ORGANIZATIONAL DESIGN AND MANAGEMENT STYLES OF SME’s IN DEVELOPING AND DEVELOPED COUNTRIES

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ORGANIZATIONAL DESIGN AND MANAGEMENT

STYLES OF SME’s IN DEVELOPING AND

DEVELOPED COUNTRIES

THE CASE OF SOUTH AFRICA AND THE NETHERLANDS

JUNE 2010

University of Groningen Faculty of Economics and Business

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ORGANIZATIONAL DESIGN AND MANAGEMENT

STYLES OF SME’s IN DEVELOPING AND

DEVELOPED COUNTRIES

THE CASE OF SOUTH AFRICA AND THE NETHERLANDS

Acknowledgement

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ABSTRACT

This paper addresses both organizational design and management styles in small- and medium-sized enterprises in developing and developed countries, South Africa and The Netherlands. Directors, employees, and researcher filled in questionnaires about firm culture and leadership on the premises of five plumbing firms in each country. After this, a generalized business process model and a generalized management style are identified for both countries. Similarities between SMEs in South Africa and The Netherlands can be found in terms of their business processes. Differences can be found in terms of their external environment, firm culture (perception), and leadership. Concerning firm culture and leadership, the Dutch SMEs found higher scores compared to the South African SMEs. This indicates that transactional and transformational leadership is more present in the Dutch sample. In sum, all the four determinants seem to interact with each other.

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1 INTRODUCTION

1.1 Introduction

My final master‟s thesis is conducted in South Africa, where I combined an internship at SAP Research CEC in Pretoria with finishing my thesis for the university. At the end of the period, two reports were produced; a final report for SAP Research CEC Pretoria and my final master‟s thesis. In the past SAP has developed business software for large and medium enterprises all over the world. Recently, SAP wants to develop business software for Very Small Enterprises (VSEs). In order to do this, they need to do research on this „new‟ and specific field of interest. The research area of SAP Research CEC Pretoria is technologies for emerging economies. Their overall aim is to engage in research activities that investigate the unique requirements of emerging economies that can make a direct intervention on the social and economic levels. The research agenda of SAP Research includes innovative business solutions for VSEs. VSEs in emerging economies are a major source of job provision and thereby making a significant impact on the economy.

The project I participated in is called OVERTURE, which aims to develop a Mobile Business Services Platform for VSEs. The emphasis of OVERTURE is to provide services such as procurement, scheduling, and customer relationship management that are readily accessible at anytime and anywhere from a mobile phone.

In order to introduce project OVERTURE in both developed and developing countries, it is essential for SAP to understand the differences and similarities between them. For this reason, they are interested in the differences or similarities from a business process perspective between plumbers in South Africa (Developing country) and their counter parts in The Netherlands (Developed country). The results from this study will influence the way in which business software for the VSE sector should be designed.

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1.2 Problem indication

In the international management literature, much research has been done focusing on the organization of multinational corporations and on the managerial policies and practices in industrialized countries. However, there has been a growing interest on the development of SMEs in emerging economies in the recent years (Luo & Tung, 2007). According to Newberry (2006), SMEs in emerging economies are becoming more competitive and increasingly crucial for economic growth. In his article, the author mentioned that SME entrepreneurs expect to grow because they have more opportunities to develop in an innovative way at a fast pace and have closer customer relationships than multinational corporations. On the other hand, Citigroup reported that SMEs still face many challenges such as insufficient access to financial resources and investment capital.

Although globalization is a worldwide evolving trend, the differences between countries are still visible today. For example, we can make a distinction between developing and developed countries. Developing countries are characterized by low incomes, inadequate housing, poor health, limited or no education and low life & work expectancy (Kintu, 2008). Other factors include dominance, dependence, and vulnerability in international relations, high levels of unemployment and technological backwardness. Developed countries do not posses these characteristics and they are more industrialized. The characteristics of both developing and developed countries are expected to influence the way organizations operate and are managed. From an international management perspective it is interesting to study whether the differences between organizations in developed and developing countries are still observable. Marsden (1991) introduced and defined the term „indigenous management‟ as utilization of local, folk or vernacular knowledge and organizational methods, in the service of more appropriate developmental strategies. This definition would suggest the differences in management practices between and even amongst countries. Marsden (1991) stated that indigenous management may be the basis for building more sustainable development strategies, because they begin from where the people are. It is commonly accepted that these indigenous knowledge systems will provide the bases for increasing productivity.

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9 the proponents of the divergence theory (Hofstede, 2001) argued that cultural differences will remain as organizations are embedded in complex systems.

The above mentioned arguments about international management are contradictory. For that reason a case study about management styles and organizational designs in different countries will produce a better understanding on this theme. In line with this, the following research question is raised:

“What are the differences and similarities from an organizational design and management style perspective between SMEs in developing countries (South Africa) and developed countries (The Netherlands) that would influence the way internationalizing organizations (either South African or Dutch) should design their businesses?”

The contribution of this research in the academic field is that the study can help us to gain in depth knowledge about management styles and organizational design and therefore can bridge the gaps in the existing literature. This study can help professionals in the field. The professional relevance is for companies that are operating in one of the countries being studied, and planning to open a subsidiary in one of the other countries to become aware of the differences or similarities between them. SMEs can especially benefit from this, as there is not much literature available between the differences of The Netherlands and South Africa with regard to management styles and organizational design.

1.3 Case study: South Africa and The Netherlands

The countries being studied are South Africa and The Netherlands. In this context, South Africa represents a developing country and The Netherlands a developed country. In the Human Development Report 2009, South Africa is ranked 129th and classified as medium human development. On the other hand, The Netherlands is ranked 6th and classified as very high human development. The Human Development Report is based upon the following components; education, life expectancy, unemployment rates and Gross Domestic Product (GDP). GDP is a measure of a country‟s overall economic output.

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10 markets efficiency, labor market efficiency, -market size, financial market sophistication,

technological readiness, business sophistication, and innovation. The GCR describes the following as most problematic factors for doing business in South Africa: crime and theft, inadequately educated workforce and restrictive labor regulations. In The Netherlands access to financing and inefficient government bureaucracy are the most problematic factors for doing business.

