Part 6 could have been placed at the end so that the employee had the opportunity to see the final overall conclusion which management reached. Would he or she agree if the final ranking were “fair” or “good”? If the object were career enhancement, performance reward – where appropriate - true transparency and complete objectivity, employees should know their final score.

Role of Performance Interviewing

Knowing that final score gives employees an opportunity to discuss problems, issues, and perspectives with their line manager. However, employees seldom get the opportunity to discuss matters of importance to them. Organizations often spend hundreds of thousands of dirhams on recruiting employees, and then leave them to their own practices of professionalism once they are hired. It appears then that a performance evaluation in itself is not entirely adequate. It does not “push the envelope” far enough. Given that many supervisors and middle managers have upward of twenty staff reporting to them, it would appear that not all can or should be interviewed for mutual feedback. But this could be done on a basis where 40-50 percent could be interviewed and the rest could be interviewed the

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following time, or they could be interviewed by an assistant manager, as long as their approach is coordinated and benchmarked. There are several things that a manager should remember about active listening:

o Resist interrupting o Clarify issues o Paraphrase employee’s comments o Problem solve o Avoid taking your employee by surprise o Regular performance meetings will ensure that surprises and shocks are avoided.

Appraisers also need to be aware that there are some traps in the review process which they should avoid. Strict objectivity should avoid prejudice, the “halo effect” and “central tendency.” Prejudice is usually race or gender based. The halo effect refers to appraisers allowing one accomplishment to outshine all others, particularly mistakes and errors of judgment on the part of the employee. And central tendency refers to appraisers who “bunch” all their employees within a very narrow middle category so that they cannot be told apart in their year’s performance. (Stone, 2005). This is a common occurrence when an appraiser is inexperienced or does not wish to offend any of the people in his charge. Appraisers must be careful to not commit distributional errors. Noe, Hollenbeck, Gerhart and Wright (2008) remind us that central tendency “create[s] problems in comparing the performance of individuals rated by different raters. If one rater is lenient [produces central tendency], and the other is strict, employees of the strict rater will receive significantly fewer rewards than those rated by the lenient rater.” (p.381). This injustice will not be lost on employees over time.

Another aspect that needs to be considered is that reward through pay is not always effective; there are other forms of recognition that work well: a note of thanks from the manager, a mention in a newsletter or at a meeting, or even a family set of movie tickets. Gomez-Mejia, Balkin and Cardy (2010) make the observation that “an organization that puts too much emphasis on pay in attempting to influence behaviors may reduce employees’ intrinsic drives. One expert argues that the more a firm stresses pay as an incentive for high performance, the less likely it is that employees will engage in activities that benefit the organization […] unless they are promised an explicit reward.” (p.372). It is in fact possible to reward not only the individual, but the team or the plant as a whole so that the benefits are spread, and employees keep working towards team and plant effectiveness. A percentage across the board may be effective although will likely occur only from time to time.

In paying attention to what an employee wishes to say, and has perhaps been waiting for a long time to find an appropriate moment to be able to say it, a manager demonstrates trust, implements confidentiality and enhances an employee’s view of himself. Of course, an employee should follow the same approach. Where an employee may have had long pent-up frustrations and conflicts, they need to be calmly and reasonably expressed, and therefore “problem-solve” has been included. When management is perceived to regularly attempt to come to terms with employee problems, it aids collaboration and cooperation, and trust and confidence are doubly enhanced. This is all the more so if employees reveal aspects of work or family life over which management has no control; management can listen and empathize, and keep these matters confidential. (Bourne and Bourne, 2009).

An important responsibility on the part of management is to help the employee set goals for the coming year, or whatever the evaluation period may be. What projects should he be involved in? What training program? What knowledge or experience does he have which

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should be shared through his giving presentations to his colleagues? Should he be mentoring junior colleagues and new entrants?

Under-performers

How might we deal with employees who have been identified as under-performers? What are some of the reasons why employees under-perform? Some have never been trained properly and are not sure what their job entails, especially if they did not receive a job description upon their appointment. A performance evaluation, particularly the interview, should clarify objectives for them. Some have the competence but not the ability or the aptitude. They require further training, or may need to be matched to a different task within the company: their own comments at an interview may help guide management towards a better “fit”. Yet others may find that there is interference or a shortage of the right resources that prevents them from completing tasks satisfactorily. (Bloisie, 2007). These employees need support before their frustration turns to apathy, or worse, dereliction of duty. Finally, there will be those who have the ability but do not understand or appreciate how important a function is, or they hold beliefs to the contrary; perhaps they suffer personal problems such as illness in the family or relationship problems. In each of these cases, management or HRM need to counsel these employees because being judgmental is likely to reap negative rewards. When they are being given some attention and second chances, employees often feel that someone has recognized that as individuals they are worth it. Of course, if these approaches do not bear good results within a reasonable time frame, it is up to the discretion of the manager whether to reduce their pay, suspend or discontinue altogether with those employees’ services. This will depend on company policy and procedure. But Performance Evaluation should be integral to procedure because it can act as a safety valve. Failing that, replacing employees is an expensive process and it should be avoided if possible.

Conclusion In the UAE, the workforce consists of nationals, GCC locals and an overwhelming proportion of ex-patriots who have come in from many different countries, cultures, languages, education and training systems and religions. The Performance Evaluation is not a panacea but it is one way to help align the cosmopolitan nature of the workforce into a more unified and coherent body of employees because it provides focus and incentive for them, and as far management is concerned it acts as a blue-print for allying company objectives and employee performance as well as harmonizing staff and management relations.

