Contemporary Business Studies - Academy of Knowledge Process

International Journal of Contemporary Business Studies 

Vol: 4, No: 4. April, 2013 ISSN 2156-7506 

Available online at http://www.akpinsight.webs.com 

IJCBS 

VOLUME 4 I NUMBER 4 I APRIL, 2013 

4 

ISSN 2156-7506 

International Journal of 

Contemporary Business Studies 

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In this issue: 

The Relationship between Innovativeness, Fashion 

Orientation and Attitudes toward Purchasing an 

Innovative, High-tech Product; iPhone 4 

Ali Pirayesh,Shaheen Mansori ,Zarina Mizam Mohd Ismail 

Exploring Factors That Construct Innovation 

Capability in Services Sector 

Asa Romeo Asa ,Navneel Shalendra Prasad, Maw Maw Htay 

Global Strategic Alliance – An Organizational 

Approach towards Business 

Dr. Abhishek Gupta 

A Joint Analysis of Financial Ratios and Non 

Parametric Approaches 

Houda Ben Said 

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International journal of Contemporary Business Studies 

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Saddal H.A 

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VOLUME 4, NUMBER 4 

April, 2013 

Contents: 

Page | 5 

The Relationship between Innovativeness, Fashion 

Orientation and Attitudes toward Purchasing an 

Innovative, High-tech Product; iPhone 4 

Ali Pirayesh,Shaheen Mansori ,Zarina Mizam Mohd Ismail……….06 



Asa Romeo Asa ,Navneel Shalendra Prasad, Maw Maw Htay……….20 



Dr. Abhishek Gupta……………………………………………………….31 

A Joint Analysis of Financial Ratios and Non 

Parametric Approaches 

Houda Ben Said………………………………………………………......39 





The Relationship between Innovativeness, 

Fashion Orientation and Attitudes toward 

Purchasing an Innovative, High-tech Product; 

iPhone 4 

Page | 6 

Ali Pirayesh (MBA) 

University of Putra Malaysia, Graduate School of Management (GSM,UPM) 

Serdang, Selangor, Malaysia 

Shaheen Mansori (PhD) 

SEGI University, Graduate School of Business 

Petaling Jaya, Selangor, Malaysia 

Zarina Mizam Mohd Ismail 

University Malaya, Institute of Educational Leadership 

Kuala Lumpur, Malaysia 

ABSTRACT 

This study has examined consumers’ adoption of a new and high-tech product which is of 

technology and fashion attributes. It is aimed to assess how an innovative hi-tech product 

which is of fashion attributes can affect consumers' attitudes and adoption process; this 

product is selected iPhone4 in this study. The study is also exclusively tested on purchase 

intention of consumers’ due to the effect of their hedonic/utilitarian attitudes towards 

such products. Data collection was done on a sample of Malaysians whom were 

considered millennial aged between 18 to 26 years old. SEM was used to analysis the 

data. Findings are grounded on a newly designed model and the supportive literature of 

which the hypotheses are generated. Above all findings, it is discovered that cognitive 

innovativeness is mediated by hedonism to affect the purchase intention of novel 

products. Lastly, it is observed that attitudes' dimensions significantly affect consumers' 

adoption of the novel product. 

Keywords: Innovativeness, Fashion Orientation, Utilitarian Attitudes, Hedonic Attitudes, 

Intentions, Innovative Products, iPhone. 

1. INTRODUCTION 

Globalization and emergence of new economy have created a favorable environment for companies to do 

the business globally. However, this situation has brought its own merits and demerits for companies in 

industries and in some aspects, it makes competition tighter and more intensive. Thanks to sophisticated 

and advanced technology which is more available for companies in developing countries, it is much easier 

compared to the past to duplicate and produce the product that has been developed by pioneer companies 

(e.g. Apple, Sony, Nokia) and it is cheaper. Consequently, keeping market share and competing with 





smaller companies from emerging markets like India and China is one of the main concerns of managers 

nowadays. To overcome this threat, companies have to continue to develop and introduce novel and 

innovative product to the market as a proactive strategy to protect their market share. Nevertheless, the 

success of this strategy is highly dependent on the acceptance of novel product by customers (Moore, 

2002; Rogers, 2003).Thus, exploring the factors, those that can influence the process of acceptance of 

new and trendy products in market is one of the most important concerns for policy makers. 

Developments of technology and expansion of internet provide opportunity for customers to reach 

information faster and more convenient. Today’s customers have higher level of expectation and 

knowledge about the products that make them trendy, stylish and more fashion oriented compared to the 

past. However, these behaviors vary between the older generation (X) and younger generation (Y) of 

societies in different countries. Accordingly, companies in international scope have to deal with 

customers from different generations, races, cultures, and economic backgrounds that have different 

pattern of behaviors toward the acceptance of technological fashioned innovations. Above all, it is of 

great importance that companies are dealing with a generation Y whom they are marketing for. This 

generation is about three times bigger than the previous one (generation X) and they are those who are 

being imitated by the other generation (generation Z) to make them accept or reject a product and have 

loads of effect on them. This generation is also called the millennium generation, nexters and echo 

boomers who are more connected to the world using internet and are considered the most dominant group 

in the environment (Djamasbi, et al., 2008; Neuborne & Kerwin, 1999, p. 294; Wright, 2008). 

Several factors may affect the speed of innovation’s spread in the market. Some factors come from 

product characteristics such as: (1) Relative advantage (2) Triblity (3) Compatibility (4) Complexity (5) 

Observable results. On the other hand, some customers’ characteristics may affect the time of acceptance 

of particular innovation or newness. According to Rogers (1995), consumers show diverse reactions 

toward a new idea or product in market through different stages of product life cycle. He classified them 

in five categories: 1) innovators (venturesome); 2) early adopters (respectable); 3) early majority 

(deliberate); 4) late majority (skeptical); and 5) laggards (traditional) (Rogers, 2003, p. 15). 

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Understating the personality and pattern behavior of each group has been the objective of many 

multidisciplinary researches (e.g., Goldsmith, Flynn, & Goldsmith, 2003; Im, Mason, & Houston, 2007; 

Rogers, 2003). The most important concern for researchers and marketers in this field is to know the 

factors that may influence each group of consumers when they view a new and fashion products/idea in 

the market. Innovativeness is one of those factors. Since 1970s, some researchers had tried to study the 

consumers’ characteristics by measuring innovativeness as an intrinsic personality trait. Midgley and 

Dowling’s (1978) definition which is similar to Rogers’s(2003) stated that innovativeness as individuals’ 

degree of acceptance to new ideas and experiences compares to other members in their social system. On 

the other hand, it is stated that consumers’ innovativeness is the predisposition to buy new and different 

products and brands rather than remain with previous choices and consumption patterns (Goldsmith, et 

al., 2003; Im, et al., 2007; Mansori, 2012; Rogers, 2003). 

Existing literature suggested that customer attitude as another variable that may help to gain better 

understanding towards the adoption of fashion innovative products by customers (Hirunyawipada & 

Paswan, 2006; Lee & Huddleston, 2010; Mansori, 2010; Muzinich, Pecotich, & Putrevu, 2003). However, 

few studies have examined the role of fashion orientation, innovativeness and consumers’ attitude in 

adoption of fashion technology innovations. Besides, most of these studies conducted in western cultures 

which make it doubtful whether the results are replicable and applicable for the companies which doing 

business in an Asian market where the lifestyle of its people is affected by different beliefs, cultures and 

motives. 

Accordingly, there is a need to assess the effects of these characteristics (consumers' innovativeness and 

fashion orientation) on the attitude of these costumers and observe the adoption process of an innovative 





product. This research was done among young consumers (generation Y in an Asian context) who grow 

up with advanced technologies and other fashion transitions. Thus, the primary aim of this research is to 

explore the relationship between consumer innovativeness (global & specific), fashion orientation, 

consumer attitudes and purchase intention of fashionable and technological products in an Asian market. 