The above mentioned reports indicate the differences between South Africa and The Netherlands. Finally, I would like to mention that South Africa is a (former) member of the BRICs economies. BRICS is an acronym for the economies of Brazil, Russia, India, China and South Africa. These economies are expected to be wealthier than most of the current major economic powers by 2050. However, the latest results show a negative economic growth rate of South Africa compared to the other BRIC members and therefore South Africa was excluded from the BRIC members in recent studies.

Based on the previous stated differences between South Africa and The Netherlands, a study on SMEs organizational designs and management styles in these countries would be interesting.

1.4 Sub questions

The following sub questions are proposed in my research. These sub questions will help me in order to answer the main research question.

S1. What are the main characteristics of the SMEs environment in developing countries (South Africa)?

Motivation: South Africa can be classified as a developing country. It is necessary to first understand the external environment before doing research within the companies. The PEST tool will be used to describe the external environment.

S2. What are the main characteristics of the SMEs environment in developed countries (The Netherlands)?

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S3. How do SMEs in South Africa organize their companies from a business process perspective (organization design)?

Motivation: In depth information on the company‟s business processes helps us to understand the way SMEs in South Africa operate.

S4. How do SMEs in The Netherlands organize their companies from a business process perspective (organizational design)?

Motivation: In depth information on the company‟s business processes helps us to understand the way SMEs in The Netherlands operate.

S5. Within the SMEs in South Africa, is there a generalized „indigenous‟ management style observable?

Motivation: Management styles of SMEs can be compared when there is a generalized management style observable.

S6. Within the SMEs in The Netherlands, is there a generalized „indigenous‟ management style observable?

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2 LITERATURE REVIEW

2.1 Introduction

2.1.1 Main functions of SMEs

SMEs as enterprises have some economic and social roles to fulfil. Manning (1996) identified three key roles for a SME as: employment promotion, economic redistribution and the enhancement of competitiveness. For example, they contribute to the country‟s national product by producing goods or through the provision of services to both consumers and other organizations. Another important aspect to take note of is that, they provide products and services to foreign customers, but to a lesser extent. SMEs are not only producers but also consumers. As consumers, they need products and services from other organizations to run their own business. As producers, SMEs generate employment and upgrade human capital.

2.1.2 SME definition

Small and medium enterprises (SMEs) represent the companies whose headcount and turnover/balance sheet falls below certain limits. In 2003 the European Commission adopted the most recent definition regarding a SME. Companies qualify as micro, small and medium-sized enterprises (SMEs) if they fulfil the criteria laid down in the Recommendation (see table 1).

Table 1: Criteria SME definition (European Commission, 2003)

Category Headcount Turnover or Balance sheet total

Medium < 250 ≤ € 50 million ≤ € 43 million

Small < 50 ≤ € 10 million ≤ € 10 million

Micro < 10 ≤ € 2 million ≤ € 2 million

However, this definition and criteria of the SME is only used in the European Union and by international organizations (e.g., the World Bank). In South Africa they adopted the terminology SMMEs (Small, Medium and Micro Enterprises) and they have other criteria. Although there is no official standard for the SMME definition, the criteria adopted by the National Small Business Act (1996) is mostly used. These class size definitions are divided into „micro‟, „small‟ and „medium‟ sized enterprises (SMMEs), which will in turn be explained below.

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13 their compliance with labour legislation is weak. The vast majority of micro enterprises are owned

and managed by black women and men. Most metal workers, furniture makers, spaza-shops, home-based enterprises, and mini-taxis belong to the micro-enterprise category. However, there may also be artisans and professionals operating micro enterprises, although these are a small proportion of enterprises in this class size. These enterprises generate income that is less than the minimum income standard or the poverty line. Economic activity is directed at providing minimal means to keep the unemployed and their families alive. There are no paid employees and asset value is negligible. Examples of survivalist enterprises include hawkers, vendors and subsistence farmers.

Small enterprises: Small enterprises tend to be more established than micro enterprises and their business practices tend to be more complex. Most often the enterprise has outgrown direct supervision by the entrepreneur, and has developed a secondary co-ordinating mechanism distinguishing it from a micro enterprise. Growth into a medium-scale enterprise requires an accumulation of resources as well as the appropriate incentives for enterprise expansion. There are fewer black people who own and manage small enterprises, compared with those in micro enterprises. In employment terms, a small enterprise employs from 11 to 50 paid workers. Medium-sized enterprises: The maximum number of employees in this class is 100, except for the mining, electricity, manufacturing and construction sectors, which is 200 employees. The separation of ownership and management is the natural barrier between medium and large enterprises. Although medium enterprises are still owner-manager controlled, the ownership and management structure is more complex. Often, decentralisation of power to an additional management layer, division of labour, and functional differentiation, are characteristics that help distinguish between small and medium sized enterprises. Black ownership in this size class is considerably less than in the others.

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14 For the purpose of this study I will refer to Micro enterprises (<10 employees), Small enterprises

(<50 employees), and Medium (<250 employees) when using the terminology SME. The terminology of the European Commission (SME) is widely accepted and used in both academic and professional fields.

2.2 The SME sector and its relevance to the South African economy

2.2.1 History and introduction

The SME sector was largely neglected during the apartheid regime. For example, black-owned enterprises were not allowed and only white men could start their own business. According to Manning (1996), the discriminatory apartheid legislation and South Africa‟s concentrated economic structure were major contributors to the limited developed of the SMEs. This had its influence on economic welfare and growth of South Africa. Since 1994, after the apartheids regime, South Africa has confronted the dual challenges of reintegration into the global economy, as well as positioning itself to realise the high expectations associated with the new democratic order (Rogerson, 2004). Promotion and support of the SME sector has become a significant policy issue (Integrated Small Business Strategy, 2003). In order to attain the objectives of economic growth through competitiveness on the one hand, and employment generation and income redistribution on the other hand, policy attention has increasingly focused on the promotion of the country‟s SME economy (Berry et al., 2002).

In 1995 the Department of Trade and Industry (DTI) released what is known as the White Paper, in which the national objectives for the SME sector were set forth. The primary objective of that document was to create an environment for SME development in terms of national, regional and local policy frameworks. However, Rogerson (2004) stated that the government SME programmes largely have been biased towards the groups of small and medium-sized enterprises and have bypassed microenterprises and the informal economy. Another issue in this government programme is that the SME sector shows only a weak contribution to employment creation because most SMEs do not grow after initial establishment (Rogerson, 2004).