Acknowledgements

The author acknowledges with sincere thanks the opportunity to use the Performance Evaluation Instrument used by a Government department in Abu Dhabi, United Arab Emirates. It wished to remain anonymous.

The author also wishes to thank Ms Mara Lagrosa of Abu Dhabi University for her generous time and assistance in the formatting of this article.

References 1. Bloisie, W. (2007). An introduction to human resource management. London:

McGraw-Hill. P. 252. 2. Spotlight on the Economy. (Aug 17, 2010). Pp. B6, B7. The National. 3. Gomez-Mejia,L., Balkin, D., & Cardy, R. (2010). Managing human resources. (6th

ed.). New Jersey: Pearson. P. 372. 4. Maierbrugger, A. (2010, Sep 9). UAE ranks high in global competitiveness report.

Gulf News. P.37.

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5. Noe, R., Hollenbeck, J., Gerhart, B. & Wright, P. (2008). Human resource management: Gaining a competitive advantage. New York: McGraw-Hill International Edition.P. 381.

6. Stone, R. (2005). Human resource management, (5th ed.). Chichester: Wiley & Sons. P. 286.

7. Weir, T. (2010, Aug 11). Managing staff in a post-recovery world. Gulf News. P. 33.

Further reading Bourne, M. & Bourne, P. (2010). Achieving high performance. New York: DK Publishing.


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Softnet Systems: Fraud or Expertise Bilal Makkawi

Morgan State University

E-mail: [email protected]

ABSTRACT

The purpose of this teaching case is to illustrate the importance of an auditor’s understanding of a client’s business environment. It also demonstrates the significance of analytical procedures in the planning and testing stages of an audit. The case focuses on the audit of Softnet Systems. The major issues relating to the audit were Softnet’s revenue recognition practices. As Peter Sullivan, partner in charge of the audit reviewed these concerns, he thought, “Are these issues an indication of questionable accounting practices?”

Key Words: Auditing, fraud, analytical procedures, audit evidence, revenue recognition

Background Softnet Systems, A California based public company is a major player in the very competitive software services industry In December 2002 Peter Sullivan the managing partner of John Sanders LLP public accounting firm in charge of the audit of Softnet Systems was becoming worried about Softnet’s accounting practices. He was also concerned that any disagreement about proper accounting practices can affect their existing relation, which Peter deemed important given the size of Softnet. Peter’s main concern was Softnet accounting practices, specifically revenue recognition and the absence of supporting document. This problem is further compounded by the lack of cooperation of management

Overview of Software Services Industry and Softnet’s Operations

Softnet’s products were successful because of their adaptability, scalability, and ability to integrate with third party products, but it faced fierce competition on several front. The e-commerce enablement technology division competed with firms such as Aspect Communications, Requisite Technology, and web-Methods, while the employee relationship management division experienced strong competition from Ariba, and CommerceOne. The infrastructure management division faced intense competition from Applix, Blue Ocean, Computer Associates, Microsoft, Nortel, and PeopleSoft. The infrastructure management group (IMG) provided a unique service of facilitating the establishment of new business areas through an internal incubator process. Through its incubator process, Softnet introduced many innovative products such as the real estate portfolio manager, a web-based technology


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through an internal incubator process. Through its incubator process, Softnet introduced many innovative products such as the real estate portfolio manager, a web-based technology that served as a hosted solution to large real estate owners, operators, leasing companies.

Softnet business had local as well internationally reach. The company has been very successful for the past three years. The balance sheet, income statement, and statement of cash flows are presented in Exhibits 1, 2, and 3 respectively.

Exhibit 1

SOFTNET SYSTEMS

BALANCE SHEET

Fiscal Year 2001 and 2000 (in thousands, except per share amounts)

ASSETS

2001 2000

---- ----

Current Assets:

Cash and cash equivalents............................................................... $ 286,658 33,511

Accounts receivable, net of allowance for doubtful

accounts of $11,511 and $2,179, respectively............ 180,372 69,940

Other current assets............................................................................ 62,811 22,826

Total current assets.............................................................................. 529,841 126,277

Property and equipment, net ................................................................ 82,717 29,537

Goodwill, net of accumulated amortization of $334,178 and

$54,406, respectively................................................................ 1,192,855 233,504

Other intangible assets, investments and other, net of

accumulated amortization of $24,015 and $1,398,

respectively ....................................................................................... 198,353 134,112

Total assets.................................................................. $ 2,003,766 523,430

========= =========

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LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:

Accounts payable.................................................................... $ 36,024 $ 19,850

Accrued expenses.................................................................... 200,886 49,064

Current portion of deferred revenue....................................... 86,653 36,779

Current portion of long-term debt........................................... 1,731 74

Total current liabilities.............................................................. 325,294 105,767

Deferred revenue, net of current portion.................................... 8,299 4,556

Other long-term liabilities................................. 17,197 --

Long-term debt, net of current portion...................... 884 1,257

Convertible subordinated notes.............................. 262,327 --

Total liabilities................................................... 614,001 111,580

Stockholder's equity:

Preferred stock, $0.001 par value, 5,000 shares authorized,

no shares issued or outstanding........................... -- --

Cont’d

Common stock, $0.001 par value, 500,000 shares authorized,

160,359 and 109,501 shares issued and outstanding,

respectively.............................................. 160 110

Additional paid-in capital.................................. 2,342,235 480,957

Cont’d

Accumulated deficit......................................... (917,104) (64,863)