2.LITERATURE REVIEW 

2.1 Global innovativeness 

The consumer innovativeness is divided into two dimensions; Global innovativeness and Domain-specific 

Innovativeness (Goldsmith, et al., 2003). In addition, they explained that global innovativeness as a 

personality trait which usually serves as a director for consumers' judgment. Having a higher degree of 

global innovativeness increases the likeliness of being more willing and receptive towards new 

experiences and novel stimuli (Goldsmith, 1984). Usually global innovativeness has been measured in 

two dimensions by literatures; cognitive innovativeness and sensory innovativeness. Based on the 

distinction made by Venkatraman and Price (1990) cognitive innovativeness is either internal or external 

thinking stimulated by pleasurable new experiences. Where else, sensory innovativeness is a tendency 

that encourages pleasure through internal experiences like wishful thinking, dreaming and risky activities 

such as bungee jumping. The second innovativeness can be stimulated by internal and external 

experiences. 

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Logical, rational and sequential thinking processes as well as modes of information processing, are the 

main ingredients of cognitive system (Venkatraman, 1991, p. 295). Cognitive system seeks after 

excitements that stimulate the mind of consumers and create consumers who enjoy novel phenomena 

which engage their minds and problem solving abilities (Hirschman, 2001; Hirunyawipada & Paswan, 

2006; Venkatraman Linda & Meera, 1990). 

With respect to this inherent nature, cognitive innovativeness is related to the process which looks into 

explanations facts and learning how things work; and also ways of doing new things to inspire mental 

activities (Goldsmith, 1984). Hence, cognitive innovators try to find the sources of problems through 

mental activities using cause and effect logics (Goldsmith, 1984; Hirschman, 1985). According to 

researchers, cognitive innovators are academically ranked higher, and they are used to read magazines 

and newspapers to look for information on different products/services. Their carefully-thinking 

mannerism has also affected their consumption (Hirschman, 2001; Hirunyawipada & Paswan, 2006; 

Venkatraman Linda & Meera, 1990). 

According to Hirunyawipada & Paswan (2006), sensory innovators are more enjoyable than novel 

activities/phenomena which are not engaged with too much thinking and concentration and they are more 

to visual stimuli for getting information about products/services. Sensory attributes and fun experiences 

called hedonic attributes; e.g., designs, styles and colors; receive more attention by sensory innovators 

(Venkatraman Linda & Meera, 1990). 

According to (Dhar & Wertenbroch, 2000), luxury goods that promote pleasure, fun, experimental 

consumption and excitement do have hedonic attributes. It is also mentioned that their emotional and less 

organized traits have an effect on the way they are consumed by different people. Sensory innovators are 

risk taker buyers; they do not like time-consuming actions and this attribute has made them impulsive 

buyers (Forsythe & Shi, 2003; Frambach & Schillewaert, 2002). Important item in purchase decision such 

as performance, complexity, economic risk and status made negative impact on the decision process of 

sensory innovators as they have low cognition on such characteristics (Venkatraman, 1991). 

Sensory Innovativeness is stronger among young men compares to old people and women who more 

prone towards cognitive dimension (Hirschman, 1984). However, they behave similarly when we look 





into the characteristics of newness and relative advantage of sensory innovativeness as both cognitive and 

sensory innovators adoption and decision are motivated by the experience of novelty in innovation 

(Venkatraman, 1991). According to innovator’s consumption behavior; sensory innovators tend to 

purchase novel products which are more hedonic-based while cognitive consumers are prone more to 

purchase new products which are utilitarian-based (Goldsmith, et al., 2003). 

2.2 Domain Specific Innovativeness 

Adoption of new products can be perceived and explained through the concepts exist in Domain Specific 

Innovativeness since consumers evaluate new products based on a specific domain of interest(Goldsmith 

& Hofacker, 1991). Goldsmith and Hofacker (1991) had proposed that the use of Domain Specific 

Innovativeness (DSI)is to figure out a generalized personality characteristic. Citrin et al., (2000) had 

found that DSI is more effective than open-processing innovativeness on consumer acceptance of online 

shopping. Domain Specific Innovativeness has been used in many studies so far and most of the studies 

operationalized it by two dimensions namely as Fashion Innovativeness and Technology Innovativeness 

(e.g., Huotilainen & Tuorila, 2005; Jordaan & Simpson, 2006; Park, Burns, & Rabolt, 2007). 

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2.3 Fashion Innovativeness 

According to Kaiser (1990), fashion is based on interests and needs of human beings. It has been studied 

intensively as a key element by sociologists, psychologists, marketers and economists because 

innovativeness in fashion and proper understanding; it helps to have more justification on new fashions 

and the behavior of those who follow fashion (Muzinich, et al., 2003). 

According to Muzinichet et al., (2003), those who follow fashion or in other word; fashion innovators 

have higher participation in society and social activities and considered opinion leaders who have higher 

income and more educated than non-fashion innovators. Moreover, they take risks; they are younger and 

more socially mobile. They are more attentive towards their appearance and they would essentially follow 

the new developments in fashion apparel. In fact, fashion innovators are the individuals who shift from 

the existing styles and adopt different ones such as clothing. Fashion innovators want to have more 

clothes than others and they utilized these clothes not as long as other people but only for a short time 

(Goldsmith, et al., 2003). Innovators' influence on fashion adopters is directly on their reaction and beliefs 

toward fashion which has made them to follow in a roughly similar way. (Cardoso, Costa, & Novais, 

2010; Goldsmith, Moore, & Beaudoin, 1999). 

2.4 Technological innovativeness 

Technology and its developments have affected different facets of human’s life from the economic to 

social life. Innovative ideas through the time have also affected the consumers, products and services as 

well. Accordingly, technological innovation has an outstanding influence on products, especially 

electronic products which are considered to be a part of high-tech product domain. As of the combination 

of software and hardware innovation in products, we cannot consider exact and tactful boundaries in 

context of domain-specific innovativeness (Rogers, 2003). The adoption process of technological 

innovations is accompanied by a high degree of uncertainty in result of an uncertainty which faces the 

adopters, and that is the main reason why researchers state that technological products carry uncertainty to 

the expected consequences (Rogers, 2003). 

Consumer technological innovativeness has been assessed in miscellaneous domains using Goldsmith and 

Hofacker's (1991) definition (e.g., Hirunyawipada & Paswan, 2006). which stimulates consumers' desire 

and tendency toward a class of product and enabling them with novel goods with relevant characteristics 

and information in the technological domain which is affected by global innovativeness in the category as 

well (Midgley & Dowling, 1978; Roehrich, Valette-Florence, & Ferrandi, 2002). 





2.5 Fashion Orientation 

Fashion is a trend prevalent at a certain time. In the most common term, fashion describes the popular 

clothing trend. Its orientation reflects the importance of certain trend in clothing according to people’s 

lifestyle. One of the important dimensions of fashion orientation is the fashion leadership which is related 

to a specific type of leadership that is based on opinion. These leaders are those kind of people who 

outstandingly have influence on other people's behavior and action (Solomon, Dann, & Russell-Bennett, 

2007). 

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Consequently, we can conclude that fashion leadership can be expressed while opinion leaders use new 

items and making it a trend for others to follow and this social behavior spread creating a self conscious 

concept of behaving in the same way (Kaiser, 1990, p. 146). Evans (1986) sees this concept in a physical 

and mental manner while it is compared with the way of people dressed which accordingly has two 

purposes; functional reason (protection) and expressive enrichment. 

Based on this self-concept; lifestyle and the value of fashion orientation reflect the image an individual 

has of himself/herself. It's a consumer behavior fact that people choose the brands which have an image in 

their mind or the brands that go through their imaginations. In a similar way, a person’s appearance is 

his/her identity, values, expression of his/her mood, or proposes the attitude. Accordingly, those who are 

interested in fashion, follow different types of fashion activities (keeping up with fashion activities like 

reading fashion magazines and watching fashion shows). Moreover, being well-dressed reflects one’s 

individuality and quality of life. In a contrary manner, people with anti-fashion attitude do not care about 

fashion and pay no attention to the way fashion leaders behave when making decision regarding their 

clothes. 