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15 businesses and small enterprises, that reduces the disparities between urban and rural

enterprises (DTI, 2006).

2.2.2 Structure and size of the SME market

The SME sector in South Africa can be divided into two separate sectors. On the one hand the businesses that are formally registered are included. They have a continuous trade and are captured by several business registers and therefore reasonable well known (Annual Review of Small Businesses South Africa, 2008). On the other hand we can identify the informal sector; the unregistered businesses in South Africa. In most (developed) countries the number of informal business is considered marginal. However, in South Africa many of these informal and micro enterprises are important to the livelihoods of millions of people. Newberry (2004) studied SMEs in developing countries. The author mentioned that SMEs face regulations and bureaucratic practices that solidify the control of large corporations in the formally regulated economy and incentivize entrepreneurs to operate informally.

The informal sector can be described as the economic activities which are of a smaller scale and those which avoid certain government requirements such as registration, tax & social security obligations and health & safety rules. The informal economy in South Africa is often seen as a solution for the unemployment problems (Devey, 2002). For example, Kingdon and Knight (2001) examined why the informal sector in South Africa remains small in spite of high levels of unemployment.

The activities of the enterprises in the informal sector are diverse; trading, collecting, providing service and manufacturing (Devey, 2002). According to Rogerson (2000) the informal sector comprises survivalist and micro enterprises. The survivalist enterprises are defined as activities undertaken by people who are unable to find regular employment. Characteristics of this group are minimum incomes, little invested capital and minimal skills and training. The micro enterprises usually consist of the owner, some family members and, at most, one to four employees. Such businesses frequently escape the requirements of formality, such as licenses. Although the entrepreneurs sometimes have only basic business skills or training, many of those micro-enterprises can change into viable formal small businesses (Rogerson, 2000).

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16 various institutions in the past few years. The correspondence between the size categories is

approximate, since sources use diverse definitions.

Table 2: Size SME market South Africa (Berry et al., 2002)

Source Micro Very Small Small Medium Large Total

Ntsika

2000 1,138,854 330,271 94,804 52,620 12,249 1,628,797

Business

partners 2,300,000 600,000 35,000 2,900,000

GEM 2001 1,115,000 1,709,142 2,860,000

The integrated business register (2005, 2007) estimated the industry classification distribution of SMEs in the formal and informal sectors. Table 3 shows the estimates made by the integrated business register.

Table 3: Industry classification distribution SMEs South Africa (DTI, 2008)

SIC Major Division Formal sector

(March 2007)

Informal sector (Sept 2005) Agriculture, Hunting, Forestry and Fishing 3.4% 4.4%

Mining and Quarrying 0.4% 0.7%

Manufacturing 11.3% 12.3%

Electricity, Gas and Water supply 0.2% 0.7%

Construction 7.3% 9.0%

Trade, Repairs, Hotels and Restaurants 22.9% 51.7%

Transport, Storage and Communication 3.4% 5.3%

Financial Insurance and Business Services 44.4% 4.0%

Community, Social and Personal Services 6.7% 10.3%

Total 100% 100%

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17 2.2.3 SME Challenges in South Africa

It is clear that a SME sector can bring great benefits to developing countries. However, in her article, Wolf (2001) mentioned that SMEs in South Africa face similar problems to SMEs in other developing countries. These include limited access to finance, poor business skills, limited access to technology, high crime level, low levels of education or quality of education, inefficient legal systems, remote locations and lack of economies of scale in production. Wolf argues that especially in developing countries SMEs are challenged by the globalization of production and the shift in the importance of the various determinants of competitiveness. In a technologically-orientated global community, constraints such as poor information and communication management become increasingly problematic.

2.3 The SME sector and its relevance to the Dutch economy

2.3.1 History and introduction

From an international perspective, the Dutch economy is performing well. The macroeconomic climate is characterised by a highly qualified workforce, a high quality public sector and strong industrial and regional clusters. The Dutch have a high GDP per head of the population, high level of productivity and a low level unemployment. In the Global Competiveness Report 2009-2010, the Netherlands is ranked 10th_{. The Dutch economy can largely be classified as a free}

market.

The Dutch government recently presented their goals with regard to entrepreneurship (Ten years entrepreneurship policy, 2009):

 Increase the number of fast-growing businesses

 Reduce the actual and perceived administrative burden

 Improve the opportunities of self-employed entrepreneurs to become employers

 Improve the link between vocational and higher education and the labour market

 Alleviate barriers to entrepreneurship

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18 According to the Ten years entrepreneurship policy (2009), the Dutch government focused on

the following fields in the last ten years (1996-2007):

 Financing; In this regard the government provided bank loans for the SME sector, provided direct financial support and introduced favourable tax facilities.

 Technology and Innovation; A financial instrument was set up to offer SMEs favourable conditions for innovative enterprises including techno starters.

 Internationalisation; The government established the special internationalisation program „Starters on Foreign Markets‟ for SMEs.

 Education; As it is important to stimulate students to become entrepreneurs, the government tried to gave students an understanding of, and knowledge about, what it means to manage and run their own enterprise.

 Regulatory simplification; To lower the administrative burden the government made it possible for a person to apply electronically for most of the formalities.

2.3.2 Structure and size of the SME market

Within the Dutch boundaries, the MKB (Midden- en Klein Bedrijf) sector refers to the SME market. The Netherlands is part of the European Union and therefore they use the same definitions as adopted by the European Commission in 2003. Due to several regulations, proposed by the government, enterprises have a huge administrative burden. The upside of this administrative burden is that all enterprises are well registered and therefore data on the SMEs market is easily accessible. The Centraal Bureau voor Statistiek (CBS) is a governmental source with regard to data on the SME market. Table 4 shows the statistics of the Dutch SME market made by the CBS. A total of 841,290 enterprises were active on the Dutch SME market at the end of 2009. Most of them are classified as Micro enterprises (<10 employees).