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Unearned portion of deferred compensation................... (22,151) (678)

Cumulative translation adjustment........................... (3,950) (666)

Treasury stock, at cost..................................... (9,425) (3,010)

Total stockholders' equity.............................. 1,389,765 411,850

---------- --------

Total liabilities and shareholder's equity.................................... $2,003,766 $523,430

========== ========

Exhibit 2

SOFTNET SYSTEMS

STATEMENT OF OPERATIONS

Fiscal Year 2001, 2000, and 1999 (in thousands, except per share amounts)

2001 2000 1999 ---- ---- ----

Revenues:

Licenses.................................................. $ 354,610 $168,467 $ 87,362

Services.................................................. 210,073 84,833 50,701

---------- -------- --------

Total revenues.......................................... 564,683 253,300 138,063

---------- -------- --------

Costs and Expenses:

Cost of licenses.......................................... 2,582 1,426 1,020

Cost of services.......................................... 111,165 51,441 31,561

Amortization of purchased technology...................... 11,844 1,338 50

Sales and marketing....................................... 223,966 101,443 50,803

Research and development.................................. 61,957 28,517 13,919

General and administrative................................ 48,420 19,871 10,482

Acquisition costs and other............................... 918,156 57,920 43,967

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---------- -------- --------

Total costs and expenses................................ 1,378,090 261,956 151,802

---------- -------- --------

Loss from operations before interest (net) and income tax

expense................................................... (813,407) (8,656) (13,739)

Interest income (expense), net.............................. (538) 38 664

---------- -------- --------

Loss from operations before income tax expense.............. (813,945) (8,618) (13,075)

Income tax expense.......................................... 38,296 16,452 10,295

---------- -------- --------

Net loss................................................ $ (852,241) $(25,070) $(23,370)

========== ======== ========

Net loss per share basic and diluted:

Net loss per share........................................ $ (6.16) $ (0.24) $ (0.27)

========== ======== ========

Shares used in computation................................ 138,447 102,332 87,166

========== ======== ========

Exhibit 3

SOFTNET SYSTEMS

STATEMENT OF CASH FLOWS

Fiscal Year 2001, 2000, and 1999 (in thousands, except per share amounts)

2001 2000 1999

---- ---- ----

Cash flows from operating activities:

Net loss.................................................... $ (852,241) $(25,070) $(23,370)

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Adjustments to reconcile net loss to net cash (used in)

provided by operating activities:

Depreciation, amortization, acquisition costs and other... 954,231 68,293 47,781

Increase (decrease) in cash resulting from changes in:

Accounts receivable................................... (100,474) (24,364) (18,984)

Other current assets.................................. (25,955) 1,485 (5,678)

Other assets.......................................... 7,648 2,717 (245)

Accounts payable and other liabilities................ 18,563 4,755 2,939

Accrued expenses...................................... (32,794) 17,328 12,486

Deferred revenue...................................... 20,851 12,467 4,874

---------- -------- --------

Net cash (used in) provided by operating

activities........................................ (10,171) 57,611 19,803

---------- -------- --------

Cash flows from investing activities:

Acquisitions and investments, net of cash acquired........ 17,974 (41,249) (11,128)

Purchases of short-term investments....................... -- -- (49,000)

Maturities of short-term investments...................... -- 2,000 54,027

Purchases of property and equipment....................... (49,031) (20,713) (12,426)

---------- -------- --------

Net cash used in investing activities............... (31,057) (59,962) (18,527)

---------- -------- --------

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Cash flows from financing activities:

Issuance (repayments) of long-term debt................... 1,284 (7,832) (1,174)

Issuance of common stock.................................. 42,501 23,427 7,921

Issuance of notes receivable.............................. (1,611) -- --

Treasury stock purchased.................................. (6,415) (1,285) (1,463)

Issuance of convertible subordinated notes................ 261,900 -- --

---------- -------- --------

Net cash provided by financing activities........... 297,659 14,310 5,284

---------- -------- --------

Effect of exchange rate changes on cash..................... (3,284) 7 35

---------- -------- --------

Net increase in cash and cash equivalents................... 253,147 11,966 6,595

Cash and cash equivalents, beginning of period.............. 33,511 21,545 14,950

---------- -------- --------

Cont’d

Cash and cash equivalents, end of period.................... $ 286,658 $ 33,511 $ 21,545

======== ======= =======

Cash paid during the period for:

Interest.................................................. $ 1,069 $ 451 $ 26

Income taxes.............................................. $ 1,587 $ 3,015 $ 155

Supplemental Disclosure of Noncash Investing Activities:

Stock issued and other noncash consideration for

acquisitions and investments............................ $1,762,952 $253,209 $105,499

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Softnet had two sales strategies; the direct sales strategy involved contacting the customer directly and providing a demonstration of their product capabilities. The other strategy involved partnering with other organizations to sell its products and services. The company’s main source of revenue was grounded in product licensing and services. The licenses usually included a one-year warranty period that was part of the license agreement and maintenance, professional services, network services, and training were the main source of service revenue. An examination of the company’s financials indicates increasing revenue over the past three years with levels far above the averages for the software services industry. Softnet’s financials and ratios along with the software services industry averages are presented in Exhibit 4.