2.6 Attitude and Consumer Attitude-Behavioral Model 

Ajzen and Fishbein (1980) defined attitude as a learned pre-determined personality that react toward 

something helpful or favourable or not helpful and unfavourable. According to Lars Perner (2008), people 

beliefs and feelings influence their attitude and consequently their behavioral intentions toward a 

particular object. Moreover, they believe that these factors should be studied together since they are 

highly correlated together and represents factors that influence how consumers will react to the object. 

Many previous studies on consumer behavior have long mentioned uni-dimensional attitudes, but the 

number of research that suggest multi-dimensions for attitude are increasing these days (Bagozzi & 

Foxall, 1996; Eagly & Chaiken, 1993; Voss, Spangenberg, & Grohmann, 2003). These studies have 

proven that two basic motives make the consumers to use goods and services; utilitarian and hedonic. 

Each of these motives has separate direction to the consumption manners and choices made by the 

consumers. 

According to Venkatraman and Meera (1991), cognitive system controls utilitarian attitudes and motives 

which are goal-oriented and represents careful thinking. On this basis, product functions determine such 

motives while the utilitarian dimension in consumer attitude is seen as functional, instrumental and 

purposeful (Voss, et al., 2003). 

Further suggestions by Bazerman et al., (1998) stated that utilitarian behaviors can be defined as "should" 

preferences rather than "want" preferences. Based on it, consumers who focus more on utilitarian motives 

tend to evaluate the functional advantages they expect from a product (Hirschman & Holbrook, 1982). 

For example, a consumer purchases a washing machine for the tangible usage they can get from a product 

which is convenient. It is stated that consumers who are more affected by their utilitarian attitude are 

prone to consume products which are expected to bring functional benefits (Hirschman & Holbrook, 

1982). Accordingly, functional benefits are more involved with tangible attributes and provide utility 

satisfaction such as buying a dishwasher for its convenience and practical reasons. 





On the other hand, hedonic consumption refers to multi-sensory and emotion aspects of consumers’ 

experience with products (Hirschman & Holbrook, 1982). It explains how consumers respond to a 

product due to their preference and experience with the product which in form of subjective reality. In 

other words, the product can evoke the consumers’ negative or positive emotive responses (Hirschman & 

Holbrook, 1982). Therefore, by measuring the key factors related to the consumers’ mental imageries 

towards a product, marketers and advertisers can get better understanding and perspectives of the 

consumers’ hedonic attitude which can be beyond its objective context. In fact, consumers who consider 

hedonism as an important factor in their consumption focus on aesthetic image of a product which is the 

core of their sensory experience. Based on this fact, the key criteria for this type of consumers in 

evaluating products and services are in terms such as fantasy and multi-sensory emotive response. 

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2.7 Intentions and Actual Behavior 

According to Eagly & Chaiken (1993) intention is different from attitude but in form of one’s 

motivation in his/her conscious effort in carrying out a behavior. Accordingly, we can say that Intention is 

the best predictor of behavior. Theory of intentions explains ones' motivation to act and behave in a 

particular and definite way which indicating a person's willingness to try something and his or her effort 

to carry out the behaviour (Ajzen, 1991). 

Fishben and Azjen (1980) stated that intention is a subjective probability that Involve a person and some 

actions. Intentions occur before a behaviour occurs; meaning that they are the predecessors of behaviour 

that make people to either engage in a behaviour or not (Ajzen, 1991). In other words, it is a relationship 

between intention and behaviour is affected by intentions. 

3. HYPOTHESIS DEVELOPMENT 

3.1 Global Innovativeness with Consumers’ Attitudes and Purchase Intentions 

According to Venkatraman (1990), Cognitive innovators' decision making procedure is the outcome of a 

careful thinking and mental exertion which is not influenced by the perceived complexity of products. As 

it is also mentioned before, cognitive innovativeness is the outcome of careful thinking and goes around 

the utilitarian attitude that is meant to provide functional advantages for its consumers. Therefore, high 

degree of cognitive innovativeness customer prefers the products and solutions which are practical and 

more convenient (Venkatraman Linda & Meera, 1990). 

Moreover, going back to the literature, we understood that sensory innovators want to take pleasure out of 

accepting novel products (Hirunyawipada & Paswan, 2006). They tend to get information through the 

advertisement and are being influenced by visual stimuli. They are emotional consumers and get pleased 

in novelty and pay attention to the aesthetic features and thereby sensory innovativeness is more related to 

hedonic attitudes on purchasing innovative products which are fun, able to evoke position emotion 

response and have enjoyable advantages for its consumers (Hirunyawipada & Paswan, 2006). 

Based on these facts, it is hypothesized that: 

H1: Cognitive Innovativeness has a positive relationship with Gen Y Consumers’ Utilitarian attitudes. 

H2: Sensory Innovativeness has a positive relationship with Gen Y Consumer’s Hedonic Attitudes. 

H3: Cognitive Innovativeness has a positive relationship with Gen Y Purchase intention of Innovative 

Products. 

H4: Sensory Innovativeness has a positive relationship with Gen Y Purchase intention of innovative 

products. 

3.2 Domain-specific Innovativeness with Consumers’ Attitudes and Purchase Intentions 

Goldsmith et al. (1999) stated that compares to global innovativeness, domain-specific innovativeness has 

stronger relationship with a specific category of product and also embolden the consumers to accept and 





learn about a product category based on its fashion and technology contexts (Goldsmith & Hofacker, 

1991). Thereby, these two contexts or dimensions of DSI are expected to have impact on the attitudes of 

utilitarian and hedonic consumers based on previously studies. 

Since the selected innovative and high-tech product in this study is iPone 4 by Apple Corp., which has 

fashion and technology attributes, it is used to examine the impact of DSI dimensions on consumers' 

attitudes toward using this product. Accordingly, it is hypothesized that: 

H5: Technological Innovativeness has positive relationship with Gen Y Consumers’ Utilitarian Attitudes 

toward using an innovative product. 

H6: Fashion Innovativeness has a positive relationship with Gen Y Consumers’ Hedonic Attitudes toward 

using an innovative product. 

H7: Technological Innovativeness has a positive relationship with Gen Y Purchase intention of 

Innovative Products. 

H8: Fashion Innovativeness has a positive relationship with Gen Y Purchase intention of innovative 

products. 

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3.3 Fashion Orientation with Consumers’ Attitudes and Purchase Intentions 

Fashion orientation is considered an important factor for innovators as they have a peculiar fascination to 

purchase new fashion and experience new things (Goldsmith, et al., 1999). Similarly, stated by Rogers 

(2003); innovators, whom are young and educated, provide positive response and attitude to new fashion 

and considered as opinion leaders. Fashion orientation dimensions which focus on fashion, fashion 

leadership, and the need to be well-dressed are the motivators for consumers to use innovative and hightech 

products. However, anti-fashion sentiment is the other dimension which can negatively prescribes 

the consumer's attitudes and purchase behaviour. Thus, it is expected that fashion orientation positively 

influence consumers’ hedonic attitudes. Therefore, it is hypothesized that: 

H9: Fashion Orientation has a positive relationship with Gen Y Consumers’ Hedonic Attitudes. 

H10: Fashion Orientation related has a positive relationship with Gen Y Purchase Intention of Innovative 

Products. 

3.4 Consumers’ Attitudes and Purchasing Intentions 

The relationship between attitude and purchase intentions is supported by experimental and observational 

findings (Ajzen, 2002). Since attitude is viewed as interpersonal behavior which is also considered as 

internal orientation and influencing behavior, it is the opposite approaches to actual behaviors. Studies in 

this area noted that higher positive consumers’ attitudes toward a particular product can create stronger 

purchasing intentions (Muk, 2007; Smith, Terry, & Hogg, 2006; Tarkiainen & Sundqvist, 2005). 

Based on it; it is hypothesized that: 

H11: Consumers’ Utilitarian Attitudes has a direct effect on the Purchase Intention of innovative 

products. 

H12: Consumers’ Hedonic Attitudes has a direct effect on the Purchase Intention of innovative products. 