Table 4: Size SME market The Netherlands (CBS, 2009)

Source Micro < 10 employees Small < 50 employees Medium < 250 employees Total CBS 2009 769,650 59,470 12,170 841,290

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Table 5: Industry classification distribution SMEs The Netherlands (CBS, 2009)

SIC Major Division SME sector

(December 2009) Agriculture, Hunting, Forestry and Fishing 11.0%

Mining and Quarrying 0.0%

Manufacturing 5.9%

Electricity, Gas and Water supply 0.1%

Construction 13.0%

Trade, Repairs, Hotels and Restaurants 24.5%

Transport, Storage and Communication 3.5%

Financial Insurance and Business Services 27.7% Community, Social and Personal Services 14.3%

Total 100%

The SMEs in the Dutch sector are found largely in financial insurance and business services, trade, repairs, hotels and restaurants. Other sectors where a lot of organizations concentrate on are community, social and personal services.

2.3.3 SME Challenges in The Netherlands

In his research for EIM, Timmermans (2008) described the challenges for Dutch SMEs. A majority (72%) of the entrepreneurs in the SME sector face challenges when doing their business. Within the SME sector, industries experience different challenges. For example, the financial industry faces the most challenges. In comparison, the constructing industry faces these challenges to a lesser extent. The main challenge for Dutch SMEs is the administrative burden. Other challenges are availability of skilled workers, local competition, and limited access to finance.

2.4 Leadership styles and organizational culture

2.4.1 Introduction

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20 mainly from its leadership, but the culture of an organization can also affect the development of

its leadership (Bass and Avolio, 1993). For example, when an employee joins an organization he/she brings her own values and beliefs. Where this person is the leader or manager of the company, these values, beliefs and assumptions become the main influence on the culture of the organization (Blanchard and O‟Connor, 1997).

2.4.2 Organizational culture South Africa and The Netherlands

One of the pioneering projects that aimed to directly identify the cultural dimensions of values is Hofstede (1980, 1983, 1991). The results of Hofstede‟s (1980) well-known study was based on the responses of 117,000 personnel from a large American-owned multinational (IBM) in the period between 1967 and 1973. Although this research is over 25 years old, it is still widely used and accepted in literature. According to Smith (1996), Hofstede‟s dimensions have been extensively invoked by researchers to help explain cross-cultural differences. Hofstede (1991) has showed that managers in different countries differ in the strength of their attitudes and values regarding various work issues.

Using the Hofstede dimensions we find the following scores for South Africa and The Netherlands (see Figure 1).

Hofstede‟s (1980) power distance dimension is defined in terms of the existing norms of inequality within a culture. Both countries have an average score on this dimension, however South Africa have a slightly higher score than The Netherlands.

Individualism-collectivism refers to the extent to which the identity of members of a given culture is shaped, primarily by personal choices and achievements or by the groups to which they belong. The Netherlands has a relatively high score on individualism, which means that personal choices and achievements are important for the people in that country. South Africa is more characterised as a collectivism culture.

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21 The fourth dimension, uncertainty avoidance, alludes to the degree to which members of a

culture are uncomfortable with uncertainties in life. Societies with high scores in this dimension prefer structured rather than unstructured situations, where there are clear guidelines for behaviour. Both South Africa and The Netherlands have an average score on this dimension.

Figure 1: Hofstede’s cultural dimension (www.geert-hofstede.com)

Although the distance between South Africa and The Netherlands is over 10,000 km, according to Hofstede‟s dimensions the differences are modest. However, this research is conducted before and during the apartheids regime in South Africa. The apartheid definitely had an influence on organizational cultures. In addition, the research conducted by Hofstede (1980) focused on one multinational corporation (IBM) instead of SMEs and on the broader concept of culture instead of specifically on organizational culture. The differences between culture and organizational culture are clear; organizational culture is the collective programming of the mind which distinguishes the members of one organization from another (Hofstede, 1997) and culture means an interdependent set of values and ways of behaving that are common in a community and that tend to perpetuate themselves, sometimes over long periods of time (Kotter and Heskett, 1992). Thomas and Lindsay (2003) studied the organizational culture at a South African food service company. The findings indicate that a difference in perception of existing culture is evident between the managers and the employee groups. For example, with regard to power, employees have a different perception than the managers. The employees perceive little empowerment and all direction would come from the top. Another example, which relates to power, is achievement.

PDI IDV MAS UAI

Netherlands 38 80 14 53 South Africa 49 65 63 49 0 10 20 30 40 50 60 70 80 90 100 sc o re

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22 The employees experience a low achievement-oriented culture, which refers to the freedom to

interpret situations and apply what they believe to be the best solution. In this case, the managers experience and expect a high achievement-oriented attitude from their employees. Ozorovskaia et al. (2007) conducted a research in the Dutch and Lithuanian construction industry with regard to leadership styles and firm culture. The external orientation of the Dutch firms is relatively low compared to the Lithuanian firms. One would have expected a higher external ambition level among the Dutch. With regard to improvement orientation the Dutch score again relatively low. According to some Dutch managers, plenty of opportunities are created, but employees are seen as quite passive (Ozorovskaia et al., 2007).

2.4.3 Leadership styles South Africa and The Netherlands

The second focus of this section is on leadership styles in South Africa and The Netherlands. It is interesting to note whether differences and similarities are observable between these two countries with regard to leadership styles. Hunt et al. (1990) stated that societal culture has an important impact on leadership theories. In the same vein, Hofstede (1980) yields hypotheses regarding cross-cultural differences in leadership.

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Table 6: Characteristics of transactional leaders (Bass, 1990)

Transactional leadership

Contingent reward: Contracts exchange of rewards for effort, promises rewards for good performance, recognizes accomplishments

Management by exception (active): Watches and searches for deviations from rules and standards, takes corrective action

Management by exception (passive): Intervenes only if standards are not met Laissez-Faire: Abdicates responsibilities, avoids making decisions

Table 7: Characteristics of transformational leaders (Bass, 1990)

Transformational leadership

Charisma: Provides vision and sense of mission, instils pride, gains respect and trust Inspiration: Communicates high expectations, uses symbols to focus efforts, expresses important purposes in simple ways

Intellectual stimulation: Promotes intelligence, rationality, and careful problem solving Individualized consideration: Gives personal attention, treats each employee individually, coaches, advises

With regard to the South African leadership styles, not much research has been done on transactional and transformational leadership. In this context, it is important to mention that leadership in South Africa is extremely diverse as several ethnic groups can be distinguished. For example, in South Africa, the Black African people represent 79.3% of the population, the White for 9.1%, Coloured for 9.0%, and the Indian/Asian for 2.6% according to Statistics South Africa 2009. However, within the 79.3% of Black African people we can distinguish ethic groups such as Zulu, Xhosa, Tswana, Swazi etc. These groups are not culturally or linguistically homogenous which also reflects their way of managing businesses.