Exhibit 4 (Source: Compustat)

Selected Financials* and Ratios Softnet Industry

Sales[Y00] 253.3 152.048

Sales[Y01] 564.683 168.252

Sales[Y02] 441.195 174.423

Gross Profit[Y00] 209.468 93.614

Gross Profit[Y01] 439.092 103.994

Gross Profit[Y02] 251.679 109.338

Sales 3 Yr CAGR**[Y01] 108.974 62.124

Sales 3 Yr CAGR**[Y02] 47.294 42.658

Receivables-Total[Y00] 69.94 41.313



Debt Ratio [00] 0.213171 0.441272

Debt Ratio [01] 0.306424 0.310898

Debt Ratio [02] 1.739852 0.403886

Current Ratio [00] 1.193917 2.457808

Current Ratio [01] 1.628807 2.680232

Current Ratio [02] 0.416811 1.319981

Gross Margin [00] 0.826956 0.615687

Gross Margin [01] 0.77759 0.618085

Gross Margin [02] 0.570448 0.626855

Total Liabilities [00] 111.58 80.356


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Current Liabilities [00] 105.767 45.921



Current Assets [00] 126.277 112.865

Current Assets [01] 529.841 142.583

Current Assets [02] 219.157 121.862

Total Assets [00] 523.43 182.101

Total Assets [01] 2003.766 292.813

Total Assets [02] 473.411 228.582

* In millions

** Cumulative average growth rate

The Audit

In December 2002 Peter Sullivan the managing partner of John Sanders LLP public accounting firm in charge of the audit of Softnet Systems was becoming worried about Softnet’s accounting practices, specifically the revenue recognition practices., Peter and his team suspected that Softnet’s license revenues were overstated, however, they were unable to obtain conclusive evidence because of the uncooperative attitude of Richard Drew, the chief accounting officer. Although they had discovered that a few of the firm’s license revenues were based on revocable license agreements, they were unsure of the extent of this problem because most of the supporting documents relating to these transactions were missing. Peter also wondered whether Softnet’s Board was effectively monitoring the firm’s management. Two independent directors on the Board had resigned recently and they had been replaced by Softnet’s executive vice president and a former CEO, who also served as a consultant to the firm. There were presently eleven members on Softnet’s Board and four of them were independent. Peter also contemplated if any of these issues were an indication of questionable accounting practices at Softnet. As he entered the elevator to go home that day, he thought, “Softnet’s management may be committing financial statement fraud.”

CASE LEARNING OBJECTIVES, IMPLEMENTATION GUIDANCE, AND OUTCOME ASSESSMENT

Case Learning Objectives

The case emphasizes the importance of analyzing a client’s business and industry in order to perform an effective audit. It also shows the significance of analytical procedures in the planning and testing stages of an audit. The case has the following specific learning objectives:

1. Recognize fraud symptoms and assess the likelihood of financial statement fraud. 2. Understand the timing and purpose of analytical procedures. 3. Perform analytical procedures.

Implementation Guidance

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This teaching case is intended to be used in the intermediate auditing course at the undergraduate level or introductory audit course at the graduate level. At both levels, the case can be used in the section on audit evidence, analytical procedures, or financial statement fraud.

The recommended approach for teaching the case is to first assign the case to students individually or in groups before having a classroom discussion (Naumes and Naumes, 1999).

For undergraduate students, it is recommended that the case is assigned to them before the class discussion. The instructor may assign the discussion questions before or during the class discussion. At the undergraduate level, a more structured discussion based on the discussion questions is recommended. For graduate students, a less structured discussion is suggested. A good teaching strategy is to assign the case to them in groups and have each group present their analysis in class. The case has been tested successfully in the undergraduate intermediate auditing class.

Outcome Assessment

TABLE 1

Student Feedback

(n = 19)

Question Mean Median Mode

The case is a good example of a real-world application of fraud detection 4.24 4 4

The case is a good illustration of a real-world application of fraud triangle 4.29 4 4

The case is a good demonstration of the importance of internal control assessment 4.47 5 5

The case has motivated me to think critically about the effect of the control environment on internal control effectiveness 4.06 4 5

The case is interesting 3.77 4 4

This case has increased my understanding of the use of analytical procedures in the planning stage of an audit 3.88 4 4

This case has increased my understanding of the application of the COSO internal control framework 4.29 4 4

The case has encouraged me to think critically about analytical procedures 4.12 4 4

The case has encouraged me to think critically about audit evidence persuasiveness 4.20 4 4

Response scale: Strongly disagree = 1 to Strongly Agree = 5

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A survey of students’ experiences with the case is described in Table 1. 19 students completed the survey. As shown on a five-point scale from strongly disagree (1) to strongly agree (5), the means for 7 out of the 9 questions were greater than 4, indicating that students had strong positive perceptions about the case. 94 percent of the students believed the case to be a good example of real-world application of fraud detection (question 1). 89 percent found the case to be a good illustration of a real-world application of fraud triangle (question 2). 94 percent believed the case is a good demonstration of the importance of internal control assessment (question 3). 73 percent believed the case motivated them to think critically about the effect of the control environment on internal control effectiveness (question 4). 68 percent found the case interesting (question 5). 78 percent believed the case increased their understanding of the use of analytical procedures in the planning stage of an audit (question 6). 89 percent believed the case increased their understanding of the application of the COSO internal control framework (question 7). 84 percent believed the case encouraged them to think critically about analytical procedures (question 8). 89 percent found the case encouraged them to think critically about audit evidence persuasiveness (question 9).