Figure1: Conceptual Framework 

GI 

COGNETIVE 

UTILITARIAN 

DS 

Technology-INNO 

Page | 13 

DS 

FASHION-INNO 

PURCHASE 

INTENTION 

GI 

SENSORY 

FASHION 

ORIENTATION 

HEDONISM 

4. METHODOLOGY 

The research design is a descriptive quantitative based on cross-sectional approach in which the subjects 

are measured based on the data collected from among the students in Malaysia. The age of the students to 

whom the questionnaires were distributed, is ranged from 18 to 26 years old. This age range is 

considered appropriate for several reasons in this study. Firstly, generally student tends to be similar in 

nature. Secondly, students at the university are considered important for many companies as they provide 

a huge market since they have the tendency to purchase innovative, technological and fashionable 

products. The sample involves 200 students which consists of both genders and selected from different 

level of studies; bachelor degree and masters. It is a non-probabilistic sampling which is considered 

suitable to rationalize the result of our study. 

The quantitative approach in this research enables the researchers to conduct a large-scale study within 

the time frame and limited budget, make a preliminary assessment on the subject and generalize the 

findings to a larger population. The scales of measurement which are used in this survey are taken from 

the literature review on consumer behavior (e.g., Clark & Goldsmith, 2006; Venkatraman Linda & Meera, 

1990; Voss, et al., 2003). A seven-point Likert-type scale is used in measuring all the variables in the 

study. In addition, iPhone 4 is selected because it is an innovative, fashionable and high-tech product 

which is appropriate for the purpose to measure the purchasing intention of participants in this research. 

5. RESULTS 

The results indicate that the causal structural model is well fitted with RMSEA = .041 (Root Mean Square 

Error of Approximation < .08). The model meets the Absolute of Goodness of Fit and the Badness of Fit 

criteria. The GFI = .85 (Goodness of Fit index) and both the CFI = .95 (Comparative Fit Index >.9) and 

TLI = .918 (Tucker-Lewis Index >.9) and CMIN/DF= 1.501,2. Collectively, the SEM results indicate that 

the causal model was adequately fitted to the data (Hair, Black, Babin, Anderson, & Tatham, 2006). 





Table 1: Model Fit Summary 

Model (CMIN) NPAR CMIN DF P CMIN/DF 

Default model 79 626.005 417 .000 1.501 

Saturated model 496 .000 0 

Independence model 31 2799.570 465 .000 6.021 

Model (Baseline Comparisons) 

NFI RFI IFI TLI 

Delta1 rho1 Delta2 rho2 

CFI 

Default model .776 .751 .912 .900 .910 

Saturated model 1.000 1.000 1.000 

Independence model .000 .000 .000 .000 .000 

Model (RMSEA) RMSEA LO 90 HI 90 PCLOSE 

Default model .053 .044 .062 .264 

Independence model .168 .162 .174 .000 

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The following hypotheses are described based on the SEM results. 

H1: States that there is a positive relationship between cognitive innovativeness and utilitarian attitudes; 

is supported (β =.549, p = .003). 

H2: States that there is a positive relationship between sensory innovativeness and Hedonism attitudes; is 

supported (β =.282, p = .048). 

H3: States that there is a positive relationship between cognitive innovativeness and Intention of 

innovative products; is supported (β =.227, p = .005). 

H4: States that there is a positive relationship between Sensory Innovativeness and hedonism attitudes; is 

rejected (β =.136, p = .468). 

H5: States Technological Innovativeness has relationship with Gen Y Consumers’ Utilitarian Attitudes 

toward using an innovative product; is rejected (β =.017, p = .902). 

H6: States that there is positive relationship between fashion innovativeness and hedonism attitudes; is 

rejected (β =.093, p = .357). 

H7: States that there is positive relationship between Technological Innovativeness and Gen Y Purchase 

intention of Innovative Products; is rejected (β =-.123, p = .554) 

H8: States that there is positive relationship between Fashion Innovativeness and Gen Y Purchase 

intention of innovative products; is rejected (β =.001, p = .997) 

H9: States that there is positive relationship between fashion orientation and hedonism attitudes is 

rejected (β =.024, p = .710). 

H10: States that there is positive relationship between fashion orientation and Intention of innovative 

products is supported (β =.227, p = .005). 

H11: States that there is positive relationship between Utilitarian Attitudes and intention is supported 

(β=.460, p = .041). 





H12: States that there is positive relationship between Hedonic Attitudes and Intention of innovative 

products; is supported (β =.463, p < .001). 

It is very interesting when we also found that there is a strong positive relationship between cognitive 

innovativeness and consumer hedonism attitude. Our results show that cognitive innovativeness (β =.779, 

p = .001) can directly affect the level of hedonism attitude toward novel products. 

Table2: Structural Model’s Results 

Estimate S.E. C.R. P 

Page | 15 

UTILITARIAN GI_COGNETIVE -.033 .143 -.229 .819 

UTILITARIAN DS_Technology-INNO -.130 .097 -1.344 .179 

HEDONISM DS_FASHION-INNO -.018 .064 -.284 .776 

HEDONISM FASHION_LEADERSHOP .058 .043 1.337 .181 

HEDONISM GI_SENSORY .006 .080 .076 .939 

PURCHASE_ INTENTION GI_COGNETIVE .408 .201 2.034 .042 

PURCHASE_ INTENTION DS_Technology-INNO -.238 .129 -1.848 .049 

PURCHASE_ INTENTION DS_FASHION-INNO .023 .100 .229 .819 

PURCHASE_ INTENTION FASHION_LEADERSHOP .199 .070 2.833 .005 

PURCHASE_ INTENTION GI_SENSORY -.083 .125 -.665 .506 

PURCHASE_ INTENTION UTILITARIAN .029 .148 .199 .842 

PURCHASE_ INTENTION HEDONISM .644 .171 3.760 *** 

As the result shows the direct relationship between cognitive innovativeness and sensory innovativeness 

with Hedonism from one side and Hedonism with purchase intention , we have conducted the Sobel test 

to find out whether Hedonism can play any mediation role or not. 

The above result indicates that Hedonism can mediate the relationship between cognitive innovativeness 

and purchase intention significantly as the p-value from Sobel test, (p=.022) is less than threshold (p=.05). 

However, since the relationship between cognitive innovativeness and purchase intention in presence of 

hedonism is significant so it can be concluded that hedonism can mediate the relationship between 

innovativeness and purchase intention.Nonetheless, the mediation role of Hedonism on the relationship of 

Sensory innovativeness and purchase intention is not supported (Sobel Test p-values =0.23). 





Table3: Sobel Test 

Mediation effect t-test Std. Error p-value 

Hedonism 

cognitive innovativeness purchase intention 

2.29 0.068 0.022 

Page | 16 

Hedonism 

Sensory innovativeness purchase intention 

1.19 0.039 0.23 

6. DISCUSSION 

This study is conducted to provide some information about the relationships between the two 

characteristics of our respondents’ innovativeness and fashion orientation and their utilitarian and hedonic 

attitude toward purchasing of an innovative product. This is the first study that has been conducted in 

Asian context that test the characteristics of consumers in innovativeness and fashion orientations at the 

same time. This means that both variables were tested while a hi-tech and fashionable product (iPhone 4) 

was introduced to the respondents. Since this product possessed both attributes and the population for this 

study was taken from among Asian students, the outcomes of this study can be different from the other 

studies where only one characteristic was focused on or there are other norms interfered with the study. 

Previously, global innovativeness dimensions affected the acceptance of a product (Foxall, 1995; 

Venkatraman & Price, 1990) but it is not supported in this study. That could be the result due to the 

consideration of two dimensions for consumers' attitudes while it is a uni-dimensional construct in many 

other studies. The other highlight of this study is that the product (iPhone 4) used for this research has 

both of fashion and technology attributes which are tested for its global innovativeness; while the 

previous research usually went for a product with one of these attributes which is either fashion or 

technology. 

Moreover, this result is not the same with the previous research since they supported DSI dimensions 

consumers’ acceptance of a product (Beaudoin, Lachance, & Robitaille, 2003; Muzinich, et al., 2003). 