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24 for local SMEs in Sub-Saharan African firms. Thierry et al. (2006) studied the Dutch leadership

style of middle managers. They describe a Dutch successful leadership style as creative, innovative, and team integrated. Ozorovskaia et al. (2007) studied the leadership and cultural differences between Lithuanian and Dutch construction firms. They found a present transformational leadership score of 3.53 on a 5-points scale.

In addition, Den Hartog et al. (1999) showed in their GLOBE follow-up study of 62 cultures that transformational leadership is present in both South Africa and The Netherlands. They found a 5.16 on a 7-point scale for South Africa (Black sample), 5.99 for South Africa (White sample), and 5.98 for the Dutch sample with regard to transformational leadership.

2.5 Business processes

A lot of institutions and theorists have gotten into the game of business process maturity models. One of the most recognized models has been developed by the Software Engineering Institute (SEI) in Pittsburgh (Harmon, 2007) (See figure 2). The SEI developed a number of process measures and developed a 5-step model that describes the levels that an organization moves through as it evolves from an immature organization to a mature organization. In an immature organization processes are managed without discipline and in a mature organization processes are managed, measured and consistently performed. The core of this CMM (Capability Maturity Model) is based on software implications as organizations are realizing that their primary problem is the inability to manage the software process.

Level 1: No organized processes - the initial level

The process is characterised as ad hoc, and occasionally even chaotic. Few processes are defined, and success depends on individual effort. The organization does not provide a stable environment to implement software.

Level 2: Some organized processes - the repeatable level

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Figure 2: The SEI CMM model (Harmon, 2007)

Level 3: Most processes organized - the defined level

The processes for both management and engineering activities is documented, standardized, and integrated into a standard software process for the organization. All projects use an approved, tailored version of the organization‟s standard software process for developing and maintaining software.

Level 4: Processes are managed – the managed level

At this level, the organization sets quantitative quality goals for both software products and processes. Both the software process and products are quantitatively understood and controlled. Level 5: Processes continuously improved – the optimizing level

Continuous process improvement is enabled by quantitative feedback from the process and from innovative ideas and technologies.

•Culture of heroes Level 1.

No organized processes

•Management processes are improved at the work group level

Level 2.

Some organized processes

•Management processes are organized and improved at the enterprise level

Level 3.

Most processes organized

•Processes are measured and managed systematically

Level 4. Processes are managed

•Processes teams continuously improve processes Level 5.

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3 CONCEPTUAL MODEL

This section describes the conceptual model that is used in this study. Actually, the conceptual model is based on the expected differences and similarities between SMEs in South Africa and The Netherlands. The differences or similarities of the characteristics and challenges of the SMEs in developing and developed countries will influence the way these organizations operate. For the development of organizations in a country, in this case SMEs, it is important that the external environment is well developed. The PEST tool is widely used to describe the external environment. PEST stands for political, economic, social, and technical. As mentioned earlier, developing or emerging countries are characterized by low incomes, inadequate housing, poor health, limited or no education and low life and work expectancy (Kintu, 2008). Other factors include dominance, dependence, and vulnerability in international relations, high levels of unemployment and technological backwardness. On the other hand, developed countries do not posses these characteristics and they are more industrialized. The stage of external environment has a direct influence on the way SMEs operate and organize their businesses in countries. Thus, SMEs in developing and developed countries are shaped by their external environment. For SMEs it is almost impossible to influence the external environment (rules and regulations, technological development, and political situation etc.) but it has a direct influence on their way of doing business.

Figure 3: Conceptual model

External environment SMEs in developing countries characteristics and challanges of SMEs in developing countries SMEs in South Africa

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27 As the external environment differs per country, the characteristics and challenges of the SMEs

also differ per country. These characteristics and challenges of the SMEs, together with cultural influences, have a direct influence on the way they are organized and operate with regard to management styles and organizational design.

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4 METHODOLOGY

4.1 Type of research

In this section, the research methodology used in this study will be discussed and explained. For the purpose of this study different research methods are available. A quantitative study could be used to investigate the differences and similarities with empirical research. However, an empirical research would not give the desired results, as „indigenous knowledge‟ is complex and influenced from various sources. For that reason, a qualitative study would be more appropriate; a multiple case study. Building theory from case studies is a research strategy that involves using one or more cases to create and test theoretical constructs from case-based, empirical evidence (Eisenhardt, 1989). In this research, the main concepts dealt with are difficult ones to measure in quantitative way. Organizational design and management styles and its relation to the way SMEs operate are examples of soft variables and need deeper understanding through qualitative research. As Yin (1994) argues, qualitative studies facilitate a deeper understanding of these variables and are particularly useful for discovering and mapping non-formal business practices. Qualitative research provides more in depth information on the organizational designs and management styles of the SMEs. In depth information is required because this gives access to the underlying aspects of the organizational designs and management styles of the SMEs. This is an excellent way to determine how policies have an effect on society at the micro level, and also to see if theories have the predicted outcomes on the individual level.

The main problems with a case study are generalizing and intersubjectivity. In other words, since I am studying a limited case or group very deeply, it is hard to apply what is learned to society in general. The second part, intersubjectivity has to do with the nature of qualitative research itself. Since it involves observation, interaction, interview, or content analysis of a particular case, most of the interpretations are made based on the opinion of the individual researcher. However, I still think this is the most appropriate strategy to find answers to my research question.

4.2 Sample

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29 foreign country. One way to capture this is to focus on the very small enterprises, as they

normally are an excellent representation of „pure local‟ organizations. Besides, VSEs are a major source of job provision and thereby making a significant impact on the economy (of emerging countries). In this study the example of plumbers is used as a representing industry for SMEs. Five plumbers in South Africa and five plumbers in The Netherlands agreed to participate in this study. All companies were selected on the basis that they are member of the national plumbing industry association. While there is no ideal number of cases, a number between four and ten cases often works well, according to Eisenhardt (2007). He stated that with fewer than four cases, it is difficult to generate theory with much complexity, and its empirical grounding is likely to be weak.

