Ivan F Rodriguez Business Optimizer Model - The Power of Simplicity – A Correlational Study
-
Upload
ivan-rodriguez -
Category
Business
-
view
383 -
download
5
description
Transcript of Ivan F Rodriguez Business Optimizer Model - The Power of Simplicity – A Correlational Study
Running head: BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 1
Business Optimizer Model: The Power of Simplicity – A Correlational Study
Concept Paper
School of Advanced Studies, University of Phoenix
Ivan F Rodriguez
Frank Bearden
September 15, 2013
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 2
Business Optimizer Model: The Power of Simplicity
Introduction
The world is facing several challenges, uncontrolled gains on carbon dioxide (CO2)
emissions, high food prices, water scarcity, aging populations, poor education, gender issues, and
unprecedented unemployment rates, affecting both developed and developing countries (OECD,
2012). Resolving these challenges depends crucially on the pace of innovation in new
technologies, for example in the areas of renewable energy, carbon capture and storage, lower
emissions, bioremediation, smart grids, synthetic biology, bio-informatics, and personalized
medicine (Wynarczyk, 2013). Innovation is increasingly perceived as essential for tackling such
challenges (West, 2002). People are at the heart of the innovation process. “Education systems
play a key role in the development of a highly qualified and flexible labor force” (Rassenfosse &
Potterie, 2009, p. 37). Small and medium-sized enterprises (SMEs) are the blood of modern and
open economies (Rahman, 2012). Their flat structure, their flexible culture, and their low levels
of bureaucracy enable the precious opportunity to move faster than large enterprises and
capitalize new concepts and technologies.
Background of the Problem
In September 2013, the Small Business and Entrepreneurship Council (SBE), a 501 c4
nonprofit, nonpartisan advocacy and research organization, posed revealing data about SMEs’
role in the United States economy. At the end of 2012, SMEs accounted 99.7% of employer
firms in the United States (Sherman, 2013), offering 64% of new private sector jobs and 49.2%
of private-sector employment, representing 42.9% of private-sector payroll and 46% of private-
sector output, offering 43% of high-tech employment, accounting 97.8% of the United States
exporters companies (33.7% of the value of exports) and 97.2% of the importers (23.2% of the
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 3
value of importations) (Sherman, 2013). SMEs produced 46% of the private nonfarm GDP in
2008 –most recent year for which the source data are available (Kobe, 2012), and registered 16.5
times more patents per employee than firms with more than 500 employees (Breitzman & Hicks,
2008).
Despite the difficulty in developing one common definition of SMEs (definitions
between countries and even between stakeholders in the same country, vary on the number of
employees and capital structure), SMEs’ statistics are comparable in both developed and
underdeveloped countries (Ayyagari, Beck, & Demirgüç-Kunt, 2003). Ayyagari, Beck, and
Demirgüç-Kunt created a cross-country database that allows making consistent and comparable
comparisons between SMEs in different countries. Using this theoretical framework, one can
observe the high similarity of SMEs’ contribution to countries’ employment and wealth creation
(see Appendix A). Advancing one step farther, the database reveals positive generalizable
correlations (e.g., between gross domestic product (GDP) per capita and SMEs employment
contribution, the higher GDP is the higher SMEs contribution; as income increases, the share of
the informal sector decreases and the SMEs increases) (Ayyagari et al., 2003). SMEs
significance of nations’ wealth creation is undeniable, and so is the importance of understanding
the variables supporting their failure or success.
Statement of the Problem
The general problem is the low survival rate (SR) of SMEs in today’s economy.
Approximately 50% of SMEs survive after five years, and only 30% after 10 (Sherman, 2013).
SRs seem to have a positive correlation with the sector in which SMEs operate. Using SBI’
specialized statistics, one observes SMEs in the finance, insurance, and real estate sectors
registered higher resistance, averaging 58% survival rate after four years of operation.
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 4
Conversely, SMEs in the construction sector averaged 47%, and those in the information
technology sector averaged only 37% (SBI, 2013)). The survival of SMEs is critical. Beyond the
statistics SMEs are a reflection of entrepreneurial spirit of a nation, its ability to innovate, and its
potential economic growth. Further support from this claim comes from Meehan and Muir who
demonstrated SMEs’ SR improvement correlates positively to large firms’ profitability. “SMEs
enhance large companies’ competiveness by strengthening industrial linkages, testing concepts,
and ideas before they are made in a larger scale” (Meehan & Muir, 2008, p. 228).