Further support is also not found in this study because the population selected for this study is not 

behaving in a similar manner as those in the previous studies. It is surprisingly seen that possessor of 

fashion innovativeness like to use a product with functional value; while it may not be of the same and 

equal interest among the consumers in all product categories and is contrary to previous studies. 

A study on the effects by fashion orientation on consumers’ hedonic attitude reveals that based on this 

sample; this relationship is rejected but fashion orientation is affected by the intention of our respondents. 

That is because these consumers specified that possession of an iPhone 4 which is fashion oriented is a 

part of their intention to purchase high-tech product even though the hedonism attitude is not being 

affected by fashion orientation dimensions considerably. In other words, possession of an iPhone 4 may 

lead them to believe that using such product can resolve a consumption pattern based on fashion updates. 

It is revealed that hedonic and utilitarian dimensions of attitude have significant influence on the 

respondents’ purchase intention. These two dimensions of consumers’ attitudes definitely influence their 

purchase intention and also consumers' adoption of an innovative, high-tech product which is supported 

by the previous research as well. In other words, customers who believe that functionality of a product is 

an important factor to buy the product probably will consider the product. Similarly, customers who look 

for fun and hedonic acceptance of a product are also likely to consider the product to purchase. 





Even though, no significant relationship is found between technology and fashion (DSI) with attitudes, in 

global innovativeness we find that cognitive innovativeness is strongly effect by intentions and mediated 

by hedonism attitude which is almost contrary to previous studies. However, the same things do not 

happened to sensory innovativeness with hedonism as a mediator. Furthermore, between the 

dimensionality of fashion orientation and consumer’s attitudes, we find that consumers’ utilitarian 

attitudes are not influenced by the dimensions of fashion orientation and fashion innovativeness 

dimension based on domain-specific innovativeness which is supported by the previous studies. 

Page | 17 

7. LIMITATIONS AND FURTHER STUDY 

The generalization of this study’s findings beyond a specific sample and a specific product might be 

limited. Gen Y consumers’ responses to an innovative and trendy product should be studied in other 

markets with different demographic and psychographic characteristics. Further study should be focused 

on exploring the differences between Gen Y in different countries, metropolitan areas and suburban areas 

to provide more valuable information for different companies. This study is conducted on an Asian 

sample of Gen Y; similar studies on the other demography of consumers in another geographic area may 

provide international companies (Apple, Samsung, etc) with valuable insight for product differentiation 

strategies and also a larger sample may allow more complicated hypotheses and in depth results. 

Moreover, future research can also elaborate on the similarities and differences between the 

characteristics of Gen X, Y, Z or baby boomers adoption of innovative products. Today, apart from young 

consumers who are well acquainted with technology and trendy life, the other segments of market also 

pay more attention to the products with both attribute; technology and fashion. It is a good opportunity for 

researchers to go through their behavioral intentions and discover new things on baby boomers' lifestyles. 

Future studies may examine innovation adoption of baby boomers while considering different shopping 

insights, behavioural intentions and different category of products. 

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Asa Romeo Asa a , Navneel Shalendra Prasad b , Maw Maw Htay c 

1 School of Management, 2 c School of Mechanical and Electronic Engineering 

Wuhan University of Technology, Wuhan, 430070, P.R. China 

Page | 20 

ABSTRACT 

Innovation Capability (IC) describes the comprehensive set of characteristics of an 

organization that facilitate and support innovation strategies. Innovation is one of the 

most significant strategic approaches an organization can exploit and considered a 

cornerstone to gain competitive advantage. This research is aimed to investigate IC in 

the services sector with the Namibian telecommunication sector as the case study. The 

analysis and theoretical model introduced in this study were primarily refined based on 

in-depth questionnaires conducted on 122 senior executives and employees of 

telecommunication organizations in Windhoek city, and identified eight key dimensions 

or factors of innovation capability that address operational aspects of the 

telecommunication organizations. 

Key Words: Innovation Capability, Strategic Planning, Resources, Leadership. 


Competition is intensifying locally and from many parts of the world as a result of increased pace of 

globalization and numerous socio-economic factors like rapid change in research and development, 

pressure of instant result and performance by the investors, prompt response demanded by the customers, 

fast changing of consumer taste and preferences, shorter product/service life cycle. The nature of 

competition in developing nations is changing rapidly and Namibia is not an exception. Firms cannot 

afford to rely on long-term plans as before; therefore, innovation is the solution and should be embraced 

in operational activities of organizations to achieve competitive edge. The markets and industries are 

quite volatile and competitive, for firms to win and survive in these markets, there have to improve or 

adopt new strategies. It is believed that organizations must constantly develop new products/ services to 

be able to compete in changing environments thus achieve performance, which requires innovation. It’s 

essential to be aware of aspects that drive innovation for an organization in order to build innovation 

capability. Developing new innovation process consists of various intertwined variables that that require 

its own set of capabilities. Within the organization, there are several concerns e.g. inefficiency in 

developing and building sustainable core competency, aligning resources (human and capital) with 

business strategy, new ideas should be converted into viable commercial goods/services. It is thought that 

when an organization chooses to embark on innovation as part of its organizational culture, that will 

require insight knowledge of different set of innovative capabilities. 

Innovation capability describes the attributes needed by a firm to support the innovation activity. These 

attributes give it the ability to quickly and successfully adopt new methods and processes, and develop 

and introduce new and improved products to compete more effectively in rapidly changing environment. 

Innovation itself is a complex act, well; innovation capability has many dimensions or components which 

draw on a wide range of aspects such as resources, assets, and abilities (Sen & Egelhoff 2000). The 

capacity to innovate is the ability of the organization to adopt or implement new ideas, processes or 

products successfully (Hurley & Hult 1998). They also propose that firms that have greater capacity to 





innovate are able to develop a competitive advantage and achieve higher levels of performance. Lawson 

& Samson (2001) define the innovation capability as the ability to continuously transform knowledge & 

ideas into new products, processes and systems for the benefit of the firm and stakeholders. Innovation 

capability is proposed as a higher-order integration capability that is the ability to mould and manage 

multiple capabilities in the organization. The concept of higher-order integration capabilities is developed 

in Fuchs, Mifflin, Miller & Whitney (2000). Organizations’ possessing this innovation capability has the 

ability to integrate key capabilities and resources of their firm to successfully stimulate innovation. 

Innovation is the mechanism by which organizations develop value through new products, processes and 

systems that are needed to respond to challenging markets, technologies, and modes of competition 

(Utterback 1994, Dougherty & Hardy, 1996). The importance of innovation to firm is revealed in 

literature as the link to competitiveness (Alvarez & Barney, 2001). 

Page | 21 

Enablers of successful innovation vary from organization to another for different circumstances. 

However, there are certain themes that feature more prominently in the literature that appears to be the 

base or minimum requirements for enabling innovation in an organization. The ideas that initiate the 

innovation process may originate from a wide variety of sources. According to O’Regan, Ghobadian, and 

Sims (2006), Strategy, leadership, and culture are the main drivers of effective innovation. Choi & Chang 

(2009) found the key themes that featured in the literature to be the innovation stimuli are organizational 

culture and structure, leadership and management support, resources; supportive climate, and knowledge 

utilization practices. 

“Resources” is a very wide term in this sense, but Clayton (1997) maintained that successful innovation 

requires four types of resources (as cited in Choi & Chang 2009: 246): personnel resources (manpower), 

material resources (physical and financial means), conceptual resources (knowledge and skill), and time 

resources (for transition and experimentation). 

Porter and Stern (1999) have shown the three identified domains in current and future challenges and 

opportunities facing business and government organizations are in the fields of sustainable development; 

e-Commerce; and new product development. To be of critically important interest to today’s governments 

and many organizations. The power of the innovation capability construct is that it is generalize able to all 

these domains, as it relates to the organizational potential to convert new ideas into commercial and 

community value. Innovation capability provides the potential for effective innovation. 