However, this study has implication far beyond this one industry and countries, and provides a way of understanding the different ways management control may be matched to local cultural expectations.

The following companies participated in this study:

Table 8: List of participating companies field research

Nr The Netherlands South Africa

1 Van Tongeren Installatie Designer Plus PTA

2 DND Dakgoten Albert & Son Plumbing

3 Alt Loodgietersbedrijf Alcinof Maintenance

4 Sienot Loodgieters Bo-Jo Plumbers

5 Loodgietersbedrijf Idefix Aquarius Plumbing

4.3 Data collection

As I am comparing the business processes and management styles of the plumbers between The Netherlands and South Africa, data from both countries is preferred. A total of five plumbers have been studied with regard to their business processes and management styles in The Netherlands. The same applies for the five plumbers in South Africa.

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30 Each company visit (interview and observations) lasted about 3 to 4 hours. Interviews and

observations were held with several members of the company. At least the director and one employee were interviewed to obtain data and information from different positions in the company. Most of the employees interviewed are plumbers, which helped to provide more relevant information.

In-depth interviews can become subject of interviewer bias, which relates to the possibility of subjective interpretation of answers as well as the possibility of posing leading questions in order to lead answers into the favored direction. However, the interviews and observations are obtained subjective as multiple questions are raised about one topic. The bias of subjective answers is minimized in this way.

A questionnaire was developed in order to obtain additional information about the management styles within the participating companies. Both operating culture and leadership are examined as these topics are related to management styles. Just examining one of them would not give the desired result. In order to measure leadership style and firm culture, most of the items of the questionnaire of Ozorovskaja et al. (2007) were used. They conducted a comparative research on constructions firms between The Netherlands and Lithuania. For efficiency, the number of questions with regard to leadership was reduced to 20. The questionnaire consists of transformational and transactional leadership style questions. The second part of the questionnaire is related to firm culture. Ozorovskaja et al. (2007) used 5 dimensions, for this research, the number of dimensions is reduced to 4. The reason for that is the non-relevance of the dimension “Interdepartmental orientation”. These questionnaires were completed during a face-to-face appointment or interview. Interviews were held with both the director and employees of the participating companies as mentioned before.

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4.4 Data analysis and variables

Organizational design

This section of the paper describes how the data will be analyzed and compared. First, after conducting the field research in both countries, a general business process model will be created for both countries (whether this is possible). The business process life cycle consist of four phases; analyze, design, implement, run and monitor. As the companies in the sample established their business processes in the past, they have already gone through the whole business process life cycle. At this stage, their current business processes are investigated. More specifically, what happens in the organization when a client gives a call/e-mail until the end of the process, the invoicing.

Different methods are available for modeling business processes, such as Flowcharts, Role activity diagrams (RADs) and Role interaction diagrams (RIDs) (Aguilar-Saven, 2003). A flowchart is defined as a formalized graphic representation of a manufacturing or work process or similar formalized structure (Lakin et al., 1996). RADs represent a graphic view of the process from the perspective of individual roles, concentrating on the responsibility of roles and the interactions between use (Holt et al, 1983). Finally, RIDs are a combination of RADs and Jacobson‟s object interaction diagrams (Boma, 1996).

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32 For this research, different methodologies are used to verify and validate the data. In depth

interviews and observations are two of them (mentioned above). However, an extra verifying method is used to be confident of the collected data. An additional check with the managers of the plumbing organizations was done after mapping the business processes. Each process is discussed in detail and enhancements were made when necessary.

Management styles

After conducting the field research in both countries, these observations and interviews were documented and compared to see whether there is a general management style observable in each of the countries. A questionnaire was used to document the management styles as discussed above. The questionnaires consisted of a 5-point scaling. They participants had to rate the questions, ranging from 1 (not at all) to 5 (constantly).

The next step was to find out whether it is relevant to take a simple average of the employee, director, and researcher opinions. Probably, not all these participants share the same knowledge about the differences or similarities in management styles between developing and developed countries. For example, employees in developing countries (usually low or no-educated) are expected to be unaware about management styles and their differences and similarities compared to the researcher. The same counts for the directors of the VSEs; they are expected to have less knowledge about this topic match up to the researcher. For this reason, different weights have been assigned to the different sources:

Weights management styles: 0.2 employee + 0.3 director + 0.5 researcher

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5 FINDINGS

5.1 Characteristics of the SMEs environment

5.1.1 Introduction

Organizations are set in particular countries or regions to which they are linked. This setting provides numerous contexts that influence the way organizations operate and what they produce. For organizations it is important to understand this so called, “external environment.” The external environment can provide both facilitating and restraining influences on organizational performance. When understanding these outside organizational boundary forces, companies are able to shape their organization.

Within the organizations‟ external environment, different dimensions can be distinguished. This study applies the PEST-tool (on national level) to describe the external environment of both developing and developed countries. The PEST-tool is the most widely used instrument to analyze the external environment (macro environment level).

 Political

 Economic

 Social

 Technological

5.1.2 Main characteristics of the SMEs external environment in developing and developed countries (The case of South Africa and The Netherlands)

5.1.2.1 The political environment

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Table 9: Results political environment (GCR 2009/2010)

Political Environment Score _SA Score _NL Explanation Public trust of

politicians 3.2 5.3 1=very low / 7=very high

Burden of government

regulation 2.8 2.9 1=burdensome / 7=not burdensome

Transparency of government policymaking

4.9 5.2 1=never informed / 7=always informed Time required to start a

business 31 10 Number of days (hard data)

The political environment of South Africa

The Republic of South Africa (RSA) has a multiparty democratic political system that is based on a democratic constitution. Since the end of the apartheid in 1994, the government of the RSA is controlled by the African National Congress (ANC), which holds the majority of seats in parliament. The political groupings of the ANC alliance range from communist parties on the left, to groupings that support free enterprise. The majority of the ANC are of African ethnicity. The ANC has been involved in multiple corruption cases. The most prominent corruption case is related to a series of bribes paid to companies involved in the ongoing R55 billion Arms Deal Saga. According to the Pretoria News (October 09, 2008), State president Zuma, currently faces 783 charges relating to fraud, corruption, and bribery.