SOFTNET SYSTEMS – TEACHING NOTES

I. Case Synopsis

It was in December 2002, and Peter Sullivan, partner in charge of the audit engagement at Softnet Systems was becoming uneasy with their client’s accounting practices. Peter was a partner at John Sanders LLP, a global public accounting firm that had been appointed as the new auditors of Softnet. Although the firm was a new client to John Sanders LLP, Peter’s firm regarded Softnet as a very important client, primarily due to the size of the client and its place in the industry. Peter was worried that any problems with Softnet’s accounting practices could lead to disagreements with the client and jeopardize the relationship between John Sanders LLP and Softnet. Regarding the Softnet audit engagement, Peter had this to say, “Softnet is an important client to us and I want this audit to go smoothly. However, issues with our client’s accounting practices may lead to problems.” What worried Peter the most was that source and other supporting documents needed to confirm a significant portion of Softnet’s revenues and accounts receivable were missing under strange circumstances. Softnet’s management had adopted a cool attitude towards attempts to scrutinize their firm’s revenue recognition practices as well as their judgments on accounts receivable collectibility.

Softnet was doing very well during a period when other firms in the software services industry were experiencing a slump. Softnet had consistently reported increasing revenues and gross profits well above the industry average. What was specifically worrisome to Peter was that management’s compensation package was based to a large extent on stock performance. Peter also wondered whether Softnet’s Board was effectively monitoring the firm’s management. Two independent directors on the Board had resigned recently and they had been replaced by Softnet’s executive vice president and a former CEO, who also served as a consultant to the firm. There were presently eleven members on Softnet’s Board and four of them were independent. Peter thought “Is Softnet’s performance a reflection of management’s stewardship or is it due to questionable accounting practices?”

II. Theory Application

The case illustrates that in order to perform an effective audit; an auditor must understand a client’s business and industry and assess a client’s business risk. It also shows the significance of analytical procedures in the planning and testing stages of an audit.

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III. Key Issues

1. Peter Sullivan and his audit team must determine whether Softnet’s financial statements are materially misstated.

2. A related issue is whether Softnet’s reported strong performance is due to financial statement fraud.

IV. Teaching Objectives

This case has four primary learning objectives. On completing this case, students must be able to:

1. Recognize fraud symptoms and assess the likelihood of financial statement fraud. 2. Perform analytical procedures. 3. Understand the timing and purpose of analytical procedures.

V. Course Suggestions

The case was written for business school undergraduate and graduate courses in auditing. It is best suited for the sections on audit evidence, analytical procedures, and financial statement fraud.

VI. Teaching Suggestions

The recommended approach for teaching this case is the three-stage learning process (Naumes, P., and Naumes, W., 1999). The three-stage learning process is implemented by first requiring students to analyze the case individually. After the individual analyses, students could be assigned the case in groups. The final stage of this process is a general class discussion, and at this stage, groups could be asked to present the case.

The group case analyses should clearly identify the critical issues, provide alternatives, recommend a solution and provide justification for the recommended solution. The time for each presentation should be structured such that there is sufficient time for class discussion and the instructor’s summary. The instructor may assign the following discussion questions before or during the class discussion.

VII. Discussion Questions

1. Based on the provisions of SOX and COSO, discuss the effectiveness of Softnet’s internal control system?

2. Using the fraud triangle, discuss the Softnet management’s motivations for financial statement fraud?

3. Discuss the usefulness of analytical procedures in the planning of the Softnet audit and in the auditor’s assessment of the likelihood of material misstatement?

VII I Answers to Discussion Questions

1. Based on the provisions of SOX and COSO, discuss the effectiveness of Softnet’s internal control system?

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Section 404 of SOX, requires the annual report of each issuer to include an internal control report which shall 1) indicate the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting and 2) contain an assessment of the effectiveness of the internal control structure of the issuer for financial reporting. It also requires the firm’s auditors to attest to the management’s assessment process of internal controls. An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the board. An assessment of Softnet’s internal control based on the COSO framework involves evaluating the effectiveness of the five components of the internal control framework. The five components of COSO’s internal control framework are control environment, risk assessment, control activities, information and communication and monitoring. According to the COSO framework, monitoring of the internal control system is critical to the continuous effectiveness of the system. Monitoring is the understanding of how the procedures in place are used to initiate actions to address inadequate performance. Monitoring is a process which entails understanding of controls, determination of their effectiveness, and feedback on those ineffective procedures.

Based on the COSO internal control framework, Softnet’s internal control system was weak. Softnet’s internal control deficiencies could be inferred from the problems associated with its revenue recognition practice. From the facts of the case, evidence of internal control weakness could be inferred from the inadequate accounting system, lack of proper documents and records, and the loss of source and supporting documents relating to the license revenues.

Based on the case, Softnet’s control environment could be regarded as ineffective because it appeared that some of the top management lacked integrity. In addition, the Board did not seem to effectively monitor management and the financial reporting process. The chief accounting officer’s uncooperative attitude, which hindered the auditors’ search for conclusive evidence regarding Softnet’s license revenues, suggested that management integrity was a problem.