According to Dun and Bradstreet (2004), 88.7% of SMEs’ failures are management
mistakes. They summarized the causes of failure in 12 categories, (1) lack of industry
experience, (2) inadequate financing, (3) lack of adequate cash flow, (4) poor business planning,
(5) management incompetence, (6) ignoring the competition, (7) unrealistic goals, (8) thinning
customer base, (9) inorganic growth, (10) inappropriate location, (11) poor system of control,
and (12) lack of entrepreneurial skills (surprising results because 50.8% of SMEs owners have a
college degree according to the data published by the U.S. Census Bureau (2011)). Similarly,
SBI offers comparable causes for the high SMEs’ failure rate. They assert incompetence (e.g.,
family pressure on time and funds, pride, emotional pricing, living too high for the business, no
knowledge of market dynamics, poor planning, low financial expertise) accounts for 46% of
SMEs’ failure (failure understood as bankruptcy), unbalanced experience (e.g., expanding too
rapidly, inadequate borrowing practices, poor credit granting practices, lack of emotional
intelligence) accounting for 30% of the failure, lack of knowledge (e.g., weak long-term vision
and commitment, wrong supply chain management practices) accounting for 11%, and neglect,
fraud and disaster, accounting for 1% (SBI, 2013).
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 5
Despite the vast quantitative and qualitative data explaining the reasons SMEs’ SR is
low, more precise correlations are urgently required to maximize SMEs’ SR. A case in point,
correlation between SMEs’ operating system (SOS) and their business model (BM) to project
SMEs SR is missed (or at best is insufficient) in the literature. Most of the scholar research is
done in the context of two complementary focus streams, (1) SMEs relevancy to nations’
economy development (e.g., Sherman, 2013; Rahman, 2012; Kobe, 2012; Meehan & Muir,
2008; Ayyagari et al., 2003), and (2) SMEs correspondence with specific subjects including
marketing, innovation, strategy, finance, customer satisfaction, globalization, and business
intelligence (e.g., Wynarczyk, 2013; Lee & Shin, 2012; OECD, 2010, 2012; Vancheswaran &
Gautam, 2011; Rassenfosse & Potterie, 2009; Breitzman & Hicks, 2008; Chon, 2007).
Purpose of the Study
The purpose of this quantitative correlational study is to understand if there is a
correlation between SMEs’ operating system (SOS), SMEs’ business model (BM), and SMEs’
survival rate (SR). Specifically, the study will define a model that helps SMEs understanding its
value proposition, differentiate it, and modify timely their leadership, supply chain methods, and
reengineering capacity (the three core elements of the SOS) to maximize their SR.
Significance of the Problem
As globalization increases, the pressure to the SMEs does too (OECD, 2010).
Globalization’ critical success factors (e.g., lower costs, product differentiation, and adaptability
speed) appear to be contrary to the dominant SMEs’ business practices, which are characterized
by high operative and financial costs, long lead times in purchased items, limited networking,
and weak contractual frame (Kobe, 2012). Scale economies and research and development
(R&D) are large firms most used strategic instruments to achieve their success factors (Rahman,
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 6
2012). SMEs seem to be at a disadvantage for both these instruments. Today’s economy is
global. It shifted from a local scope to an international one with minimum barriers, exacerbating
the need SMEs have to be aware of market needs, trends, and preferences. Technology
advancements (e.g., nano-microprocessors, integrated chips-on-boards (COB), flexible printed
circuit boards, ball grid arrays, etc.) will continue enhancing the speed and penetration of
globalization, reducing the cost of goods sold (COGS) making SMEs’ viability more uncertain
and ambiguous (Wynarczyk, 2013).
The shift in the economy is changing the paradigms of comparative advantages too.
What few years ago were the principles of competition (e.g., mass production-based industries
with specialized large and rigid manufacturing equipments), changed to information-based
companies, focused on controlling and enhancing information generation, transmission, and use.
More recently a change to knowledge-based industries, with virtual teams spread across the
globe, sharing concepts, and designing products and services for customers who do not exist yet
(Sherman, 2013). This structural transformation requires SOS to adapt efficiently.