According to The Democratic Alliance (DA) the current amount of money wasted by the ANC government stands at R1 billion of taxpayers‟ money. The ANC spent this money on luxury vehicles, expensive hotels, banquets and other expenditure.

According to the Global Competitiveness Report 2009-2010 (GCR09/10), presented by the World Economic Forum (WEF), the public trust in politicians is ranked 50th_{out of 134 with a score of 3.2}

(See table 9).

The WEF addresses several issues regarding legislation in South Africa. For example, burden of government regulation is ranked 95th_{with a score of 2.8. In his article, Visagie (1997) also}

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35

Feedback case study South Africa - plumbers

Ms Holl from Bo-Jo plumbers mentioned in the interview (April, 2010) that the South African government is corrupt and that knowing the right people important is to get things done in terms of legislation and regulation for her company. You really need patience when you have to deal with the government.

The political environment of The Netherlands

The government of The Netherlands is formally considered a parliamentary democracy and constitutional monarchy. The Dutch Crown is currently held by Queen Beatrix. However, the executive power belongs to the ministerraad, the Dutch cabinet.

At the time of this study, a temporary government is in control of The Netherlands. In February this year (2010), the Dutch cabinet collapsed after an internal argument about the Uruzgan military mission. New elections for the Dutch government will take place in June of this year. According to GCR09/10, presented by the World Economic Forum, the public trust in politicians are ranked 11th_{out of 134 with a score of 5.3 (See table 9)}

The GCR09/10 addresses several issues regarding legislation in The Netherlands. For example, burden of government regulation is ranked 91st_{with a score of 2.9. On the other hand, the}

transparency of government policymaking is relatively well developed with a score of 5.2 (See table 9).

Feedback case study The Netherlands - plumbers

In the interview (February, 2010) Mr. Alt from Alt Loodgieters highlighted that the Dutch government is progressing in terms of electronic communication. You can arrange the business from home instead of visiting local government institutions. On the other, Mr. Alt sometimes gets tired of all the paperwork that has to be done. Sometimes he spends more time on all the paperwork than actually running his business.

5.1.2.2 The economic environment

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36 analysis should focus on those aspects of the economic system that directly influence the

organization.

Table 10: Results economic environment (GCR 2009/2010)

Economic Environment Score _SA Score _NL Explanation Business impact of rules

on FDI 5.0 5.4 1=discourage FDI / 7= encourage FDI

The economic environment of South Africa

According to the International Monetary Fund (IMF) (2010), South Africa is ranked 77th_{of the}

world with regard to GDP (PPP) per capita (International $ 10,244). This is the value of all final goods and services produced within South Africa in 2009 divided by the average population of that year. The GDP per capita at PPP can be used to compare living standards across countries because living standards depend on relative price levels in each country (PWC, 2008). Compared to other countries in the world, the GDP (PPP) per capita of South Africa is relatively low. However, the IMF prognoses that value of the GDP (PPP) per capita will grow in the future (see table 11).

In 2009 South Africa has a negative economic growth of 1.8% due to the worldwide economic recession. In most other countries this percentage was even higher. The IMF expects a positive economic growth for South Africa in the coming years. The hosting of the FIFA 2010 World Cup will definitely contribute to the growth of the country‟s economy.

Table 11: Economic situation South Africa (IMF WEO Database, April 2010)

South Africa 2008 2009 2010 2011 2012

Economic growth (%) 3.7 -1.8 2.6 3.7 4.0

GDP (PPP) per capita 10,442 10,244 10,466 10,886 11,396

Inflation (% change) 11.5 7.1 5.8 5.8 5.6

Unemployment (% total) 22.9 23.9 24.3 n/a n/a

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37 South Africa in the future. Unemployment, on the other hand, is another major issue for the

country. In 2009 23.9% of the total labor force was unemployed.

As mentioned in the SA Yearbook 09/10, SMMEs in South Africa have difficulties in getting access to finance. For this reason the government launched The Direct Lending Strategy in 2008 that focuses on providing finance to the lower end of the market, which is not serviced by mainstream financial institutions.

The GCR 09/10 ranked South Africa 77th_{with regard to business impact of rules on FDI.}

Compared to other countries, the ranking is not that good, but the score of 5 out of 7 still encourages foreign direct investment.

Figure 4: ZAR exchange rates (ww.google.com/finance, accessed 3 May 2010)

The South African Rand (ZAR) is the currency of South Africa. In the last year, the ZAR has strengthened against other currencies. The ZAR benefited mainly from substantial capital inflows into South Africa. This was mainly due to an increase in commodity prices and investors‟ attitude towards emerging market assets (SA Yearbook 09/10). A disadvantage of the strengthening of the ZAR is that exporting goods becomes more expensive for foreign customers as they have to pay more of their own currency for the same amount of ZAR.

2005 2006 2007 2008 2009 USD 0,158 0,143 0,147 0,103 0,135 EUR 0,133 0,108 0,099 0,073 0,094 0 0,02 0,04 0,06 0,08 0,1 0,12 0,14 0 0,02 0,04 0,06 0,08 0,1 0,12 0,14 0,16 0,18 Z AR / EUR e xc ha nge r ate Z A R / U S D ex change r ate

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Inflation can be an extremely damaging factor for the plumbing business. As mentioned by Mr. Moodley from Desinger Plus PTA (March, 2010), stock management is very important. Buying your products and parts before prices increase can save you a lot of money and you can offer your customers competitive quotes.

The economic environment of The Netherlands

The International Monetary Fund (IMF) (2010) ranked The Netherlands 8th_{with regard to GDP}

(PPP) per capita (International $ 39,938). As mentioned in the section of South Africa, the GDP (PPP) per capita is the value of all final goods and services produced within The Netherlands in 2009 divided by the average population of that year. Compared to other countries in the world, the GDP (PPP) per capita of The Netherlands is far above standard. The IMF prognoses that the value of the GDP (PPP) per capita will grow in the future (see table 12).

Due to the worldwide economic recession The Netherlands has a negative economic growth of 3.9% in 2009. In other words, the effect of the economic recession is feasible in The Netherlands. However, the IMF prognoses small economic growth for The Netherlands in the next three years.