However, it is not a simple or single-factored concept, as it involves many aspects of management, 

leadership and technical aspects as well as strategic resource allocation, market knowledge, organizational 

incentives, etc. Lawson and Samson (2001) identified several dimensions of innovation capability which 

are: vision and strategy, creativity and idea management, harnessing the competence base, leveraging 

information and organizational intelligence, possessing a market and customer orientation, management 

of technology, culture and climate, lastly, organizational structures and systems. 

2. HYPOTHESES 

The following hypotheses are tested in order to validate theories on innovation capability in services 

sector; 

H 1 : Strategic planning process positively influences the organization’s innovation activities. 

H 2 : Business and technical roles are positively associated with clear responsibility to lead the innovation 

planning and activities. 

H 3: Adequate resources and right skill mix positively impact innovation capability. 

H 4 : Management approach to innovation risk positively influences the innovation capability. 

H 5 : Operational structures and processes positively support innovation 

H 6 : Open communications significantly drive innovations in the organization 





H 7 : Workplace environment and workspaces positively impact activities of innovation 

H 8 : Organizational tools and processes in place significantly influence key innovation activities. 

H 9 : Management systems moderate the relationship between human resources and innovation strategy 

3. RESEARCH METHODOLOGY 

This is a quantitative study dependent on the use of primary sources of data collected through use of 

questionnaires on senior executives and employees of selected companies. However, the study recognizes 

the theories and prior researches on innovation capability. This study is largely descriptive in nature and 

seeks to analyze factors that build an organization’s innovation capability in services sector, primarily on 

a telecommunications perspective. The deductive approach was used because a conceptualized model for 

innovation capability for service organizations revealed through the literature was evaluated in practice in 

this research to expand knowledge and the understanding of the theory. 

Page | 22 

The deductive stage (testing and validating the theory) involved the formulation of formal hypotheses that 

were tested using Statistical Package for Social Sciences (SPSS), the Alpha level was set at 0.05. Nine 

factors were used to examine the innovation capability. Descriptive statistics were employed in the 

presentation and analysis of results. Quantitative data was analyzed using frequencies and percentages. 

Multiple regression analysis was applied to determine the impact of variables on innovation capability. 

4. RESULTS AND DISCUSSIONS 

4.1 Research Key Variables 

Table 3-1 presents the key variables employed in this study as the parameter of this research on 

innovation capability. The key variables are a result of solid reasoning drawn from innovation theories 

and prior studies to examine and give an insight into an organization’s innovation capability. 

Key 

Variable 

ISPP 

LIPA 

RPIS 

MRIF 

IAPS 

OSOC 

WECI 

IRRI 

MSIS 

ICPI 

Table 4-1: Key Variables used in this Study 

Representing 

Innovation Strategic Planning 

Roles and Responsibility 

Resources and Right Skill Mix 

Management of Innovation Risk 

Collaboration and Networking 

Open Communications 

Work Environment 

Innovation Process 

Leadership, Management and Reward System 

Innovation Capability (Innovation Performance Indicators) 

4.2 Descriptive Statistics 

Table 4-2 shows the descriptive statistics of key variables used in this research study. It includes the 

Number of respondents, Minimum, Maximum, Mean, Standard Deviation, Skewness and Kurtosis. 





Table 4-2: Descriptive Statistics of Key Variables Used in this Study 

N Minimum Maximum Mean 

Std. 

Deviation Skewness Kurtosis 

Statistic Statistic Statistic Statistic Statistic Statistic Statistic 

ISPP 122 1 5 3.93 .981 -.866 .311 

LIPA 122 1 5 4.10 .876 -.794 .372 

RPIS 122 1 5 3.68 1.085 -.751 .180 

MRIF 122 1 5 3.74 1.035 -.408 -.597 

IAPS 122 1 5 4.01 1.124 -1.080 .265 

OSOC 122 1 5 4.00 .953 -.989 .728 

WECI 122 1 5 4.11 .969 -1.269 1.513 

IRRI 122 1 5 3.66 1.310 -.751 -.666 

MSIS 122 1 5 3.25 1.319 -.312 -1.090 

ICPI 122 1 5 3.94 .846 -1.139 1.510 

Valid N 

(listwise) 

122 

Page | 23 

The above table indicates the sample size (N= 122) as a representative of the whole population for this 

study. Minimum and maximum values are consistent within the 5 Likert- scales used in measuring the 

innovation capability variables ranging from 5 (strongly agree) to 1 (strongly disagree). 

The highest mean score is attributed to work environment (4.11), and the lowest mean is 3.25 for 

leadership, management and reward systems. Skewness is a measure of symmetry, or more precisely, the 

lack of symmetry, while Kurtosis is a measure of whether the data are peaked or flat relative to a normal 

distribution. Below are formulas for skewness and kurtosis, for this research the statistics are done 

through use of SPSS. 

Skewness = , Kurtosis = 

Where, is the mean, s is the standard deviation, and N is the number of data points. 

The statistics shows that three variables namely collaboration and networking, work environment and 

innovation capability fall into normal distribution (-2 to +2). Kurtosis values fall outside the range of -1 to 

+1, the statistics in this research show that all the variables fall outside the range of (-1 to +1), showing 

high characteristic of Kurtosis. The variables represent a normal and parametric distribution analysis. 

4.3 Frequency Distributions of Innovation Capability Variables 

This study used 10 variables as a parameter for the study of innovation capability in the 

Telecommunication organization. The findings associated to each key variable are presented in the 

following tables and graphs. 





Table 4-3: Summary of Responses 

Values 

Key Variables 5 (Strongly 

Agree) 

4 (Agree) 3 (Neutral) 2 (Disagree) 1 (Strongly 

Disagree) 

KV-1 37 54 18 11 2 

KV-2 46 48 23 4 1 

KV-3 29 47 31 8 7 

KV-4 34 39 34 13 2 

KV-5 51 43 10 14 4 

KV-6 40 55 16 9 2 

KV-7 48 52 12 7 3 

KV-8 38 45 9 19 11 

KV-9 23 39 21 23 16 

KV-10 26 76 8 11 1 

Page | 24 

Table 4-3 displays the frequency responses of each key variable from 122 respondents to determine the 

totals of strongly agree, agree, neutral, disagree and strongly disagree for each key variable. KV-1 aimed 

at assessing the innovation strategic planning shows a high number of respondents with 54 score agree, 37 

strongly agree that innovation strategic planning process in operation provides clear direction to all the 

innovation activities that is aligned to the corporate planning. 

KV-2 is assessment of roles and responsibility of business and technical aspects. The highest numbers of 

respondents agree with a 48 score, 46 persons strongly agree that the organization have well defined 

business and technical roles with clear responsibility to lead the innovation planning and activities, while 

a total of neutral, disagree and strongly disagree respondents for KV-2 is only 28 respondents. KV-3 

shows a highest figure (47) is for agree, and then 29 strongly agree that they have well- structured and 

adequately resourced programme of innovation with the right skill mix, a total number of 15 contradicts 

the large number of the agrees. For KV-4, shows a total number of 73 respondents agree (strongly agree + 

agree) that the organization have a defined and managed approach to risk across all innovation activities 

that recognizes an acceptable level of failure. KV-5 shows high figures for strongly agree and agree and 

low figures for strongly disagree and disagree respectively. 

For the other five variables; KV-6 shows a total number of 95 agree that the organization’s operational 

structures support open communications in a network of expertise and knowledge domains across the 

internal and external value chains to facilitate innovation. While key variables 7, 8 and nine respectively 

have high number of respondents that agree compared to disagree. KV- 10 is the assessments of 

relationship of the 9 parameters to innovation capability of the organization which also show a total 

number of agree in support of the connotation. 

In assessing KV-10, this study used two innovation performance indicators, following the OSLO manual 

(OECD, 1992), namely the ratio of innovation sales and the innovation rate, to represent the economic 

significance of innovation. The ratio of innovation sales is defined as the percentage of new product sales 

over total product sales. The innovation rate is defined as the percentage calculated by dividing the 

number of new products by the total number of products. KV-10 examines the respondents perceptions 

towards the relationship or influence that key variables namely innovation strategic planning, roles and 

responsibility, resources and right skill mix, management of innovation risk, collaboration and 

networking, open communications, work environment, innovation process, and leadership, management 

and reward system have on innovation capability of the organization. 