Research Questions
This quantitative correlational study will examine 16 BM archetypes (Weill et al., 2004)
and correlate them with the SMEs’ SOS and SR. The following research questions will guide the
study:
1. What is the relationship between SOS and BM?
2. What is the relationship between BM and SR?
3. What is the relationship between SOS and SR?
Hypotheses
Three null hypotheses will be tested:
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 7
1. H10: There is no relationship between SOS and BM.
2. H1A: There is a relationship between SOS and BM.
3. H20: There is no relationship between BM and SR.
4. H2A: There is a relationship between BM and SR.
5. H30: There is no relationship between SOS and SR.
6. H3A: There is a relationship between SOS and SR.
Theoretical Framework
The conceptual framework guiding this study relies in two theoretical references. (1) Free
market economy paradigms that embrace Adam Smith’s theory of economy (e.g., self-interested
and competition can lead to economic prosperity, market forces ensure the effectiveness of the
supply-demand process). (2) Conjectural model created by Weill, Malone, D’Urso, Herman, and
Woerner in 2004. These authors proposed 16 BM archetypes. They demonstrated some business
performed better than others and demonstrated business models correlate positively with at least
two broad measures of financial performance, profit and market value. Weill et al. (2004) probed
this predictors are more precise than COMPUSTAT’s traditional classifications. The study relies
intensively on the SMEs’ cross-country database created by Ayyagari et al. in 2003. This
database is unique in that it depicts comparable and consistent information about SMEs
contribution to total employment and GDP across different countries. The database improved
existing publicly available datasets. It extended the coverage of the countries, standardized the
definition of SMEs, and included the informal sector, making the database more relevant to
assess SMEs globally. The selected theory offers rationales that identify factors that support the
correlation between SOS, BM, and SR.
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 8
Research Methodology
Considering there is one objective reality (SMEs’ low SR) that is not dependent on
human interpretation, and the post-positivism paradigms underlying this study, a quantitative
research methodology is chosen to satisfy effectively the purpose of the study (maximize SEMs’
SR). This methodology facilitates the process of gathering data through custom made surveys
(see research design) and applying quality assurance metrics (e.g., internal and external
reliability, construct and context validity, and random and deliberate sampling) in the study to
ensure it draws of meaningful results. More important, this research methodology endorses the
use of the deductive process to test the pre-specified concepts, constructs, and hypotheses
described in the problem statement section. Last, this methodology provides observed effects,
number-based, and consequently more generalizable, which is a critical success factor of the
study, allow SMEs in any country in the world improve their SR based on the correlation
findings.
Research Design
A correlational study is selected as the research design of this investigation. Correlational
studies examine variables in their natural environment and minimize researchers’ inference
(Simon, 2006). Additionally, correlational studies depict the relationships between defined
variables applying statistical techniques and parametric analyzes (e.g., cross-tabulation, t-test,
ANOVA, ANCOVA) (Thompson, Diamond, Mc William, & Snyder, 2005). The treatment
group is formed by the SMEs of two BRIICS countries, Brazil and China. SMEs on these
countries are the population of the study. The control group is formed by the SMEs of the United
States, experimental results are compared against this reference.
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 9
The study seeks to identify complex relationships between three variables. SOS
(independent variable), SR (dependent variable), and BM (controlled variable). It uses a
customized survey as its research method with simple random sampling in which a random
number table is used to define the number of surveys to send. The survey includes 25 questions
that are answered by SMEs’ owners. The questions cover the three core areas of the SOS (i.e.,
leadership effectiveness (L), supply chain effectiveness (S), and reengineering capacity
effectiveness (R)). Each of them has a subset of factors that facilitate data gathering about SMEs
operating system. For example, under the leadership effectiveness area, five factors are included,
(1) strategy definition, (2) strategy deployment, (3) roles and responsibilities, (4) incentive and
rewards program, (5) balanced scorecard. These factors are measured using the Liker-type scale.
SMEs’ owners rate their company with “1” if they strongly agree with the assertion that referred
factor is defined and implemented effectively in their company, “2” when they agree, “3” when
neither, “4” when disagree, and “5” when they strongly disagree.
Through the use of this research methodology relevant and reliable correlation evidence
is expected. These findings are used to generalize causal inferences between SOS and BM, and
between SOS and SR. Consequently this quantitative correlational study creates evidence-based
projections of SMEs’ SR that help leaders make timely decisions to maximize their SR. To
ensure the quality of the research and given its inherent challenges (e.g., data consistency
between selected countries, broadness, speed of change of defined core SOS’ factors), three
quality indicators are used, (a) measurement (e.g., score reliability and validity), (b) avoidance of
common macro-analytic errors (e.g., failure to interpret structure coefficients, converting
intervallic scaled variables to nominal scale, inappropriate single-dependent methods, test
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 10
statistical assumptions), and (c) confidence intervals (e.g., score coefficients reliability, statistics,
and effect sizes) (Thompson et al., 2005).