2. Using the fraud triangle, discuss the Softnet management’s motivations for financial statement fraud?

The fraud triangle includes three elements that should all be present in order for someone to commit fraud: a perceived pressure, a perceived opportunity, and some way to rationalize the fraud as acceptable. The elements need not all present in the same magnitude. The strength of one factor can almost but no totally eliminate the need for other factors. In the presence of strong incentive / pressure one can “create” the opportunity, In other words, the greater the perceived opportunity or the more intense the perceived pressure, the less rationalization it takes to motivate someone to commit fraud. Likewise, the more dishonest a perpetrator is, the less opportunity and/or pressure it takes to motivate fraud. The fraud triangle is important because it helps us to determine the motives, reasons, and opportunities that someone had in committing fraud. By using the fraud triangle, we can better focus on areas in an organization that will help us detect and prevent fraud. Based on the facts of the case, Softnet’s management was sufficiently motivated to commit financial statement fraud. Motivations for committing fraud can be analyzed using the fraud triangle. Based on the case, Softnet was under pressure to sustain its strong performance because of the market’s expectation and the competitiveness of the software services industry. According to the case, the software services industry was very competitive with old products being constantly improved while new and innovative products were consistently introduced by new entrants as well as existing firms in the industry. Softnet’s management was thus under pressure to sustain the firm’s high revenues performance. If Softnet management was sufficiently motivated to commit fraud, then there had to be opportunity to perpetrate the fraud. Because the firm’s board did

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not have a high proportion of independent members, it was very likely that it was not effectively monitoring management. An ineffective board provides “opportunity” because it makes it easier for management to perpetrate fraud. The third element of the fraud triangle is rationalization, and according to the case, Softnet’s management could rationalize financial statement fraud from the need to sustain their firm’s strong performance and satisfy stockholders.

3. Discuss the usefulness of analytical procedures in the planning of the Softnet audit and in the auditor’s assessment of the likelihood of material misstatement?

Statement on Auditing Standards No. 56 defines analytical procedures as evaluations of financial information based on a study of plausible relationships between both financial and non-financial data. Generally Accepted Auditing Standards requires the use of analytical procedures in the planning stage of an audit. Analytical procedures enable the auditor to determine the nature, timing and extent of the substantive testing and in forming an overall opinion about the reasonableness of recorded account balances.

Preliminary analytical procedures such as comparison of Softnet’s ratios to industry ratios provides an indication of the firm’s performance and facilitates audit planning because it enables the auditors to gain an understanding of Softnet’s business and industry as well as its business risk. Furthermore, it focuses the auditor’s attention on possible misstatements and facilitates the determination of the extent of testing of various financial statement items. It also enables the auditor to assess the firm’s ability to continue as a going concern.

References Albrecht, W. S., Albercht, C. and C. Albercht (2006). Fraud Examination, Southwestern; 2nd edition (ISBN: 0-324-30160-X).

Naumes, P. and W. Naumes. The Art and Craft of case Writing, (California: Sage, 1999).


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Strategic Approach to Outsourcing the Research and Development Function

Dr. Firend A. Rasheed E-mail: [email protected]

Abstract

This paper proposes an approach for outsourcing the R&D function. This model is to serve as a strategic approach to outsourcing that considers number of elements with strategic competitive advantage as an ultimate objective. This paper suggest that outsourcing research and development should be planed and conducted from a strategic standpoint and have positive impact on organizational competitive position by incorporating it into the overall strategy of the organization to reduce the number of risks inherited in the outsourcing process, and ultimately, achieve competitive advantage.

Keywords

Strategic outsourcing, competitive advantage, research and development.

Introduction The outsourcing process has long captured the attention of large and mid-size corporations. The concept of outsourcing is commonly associated with corporate core competencies. Prahalad and Hamel (1990) was a pioneer in the development of the relationship between outsourcing and corporate core competence. Prahalad & Hamel asserted that core competencies and physical assets are mutually exclusive. Core competence is the primary corporate objective and an irreplaceable asset, while physical assets are replicable and subject to obsolescence.

Since, numerous scholars attempted to propose a standard framework that can be applied to multiple industries and cross-functional in nature. In this paper, a model is developed to outsource the research and development function. This model is to serve as a strategic approach to corporate planners attempting to outsource the research and development function.

As outsourcing escalates among various industries of the international economy, mid and large-


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size companies are increasingly outsourcing essential activities such as R&D overseas (Grant, 2007). The primary objective for such consideration is profit maximization through cost reduction, with little regard for long-term strategic competitive advantage (Bertolini, Bevilacqua, Braglia, & Frosolini, 2004; Chandler & Werther, 2006). The process of outsourcing is perceived by various corporations as a crucial determinant of profitability and return on investment. Thus, increasing the outsourcing process could significantly contribute to corporate growth (Burnes & Anastasiadis, 2003). However, over the past 10 years, many studies have supported the hypotheses that organizations may not be attaining the expected benefits from outsourcing their R&D activities (Barragan, Cappellino, Dempsey, & Rothenberg, 2003; Epstein & Manzoni, 2004; McIvor, Humphreys, and McAleer, 1997).

Kremic et al. (2006) argued that true competitiveness was derived from management’s capacity to combine organization-wide innovative capital resources, including R&D activities, in such a way that allowed organizations to adapt rapidly to changing market needs and set up a long-term competitive position.

The premise behind the analysis in this paper is to show that outsourcing research and development should be planed and conducted from a strategic standpoint, and by doing so, ultimately it will positively impact corporate competitive advantage. This is possible through the incorporation of such modeling into the overall strategy of the organization to reduce the risks associated with the outsourcing effort to achieve competitive advantage.