4.4 Multiple Regression Analysis Results 

The results of multiple regression summary is shown in table 4-4-1, Anova test in table 4-4-2 and multiple 

regression analysis summary for variables predicting innovation capability is shown in table 4-4-3. 

Mode 

l R R Square 

Adjusted R 

Square 

Table 4-4-1: Model Summary 

Change Statistics 

Std. Error of R Square 

the Estimate Change F Change df1 df2 Sig. F Change 

1 .946 a .896 .887 .284 .896 106.883 9 112 .000 

a. Predictors: (Constant), MSIS, WECI, ISPP, LIPA, RPIS, MRIF, IAPS, 

IRRI, OSOC 

Page | 25 

The R 2 measures the quality of the model, which shows how well the model fits within the data of the 

sample. However there is one main drawback with the R 2 coefficient, the drawback is that its value will 

always increase, irrespective of the relationship between the dependent and independent variable. Even if 

the relationship completely not relevant, the R 2 will still increase. Therefore a solution to this problem is 

by utilizing the adjusted R 2 . The value of this measure will decrease when the percentage of variance of 

the added variable has not sufficient explanatory power. The highest possible value of R 2 is necessary for 

the good model fit. The results show that the value of the R 2 in the summary model is 0.896. This means 

that 89.6 percent of the variance in the dependent variable, which is innovation capability, is explained by 

the model. A second and even more important figure is the adjusted R 2 score. The adjusted R 2 reflects the 

best model that can be made with the present variables. In the model, the value of the adjusted R 2 is 

0.887; this means that 88.7% significantly explains the variance in the dimensions of innovation 

capability. The research model is well constructed and shows a good proportion for this study. 

Table 4-4-2: Anova Test 

ANOVA b 

Model Sum of Squares df Mean Square F Sig. 

1 Regression 77.567 9 8.619 106.883 .000 a 

Residual 9.031 112 .081 

Total 86.598 121 

a. Predictors: (Constant), MSIS, WECI, ISPP, LIPA, RPIS, MRIF, IAPS, IRRI, OSOC 

b. Dependent Variable: ICPI 

The F-test in the table above determines whether the model is useful. The most important figure that can 

be derived from above is the F-value and its significance. The F-statistics is 106.883 and the significance 

is at 1 percent level, this indicates that the model is very significant. Stated otherwise, the chance that the 

model is not usable is less than 0.000. 





Model 

Table 4-4-3: Multiple Regression Analysis for Variables Predicting Innovation Capability 

Coefficients a 

Unstandardized 

Coefficients 

B 

Standardized 

Coefficients 

Collinearity Statistics 

Std. 

Error Beta t Sig. Tolerance VIF 

1 (Constant) .847 .180 4.704 .000 

ISPP .546 .129 .632 4.225 .000 .042 24.061 

LIPA .399 .109 .413 3.658 .000 .073 13.667 

RPIS .486 .092 .623 5.289 .000 .067 14.918 

MRIF .352 .102 .431 3.453 .001 .060 16.712 

IAPS .083 .095 .110 .871 .385 .059 17.076 

OSOC .416 .130 .469 3.210 .002 .044 22.941 

WECI .240 .102 .275 2.363 .020 .069 14.593 

IRRI .422 .092 .653 4.604 .000 .046 21.627 

MSIS .208 .072 .324 2.867 .005 .073 13.693 

a. Dependent Variable: ICPI 

Page | 26 

Table 3-6 contains the regression of the complete model, including the coefficients and the significance of 

each of the variables. The model consists of nine variables, namely innovation strategic planning, roles 

and responsibility, resources and right skill mix, management of innovation risk, collaboration and 

networking, open communications, work environment, innovation process, and management practices and 

reward system. 

4.4.1 Innovation Strategic Planning 

Based on the results of regression in table 4-4-3 shows that standard path coefficient of the innovation 

strategic planning was (0.632) which is statistically significant at 0.01 alpha level. Therefore, the first 

hypothesis of this research (H 1 ) is accepted, and the result shows that strategic planning process is 

positively related to organization’s innovation activities. This results corresponds with Josh Gluckman 

(2010) innovation without some form of strategic planning, can be pretty difficult to assess whether a 

given innovation is likely to take you in the right direction, therefore innovation ought to have a strategic 

plan to point in the right direction and thus achieve innovation performance. Mootee (2010) Innovation 

that is linked to strategic planning is seen as more realistic and supportable to achieve performance. When 

organizations’ strategy managers effectively carry out the strategic plan that guides the right direction of 

innovation, it eventually achieves innovation performance. Innovation that is linked to strategic planning 

is seen as more realistic and supportable in achieve organizational performance 

4.4.2 Roles and Responsibility 

The result shows a negative standardized coefficient of (0.413), however the regression is significant at 

0.01 level. The second hypothesis (H 2 ) is supported. Business and technical roles are positively associated 

with clear responsibility to lead the innovation planning and activities. The findings is in same direction 

with OVO (2007) states that developing a focused innovation team with defined roles and responsibilities 

in conjunction with a defined innovation process will improve an organization’s innovation capability. 





4.4.3 Resources and Right Skill Mix 

The third hypothesis (H 3 ) Adequate resources and skills positively impact innovation capability, is 

supported. The result shows standardized coefficient of (0.623) and is statistically significant at 0.01 alpha 

level. Focusing on a firms-level analysis, the results of this study corresponds with Hurley & Hult (1998), 

they also proposed that firms that have adequate resources have a greater capacity to innovate. The 

positive effect of resources as attribute for innovation capability supports prior researches on innovation 

capability, RBV suggests that differences in firms’ innovative performances are primarily the result of 

resource heterogeneity across firms (Wernerfelt, 1984), Irwin, Hoffman, and Lamont (1998) used a 

resource-based view to show the positive relationship between organizational resources and 

organizational innovation characteristics of rarity, value, and inimitability moderated this relationship. 

Resources and the right skill mix are important in building innovation capability. Adequate resources with 

right skills to utilize the resources innovatively or economically are necessarily for an organization 

embarking on developing IC to achieve competiveness. 

Page | 27 

4.4.4 Management of Innovation Risk 

The fourth hypothesis (H 4 ) is well supported on the basis of the multiple regression result, management 

approach to innovation risk positively influence the innovation capability. The result shows standardized 

coefficient of (0.431), showing a positive relationship, hence the results showed a statistically significant 

alpha level at 0.01. Successful innovation is largely an issue of identifying and controlling risks, this 

finding is in line with prior research (Brown, 1997) successful innovation management is to try to manage 

the risk, and the value of a process model is that it provides milestones along the journey where these 

risks can be assessed. Eliminating risks that come with innovation significantly boosts the organization’s 

innovation capability. Successful innovation is mostly a result of identifying and controlling risk 

4.4.5 Collaboration and Networking 

Regression results show a standardized coefficient of (0.110) and significance of (0.385) which is not 

statistically significant at 0.05 alpha level, therefore the fifth hypothesis (H 5 ) is rejected. The results show 

operational structures and processes do not positively support innovation aimed at collaborating with 

different organizational departments to enhance innovations, however there is an absence of consensus on 

the benefits of this type of networking. Although the results of this study shows the operational structures 

and processes that enhance collaboration and networking as not effectively utilized and do not positively 

support innovation, aimed at collaborating with different organizational departments and the external 

environment of the organization to enhance innovations. We recommend that the organizations should 

improve both their departmental and external networking as it is essential to get new ideas from inside 

and externally particularly from customers and suppliers that are useful for pull innovation. 

4.4.6 Open Communications 

The result supports the hypothesis (H 6 ), open communications significantly drive innovations. Table 3-6 

shows a standardized coefficient (0.469) and is statistically significant at 0.01 alpha level. Open 

communication between management and employees sets the stage for an atmosphere of trust and sharing 

information with employees on a regular basis. The findings of this study corresponds to scholars that 

stress the importance of information sharing to enhance innovation capability (Liebowitz, 2002; Lin, 

2006), their studies on open communications acknowledges the importance of information and knowledge 

sharing in building IC. Practically, open communications between management and employees sets the 

stage for an atmosphere of trust and sharing information and knowledge with employees on a regular 

basis result into new ideas thus, enhance innovation. 