Definition of Terms
Most of the scholar research on BM is done in the context of e-Business (e.g., business
enhanced by information technology (IT)) with focus in two complementary streams, taxonomies
of business models, and definitions of components of business models (Hedman & Kalling,
2001). For the purpose of this study, BM is defined as (a) what the SMEs do, and (b) how SMEs
make money in so doing. SOS is defined as the SMEs’ operating system, i.e., the combination of
leadership structure and practices (L), supply chain method and practices (S), and reengineering
capacity (R). SR is defined as the SEMs’ survival rate, i.e., the coefficient between the number of
SMEs in operation at a given time x and the number of SMEs that started at a given time y.
Assumptions
Chong’s literature review identified five inhibiting factors for both, large organizations
and SMEs, lack of clarity on a strategic level, lack of IT expertise, absence of a cross-functional
mindset among senior executives, lack of senior executives/leaders, and poor knowledge of
process-oriented approaches (Chong, 2007). These inhibiting factors underlie the SMEs’ SOS
assumption (i.e., SMEs’ effectiveness can be described as a function of leadership effectiveness
(L), supply chain effectiveness (S), and reengineering capacity effectiveness (R)). On the hand,
the 16 Weill et al.(2004) BM archetypes are assumed as descriptive of the entire options public
or private lucrative enterprises have to define what they do and how they do it. Last, the
correlations supported on the cross-country database (Ayyagari et al., 2003) are assumed
accurate.
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 11
Limitations and Delimitations
This study will be limited to a random representative sample of SMEs in Brazil and
China. Similarly, the study will be confined to custom made surveys to be distributed as the
primary instrument for gathering data within the given population. Using Cooper’s (1988)
Taxonomy of Literature Reviews, the study is focused on SMEs practices, its goal is integrative
(e.g., SMEs’ low SR problem resolution), its perspective is espousal of position (numerically
supported and generalizable), its coverage is representative (random sampling on selected
populations), and its audience is the public.
Summary
SMEs are the blood of modern and open economies (Rahman, 2012). As globalization
increases, the pressure to the SMEs does too (OECD, 2010). The shift in the economy (local to
global) has changed the paradigms of comparative advantages. The current paradigm (i.e.,
knowledge-based companies) opens an unprecedented opportunity for SMEs to increase their
survival ratio (SR). The novelty of this quantitative correlational study is the introduction of a
comprehensive concept, SMEs’ Operating System (SOS), defined as the combination of SMEs’
leadership effectiveness, supply chain effectiveness, and reengineering capacity effectiveness.
Understanding the correlations between SOS and BM, and those between SOS and SR provide
SMEs with reliable predictors to maximize their SR.
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 12
References
Ayyagari, M., Beck, T., & Demirgüç-Kunt, A. (2003). Small and medium enterprises across the
globe: a new database. Worldbank.org. Retrieved from
http://elibrary.worldbank.org/docserver/download/3127.pdf?
expires=1379177250&id=id&accname=guest&checksum=1775B5FBFEEC7626D49907
C9781B3110
Breitzman, A., & Hicks, D. (2008). An analysis of small business patents by industry and firm
size. Small Business Research Summary, 335, 1-60.
Chong, S. (2007). Business process management for SMEs: an exploratory study of
implementation factors for the Australian wine industry. Information Systems and Small
Business, 1, 41-58.
Cooper, H. M. (1988). Organizing knowledge synthesis: A taxonomy of literature reviews.
Knowledge in Society, 1, 104-126.
Hedman, J., & Kalling, T. (2001). The business model: a means to understand the business
context of information and communication technology. Institute of Economic Research
Working Paper Series, 1(4), 42-56.
Kobe, K. (2012, January). Small business GDP: update 2002-2010. SBA.gov. Retrieved from
http://www.sba.gov/advocacy/7540/42371
Lee, Y., & Shin, J. (2012). The changing pattern of SME's innovativeness through business
model globalization. Technological Forecasting and Social Change, 79(5), 832-842.