Significance of the study

Two decades since outsourcing activities began to attract the attention of corporations, outsourcing has became far more important today than it was a decade ago (Cassiman & Veugelers, 2002; Epstein & Manzoni, 2004). Because outsourcing is can significantly influenced by corporate strategy, it is essential to examine the impact of developing outsourcing models on mid and large-size corporations. This study also will contribute to the available literature by (a) expanding the current understanding of strategic outsourcing practices, and (b) outlining better measurement processes to assist in improving current outsourcing efforts.

Research Questions

Based on the statement of the problem, the research questions of this study were as follows:

1. Does strategic outsourcing of research and development activities have an impact on mid to large-size corporate competitive ability?

2. Do corporations lack the approach to effectively attain competitive advantage?

Literature Review

The subject of corporate competitiveness is critical to the outsourcing of R&D activities from a strategic standpoint (Jiang & Qureshi, 2006). For example, Bamfield’s (2006) approach was to analyze the manufacturing practice used by large organizations from a competitive point of view in the way they are set up, which is vital to the success of mid to large-sized businesses. Furthermore, to distinguish the necessary components that provide organizations with the needed competitive edge, mid to large-size corporations must view

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outsourcing R&D activities in a competitive framework. For instance, when outsourcing procurements in the manufacturing sector, it is important to note the various related issues tied up with the manufacturing process, such as research, development, and innovative talent, instead of considering only the natural resources required in manufacturing the end product (Bamfield, 2006).

Harland et al. (2005) contended that innovation is highly linked to competitive ability; therefore, innovation should be the primary objective in the consideration of any R&D outsourcing process. Influenced by cost-reduction thinking, many mid to large-size corporations have been outsourcing their R&D activities to focus on improving profitability. The current state of outsourcing R&D activities in these corporations is concerned with the means of achieving and maintaining higher profits and vigorous stock prices, with little regard for long-term competitiveness (Clott, 2007; Hemphill, 2004). In the 1990s, Fortune 500 corporations were outsourcing what are considered nonessential activities, such as marketing, distribution, and information technology. Recently, however, mid to large-size corporations have begun contracting out essential and strategic tasks such as planning, research, and innovation more than before (Click & Duening, 2004). For the past two decades, there has been great consistency in what R&D outsourcing and the potential impact of corporate competitiveness have meant for large corporations. Starting with Quinn and Mueller (1963), and moving on to recent studies on outsourcing R&D.

For example, some of the points that Quinn and Mueller mentioned as important for competitive outsourcing of R&D included (a) long-range planning to determine what technology is relevant to the company’s business goals, (b) the establishment of an environment that motivates people, (c) the planning and control of technology transfer, and (d) top management attitudes that foster the development and use of new technologies. Dodgson and Rothwell (1994) compared nine studies of industrial innovation. Some of the success factors for industrial innovation that all nine studies identified were good communication, innovation as a corporate-wide task, efficient R&D, good planning and management techniques, and precision in identifying market needs. Up to recently, it has been generally accepted that R&D can be effective in the organization only if it is integrated into organizational strategies. Noticeably, functions like design and project control are considered the domain of the R&D department; they also affect R&D effectiveness. To do well only in functions that are viewed as a domain of R&D can make an R&D department innovative, but it can never make an R&D department effective. To be effective, the R&D department must meet the strategic objectives of the company (Gottschalk & Solli-Sæther, 2006; Tafti, 2005). Despite the generally accepted notions that R&D activities are essential to organizational competitiveness and that R&D as a department must be strategically integrated into organizational operations (Pearson, Nixon, & Kerssens-van Drongelen, 2002), since 1960, there has been no effort to measure outsourcing the R&D function, as defined in terms of organizational competitiveness. Instead, almost all measurement efforts have focused on R&D output (De Boer et al., 2006). These efforts have concentrated on three types of indicators: strictly technical products, such as patents, technical publications or citations to technical publications; profits, sales, or other financial benefits that are thought to stem from R&D; and judgments about the success of individual R&D projects (Bamfield, 2006; Hira & Hira, 2005, Kehal & Singh, 2006).

With regard to calculating a link between R&D and profits, sales, or other financial benefits, there have been many attempts to demonstrate such a link within a company. Galloway wrote about an approach used at Stauffer Chemical to determine the profits from products to which it was judged that R&D had made a critical contribution. Patterson (1983) described a tactic that Alcoa used to measure the financial benefits from major

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accomplishments in R&D. Merlyn and Parkinson (1994) reported a method that business managers at British Petroleum used to judge the percentage R&D was contributing to corporate earnings. Chrispeels and Sadava (2003) also covered the same topic and came to a similar conclusion.

Methodology

A mixed-model consisted of structured interviews and survey was adapted in this study. A series of structured interviews with senior managers and executives in 12 organizations was conducted. The objectives of interview with senior managers are to obtain a cross-functional perspective on the outsourcing process. These organizations represent large and medium size organizations engaged in outsourcing their R&D activities. Additionally, a total of 125 employee involved in the R&D function agreed to participate in this study by returning their surveys out of 1000 survey sent-out. This represented a response rate between 12%.

A 20% to 25% response rate would have been above average for survey returns, and if only 80 respondents had been obtained for each group, that would still have constituted a representative sample (Babbie, 1998; Rea & Parker, 1997). It is therefore believed that the number of respondents in this study represents a meaningful sample. The questionnaire consisted of twenty one Likert-scale questions.

Hypotheses

The following null hypotheses were tested using a statistical significance level = 0.05 and =0.01 if a higher level of statistical probability could be attained.

H1: Current frameworks for outsourcing project are sufficient to attain competitive advantage.