Table 12: Economic situation The Netherlands (IMF WEO Database, April 2010)

The Netherlands 2008 2009 2010 2011 2012

Economic growth (%) 2.0 -3.9 1.3 1.4 1.7

GDP (PPP) per capita 40,558 39,938 40,601 41,622 42,971

Inflation (% change) 2.2 1.0 1.1 1.3 1.3

Unemployment (% total) 2.8 3.5 4.9 n/a n/a

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39 Also in other countries, access to finance is still difficult for SMEs. This is confirmed by the

European Commission (EC) in an article they published on the 6th_{of May 2010}

(www.europa-nu.nl). In this article the EC mentioned that bank credit standards are still tight and almost 20% of SMEs‟ bank loan applications are rejected. Having said this, it is hard for SMEs to find banks that are willing to finance their plans. In this same article, European Commission Vice-President Antonio Tajani mentioned: “It is one of my top priorities to encourage new strategies for improving access to finance in order to help small and medium-sized enterprises to exit the recession and achieve smart growth”.

The GCR 09/10 ranked The Netherlands 33rd_{with regard to business impact of rules on FDI.}

Although this ranking is not very good compared to other countries, it still encourages foreign direct investment.

Figure 5: EUR exchange rates (ww.google.com/finance, accessed 3 May 2010)

The currency of The Netherlands is the Euro (EUR). Together with 15 other countries they represent the Euro zone. Due to recent financial problems in the Euro zone (Greece and Portugal), the Euro declining in value. At this moment is the exchange rate EUR/USD 1.23, which is historical low (RTL Nieuws, 5th_{of May 2010). The only benefit of a low exchange rate is that}

the export will strengthen.

2005 2006 2007 2008 2009 ZAR 7,492 9,256 10,045 13,645 10,614 USD 1,184 1,319 1,47 1,407 1,432 0 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 0 2 4 6 8 10 12 14 16 EU R / U S D ex change r ate EU R / Z A R e xc hange r ate

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40

Feedback case study The Netherlands - plumbers

Both Mr. Breden (Van Tongeren Installatie) and Mr. Sienot (Sienot loodgieters) (February, 2010) described the Dutch economic environment as stable. However, due to the economic recession, it is sometimes hard to find new customers. As a result, the plumbers lose money because they cannot work efficiently. There are moments they have nothing to do at all.

5.1.2.3 The social environment

Social factors, either national or local, include both demographic and cultural aspects of the external macro environment. These demographic and cultural aspects influence the way organizations conduct their business. For example, the influence of indigenous cultures on the way organizations operate and people are related to each other. Other aspects in this context are age distribution, career attitudes, emphasis on safety, and population growth rate.

Table 13: Results social environment (GCR 2009/2010)

Social Environment Score _SA Score _NL Explanation

Organized crime 3.6 5.9 1=imposes significant costs / 7=does not _{impose significant costs} Reliability of police

services 3.1 6.2 1=cannot be relied / 7=can be relied

Quality of primary

education 2.8 5.4

1=of poor quality / 7=among the best in the world

Tertiary enrollment 15.4 60.3 Gross rate, % (hard data) Quality of educational

system 2.8 5.2 1=does not meet needs / 7=does meet needs

Degree of customer

orientation 4.5 5.4 1=treat customers badly / 7=highly responsive to customers Cooperation in

labor-employer relations 3.7 5.7 1=generally confrontational / 7=generally cooperative The social environment of South Africa

With a population of almost 50 million people, a surface area of 1,219,090 km2 and eleven national languages, South Africa is comprised of many different cultures. The HDR 09 classified South Africa as a Medium Human Development country. According to their report, 25.4% of the population still lives in poverty and 42.9% of the population has a daily income of $2 or less (2000-2007). In 2007 the life expectancy in South Africa was 51.5 years and the adult literacy was 88.0% (aged 15 and above).

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41 109th_{regarding the reliability of police services. These facts definitely influence the way}

companies organize their businesses.

The availability of skilled workers is another issue in South Africa. With a tertiary education enrollment of 15.4% of total enrollment (to the population of the age group that officially corresponds to the tertiary education level), only a minority of the population continues their education after secondary school. Both the quality of the educational system and primary education are underdeveloped and below standards (see table 13). The South African government launched the Accelerated and Shared Growth Initiative for South Africa (AsgiSA) to respond to constraints such as the shortage of suitably skilled graduates and technicians (SA Yearbook 09/10).

The South Africans perform terrible in terms of customer orientation. With a score of 4.5 they don‟t treat their customers badly, but they are not highly responsive either (see table 13). This statement is confirmed by Morrison et al. (2008), they studied the organizational culture of 29 South African organizations and they have found a low value for customer involvement as well. As mentioned by Hofstede (1980), South Africa has an average score on the power distance dimension. Hofstede‟s (1980) power distance dimension is defined in terms of the existing norms of inequality within a culture. Compared to countries in Europe, this score is slightly higher. In line with this, the GCR 09/10 ranked South Africa 119th_{with a score of 3.7 regarding cooperation}

in labour-employer relations. According to their report, the relationship labour-employer relations are generally confrontational.

ORGANIZATIONAL DESIGN AND MANAGEMENT STYLES OF SME’s IN DEVELOPING AND DEVELOPED COUNTRIES

ORGANIZATIONAL DESIGN AND MANAGEMENT

STYLES OF SME’s IN DEVELOPING AND

DEVELOPED COUNTRIES

THE CASE OF SOUTH AFRICA AND THE NETHERLANDS

ORGANIZATIONAL DESIGN AND MANAGEMENT

STYLES OF SME’s IN DEVELOPING AND

DEVELOPED COUNTRIES

THE CASE OF SOUTH AFRICA AND THE NETHERLANDS

ABSTRACT

TABLE OF CONTENTS

1 INTRODUCTION

1.1 Introduction

1.2 Problem indication

1.3 Case study: South Africa and The Netherlands

1.4 Sub questions

2 LITERATURE REVIEW

2.1 Introduction

2.2 The SME sector and its relevance to the South African economy

2.3 The SME sector and its relevance to the Dutch economy

2.4 Leadership styles and organizational culture

2.5 Business processes

3 CONCEPTUAL MODEL

4 METHODOLOGY

4.1 Type of research

4.2 Sample

4.3 Data collection

4.4 Data analysis and variables

5 FINDINGS

5.1 Characteristics of the SMEs environment