Meehan, J., & Muir, L. (2008). SCM in Merseyside SMEs: benefits and barriers. The TQM
Journal, 20(3), 223-232.
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 13
OECD (2010). Enhancing the competitiveness of SMEs through innovation. Paper presented at
the Conference for Ministers responsible for SMEs and Industry, Bologna, Italy.
OECD (2012), OECD Science, Technology and Industry Scoreboard. Paris: OECD Publications.
Rahman, N. M. (2012). The effective implementation of global supply chain management in
small to medium-sized companies in Malaysia: an empirical study. International Journal
of Management, 29(3), 274-287.
Rassenfosse, G., & Potterie, B.P. (2009). A policy insight into the R&D–patent relationship. Res
Policy, 38, 779–792.
Statistic Brain Institute SBI (2013, July, 27). Startup business failure rate by industry.
Statisticbrain.com. Retrieved from http://www.statisticbrain.com/startup-failure-by-
industry/
Sherman, A. J. (2013, September 13). Small business facts and data. Sbecouncil.org. Retrieved
from http://www.sbecouncil.org/about-us/facts-and-data/
Simon, M. K. (2006). Dissertation & scholarly research: a practical guide to start & complete
your dissertation, thesis, or formal research project. Dubuque, IA: Kendall Hunt.
Thompson, B., Diamond, K., Mc William, R., & Snyder, P. (2005). Evaluating the quality of
evidence from correlational research for evidence-based practice. Exceptional Children,
71(2), 181-194.
U.S. Census Bureau. (2011). Half of U.S. respondent businesses were home-based, majority self-
financed. Census Bureau Reports. Retrieved from
http://www.census.gov/newsroom/releases/archives/business_ownership/cb11-110.html
Vancheswaran, A., & Gautam, V. (2011). CSR in SMEs: exploring a marketing correlation in
Indian SMEs. Journal of Small Business and Entrepreneurship, 24(1), 85-98.
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 14
Weill, P., Malone, T. W., D’Urso, V. T., Herman, G., & Woerner, S. (2004). Do some business
models perform better than others? A study of the 1000 largest U.S. firms. MIT Sloan
School of Management Working Paper No. 226.
West, M.A. (2002). Sparkling fountains or stagnant ponds: An integrative model of creativity
and innovation in work groups. Applied Psychology: An International Review, 51, 355–
386.
Wynarczyk, P. (2013). Open innovation in SMEs. Journal of Small Business and Enterprise
Development, 20(2), 258-278.
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 15
Appendix A SMEs Correlations (adapted from
GDP/CAP SME250 SMEOFF INFORMAL INFORMAL_GDP
SME250 0.43a
SMEOFF 0.44a 0.98a
INFORMAL -0.72a -0.35c
INFORMAL_GDP -0.65a -0.32b -0.31b -0.51c
SME_GDP 0.51a 0.68a 0.70a -0.32 -0.17
Notes: (1) The variables are defined as follows: GDP/CAP is the real GDP per capita in US$. SME250 is the SME sector’s share of formal employment when 250 employees is used as the cut-off for the definition of SME. SMEOFF is the SME sector’s share of formal employment when the official country definition of SME is used. INFORMAL is the share of the shadow economy participants as a percentage of the formal sector labor force. INFO_GDP is the share of the shadow economy participants as a percentage of GDP. SME_GDP is the SME sector’s contribution to GDP. (2) The official country definition of SME is used. (3) Values are 1990-99 averages for all the variables. (4) a , b and c stand for significance levels at 1, 5 and 10 percent, respectively.
BUSINESS OPTIMIZER MODEL: THE POWER OF SIMPLICITY 16
Appendix B Business Model Archetypes (adapted from Weill et al., 2004)
Business Model Asset Involved
Financial Physical Intangible Human
Creator (ownership of asset with significant transformation)
1Entrepreneur
2Manufacturer
3Inventor
4Human Creatora
Distributor (ownership of asset with limited transformation)
5Financial Trader
6Manufacturer
7Intellectual Property Trader
8Human Distributora
Landlord(use of asset)
9Financial Landlord
10Wholesaler / Retailer
11Intellectual Landlord
12Contractor
Broker(matching of buyer and seller)
13Financial Broker
14Physical Landlord
15Intellectual Property Trader
16Human Resource Broker
Notes: a Models illegal in most countries as they involve selling people (included for logical comprehensiveness).