H0: Better framework for modeling outsourcing projects is needed to improve competitive advantage.

Likert-scale data are often treated as interval data and t-testing parametric. T-test of the hypothesis testing process was conducted because of the level of response rate and close to normal distribution shape for the testing. T-testing supported the null hypothesis that better framework for modeling outsourcing projects is needed to improve competitive advantage.

Analysis & Findings

Findings supports (Hemphill, 2004; Elmuti & Kathawala, 2000) that few organizations have taken a strategic outlook of outsourcing decisions, with many organizations deciding to follow the leaders in their industry for short-term reasons of cost reduction. In addition, many organizations found themselves duplicating a homogenous outsourcing model used by companies of the same size but not quite applicable to their own business model. The current outsourcing mechanism is already established since the late 1990’s which supports (Bonifazi, and Desouza & Power 2004; Henry & Mayle 2002) theses. However, this is likely to have happened due to a sequence of short-term decisions with no contemplation for the long-term strategic position of the organization. This research supports (Qureshi 2006) findings that some of the problems organizations come across in their attempt to create a practical outsourcing methodology rest in lack of structured outsourcing approach.

Several organizations lack a methodological source of assessment of their outsourcing effort. This finding also supports argument raised by (Bonifazi, Desouza & Power, 2004). Analysis of this study found that countless organizations go about their outsourcing decisions mainly on the principle of cost reduction rather than a strategic methodological process. Further findings suggest that the decision of what business segment to outsource is evaluated

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on the bases of what will reduce the largest part of organizational costs, rather than on the bases of strategic long-term advantage. This also supports Clott (2007) and Qureshi (2006) findings. Findings of this research suggests that (25%) of organizations are lacking the thinking of such issues as whether the company should attempt to keep and develop internal innovative means regarding specific business activities or whether it should outsource such activities.

Lack of benchmarking also exists among large companies (13%) that warrant strategic comparative advantages of differences between internal capabilities and outsourced capabilities. This finding also supports similar findings by Elmuti & Kathawala (2000). Hence, The assessment and evaluation of current outsourced activities in terms of measuring impact on competitive advantage is ultimately concerned with making recommendations of what approach organizations need follow to improve competitive advantage when outsourcing essential activities.

Diagram 1: STRATEGIC APPROACH TO OUTSOURCING

As a result of the research findings, an outsourcing approach was developed to assist in the process of decision-making. This approach is concerned with making recommendations and designed to serve as a roadmap. The strategic approach contains prescriptive elements to decision-making regarding outsourcing activities all with the single vision of attaining competitive advantage as an ultimate objective. The approach above suggests that organizations engaged in the outsourcing process, should carry out the outsourcing with careful evaluation of each element outlined in the model above. The

Design to Market

R&D Cost

Innovative Capabilities

Competitive Factors (access to new/wider markets)

Maintaining a Competitive Advantage

The Organization

Assessment of Internal

R&D Strengths vs.

the Outsourced

Assessing, Short-term vs. Long-

term Advantage

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outsourcing approach consists of a number of logically sequential steps designed to improve competitiveness and achieve current organizational objectives such as cost reduction and access to expertise, but with careful assessment and evaluation of short-term vs. long-term advantages. The first step in the strategic approach is for the organization to determine what competitive factors to consider.

Although most organizations tend to share similar list of priorities, yet some organizations might put more emphasis on one element more than the other. For instance, one of the findings of the structured interviews conducted in this study was that organizations needed an access to the markets they outsource at. While other organizations needed to position their outsourcing approach more strategically to leverage on accessing wider market share due to geographical advantages. The innovative capability element extends to the product design process. The second step is to consider whether product development (design) may accelerate the overall process of innovation. Meaning, if the design group is closer to production then this might be more advantageous. In other instances however, distance between design groups and production is irrelevant largely because of product complexity and utilization of advanced technologies that makes it possible to monitor production from home country and video- conference mechanism. Moreover, there are cultural and cost considerations attached to this assessment. The second step in the strategic approach also includes comparing existing talent (within the organization, or accessible in the surrounding market) to existing innovative capabilities in the target country.

When considering outsourcing to countries such as China and India, the assessment of placing a design team closer to target market will provide strategic advantage. This is due to the fact that design teams are more culturally aware of certain elements that immediately impact design and ultimately maintaining strategic competitive advantage in the target market. The interviews conducted in this study also showed that (70%) of interviewees showed an interest in accessing larger market share in China and India. Interviews suggest that more organizations are interested in targeting wider market in the countries they outsource at. The third step is largely concerned with the short-term and long-term cost of research and development. Here organizations are required to carefully assess capabilities, setup cost, social cost, technology transfer cost, and other unforeseeable costs. The objective here is that with each stage in the assessment process, long-term competitive advantage must be the primary objective. Long-term competitive advantage may be in the form of accessing larger pool of experts at a lower cost, access to new markets, increasing current market share, cost reduction, and other elements of strategic importance to organizations.

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Bamfield, P. (2006). Research and development management in the chemical and pharmaceutical industry. Weinheim: Wiley-VCH.

Bertolini, M., Bevilacqua, M., Braglia, M., & Frosolini, M. (2004). An analytical method for maintenance outsourcing service selection. International Journal of Quality & Reliability Management, 21(7), 324-331.

Burnes, B., & Anastasiadis, A. (2003). Outsourcing: A public private sector comparison.

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Supply Chain Management: An International Journal, 8(4), 355-366.

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