4.4.7 Work Environment and Workspaces 

The regression results show a standardized coefficient (0.275) and are statistically significant at 0.05 

alpha level. The seventh hypothesis (H 7 ) is accepted. Workplace environment and workspaces have a 

positive influence on activities of innovation. The result corresponds with the study of Amabile, (1996) on 





the impact of work environment on organizational creativity and innovation. Work environment and 

workspaces that are conducive in driving innovation in an organization 

4.4.8 Innovation Process 

Based on the result of table 3-6, standardized coefficient (0.653) and statistically significant at 0.01 were 

obtained from the regression results. The eighth (H 8 ) hypothesis is supported. Innovation tools and 

processes in place positively influence the key innovation activities. Process innovation can and should 

happen at various levels within the organization as no organization can depend solely upon innovation 

occurring at one level only. Successful organizations have an innovation process working its way through 

all levels of the organization. Hamel (2004) states, “Innovation has become a mantra: Innovate or Die. 

Page | 28 

4.4.9 Leadership, Management and Reward System 

The result shows a standardized coefficient of (0.324) and statistically significant at 0.05 alpha level. The 

last hypothesis (H 9 ) is supported. Management systems moderate the relationship between human 

resources and innovation strategy. Results showed that the leadership and management have a significant 

relation with the organizational innovation capability, the findings of this study on leadership and 

management relates to many scholars that presented successively different viewpoints on leadership and 

management connotation. Leadership has been emphasized as one of the most 

important individual influences on firm innovation, because leaders can directly decide to introduce new 

ideas into an organization, set specific goals, and encourage innovation initiatives from subordinates 

(Harbone & Johne, 2003). On reward systems as an incentive for innovation have significant influence on 

the organizational innovation capability; there is a positive relationship between reward systems and 

employee willingness to innovate. The result corresponds well with Harden, Kruse and Blasi (2008); their 

study shows that different features of the reward system can stimulate different aspects of innovation 

within a firm. 

5. IMPLICATIONS 

Firstly, the study proved that organizations must pay attention to the leadership and management system. 

Thus, leaders are the people who should embrace innovation strategic planning, be inspirational, coaches, 

collaborators and explicit motivators. Failing to have this archetype in leaders predicts the future demise 

of a non-innovative organization in a face of fierce competition. 

Secondly, elevating innovation knowledge in the organization is critical. Organizations must devote 

continuous and substantial investment to develop organizational innovation capability. Innovation 

performance will increase if barriers and innovation risks are eliminated. 

Thirdly, to increase organizational innovation capability, leaders must make sure the right skill mix is 

aligned with adequate resources; it’s a factor that need concrete consideration. Abundance of resources 

without right skilled people to utilize those resources effectively and efficiently does not have any 

positive impact on innovation. 

Fourth, collaborative networking in working environment that encourages generation of new ideas is 

critical to an organization. The organization must improve its collaborative networks both internally and 

externally, as customers and suppliers can provide innovative ideas. Successful innovative leaders must 

provide guidance for implementation of innovation culture in every level of organizational hierarchy. 

Finally, although the research focused solely on Telecommunications sector in Namibia, it clearly gives 

an overall picture on an organization that realistically embarks on a plan to build innovation capability, 

stressing the importance of involving all levels and departments of the organization to project a culture of 

innovation, Because organizational innovation is not an individual act but a collective achievement, it 





takes work to create and build a context that legitimates innovative behavior, dedicates resources to 

innovation and assumes the structure and culture that nourishes the development and implementation of 

innovation, otherwise the organization’s innovation activities will lag. 

6. RESEARCH CONTRIBUTIONS 

The significance of this research work revolves on the strategic level for the planning and decisions 

making in the services organizations to best implement the strategies in Namibian telecommunications. 

Hence, improve business services in the country, also for the benefits of various organizational 

stakeholders. Moreover, the evaluation results provide valuable practitioner guide-lines in the sector. The 

elucidation and validation of the innovation capability construct of this research contributes significantly 

to the bodies of knowledge of an innovation capability scale for the services sector. 

Page | 29 

7. CONCLUSIONS 

The results of the study generally indicate that variables used in this research in assessing innovation 

capability in a service organization have contributed positively to the provision of organizational 

innovation capability. The findings have important implications for organizations decision makers in 

formulation and managerial practices and it also validates firm-level evidence on service innovation 

which provide a feasible direction to service firm managers adopting innovation to outperform 

competitors, in that they must build and nurture a set of strategic capabilities by adopting proactively the 

dimensions proposed in this study. 

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Page | 30 







Dr. Abhishek Gupta 

Administrative-cum-Accounts Officer & Head of Office, Sardar Swaran Singh National Institute of 

Renewable Energy (Ministry of New & Renewable Energy, Govt. of India), 

Page | 31 

ABSTRACT 

To meet customer demands and for a significant form of growth, strategic alliances are 

becoming more and more relevant as a tool. Contemporary business environment forces 

companies to create alliances, which enable them to take better market position. 

Innovativeness plays crucial role in accomplishing business efficiency and better market 

position. The future belongs to the strategic alliances that realize the importance of 

formulation and implementation of innovation strategies first. A strategic alliance is 

partnership of two or more corporations or business units to achieve strategically 

significant objectives that are mutually beneficial. Aside from the explicit strategic and 

operational motives, learning in order to sustain competitive edge in the marketplace 

serves as a primary motivation for alliance formation. However, learning is an important 

and a far subtler aspect of strategic alliances. Significant also, alliances evolve over time 

and metamorphosis as partners learn. Competencies change, and goals are redefined; 

thus, the potential for learning also changes. Extant strategic alliance literature scarcely 

addresses this dynamic and interactive aspect. The basic purpose of this paper is to 

highlight the importance of understanding the evolutionary perspective of alliance 

learning. More specifically, it explores alliance learning priorities as the partnership 

unfolds in key areas outlined by environment, tasks, process, skills, and goals. In 

addition, the paper investigates some processes/mechanisms that contribute to alliance 

learning. A strategic alliance could help a company develop a more effective process, 

expand into a new market or develop an advantage over a competitor, among other 

possibilities. 


A Strategic Alliance is a relationship between two or more parties to pursue a set of agreed upon goals or 

to meet a critical business need while remaining independent organizations. Partners may provide the 

strategic alliance with resources such as products, distribution channels, manufacturing capability, 

project funding, capital equipment, knowledge, expertise, or intellectual property. In other words a 

strategic alliance is a partnership of two or more corporations or business units to achieve strategically 

significant objectives that are mutually beneficial. Alliance between companies or business units has 

become a fact of life in modern business. Some alliances are very short term, only lasting long enough 

for one partner to establish a beachhead in a new market. Others are more long lasting and may even be 

the prelude to a fall merger between the two companies. A strategic alliance is partnership of two or more 

corporations or business units to achieve strategically significant objectives that are mutually beneficial. 

Conglomerate diversification has been criticized as providing less value than has concentric 

diversification, primarily because it is more difficult to keep track of unrelated business units than related 

ones. Partially because of this, many companies are currently divesting units unrelated to their primary 

business. As more corporations become involved in international operations through acquisition, strategic 

alliances and other options, expect conglomerate diversification to become even less popular firms that 





are unable to finance alone the huge costs of developing a new technology may coordinate their R&D 

with other firms through a strategic alliance. By the 1990s, more than 150 cooperative alliances involving 

1,000 companies were operating in the United States and many more were operating throughout Europe 

and Asia, These alliances can be joint programs or contracts to develop a new technology, joint ventures 

establishing a separate company to take a new product to market, minority investments in innovative 

firms wherein, the innovator obtains needed capital and the investor obtains access to valuable research. 

2. VARIETIES OF INTER-ORGANIZATIONAL RELATIONS 

Page | 32 

Companies or business units may form a strategic alliance for a number of reasons such as to obtain 

technology and/or manufacturing capabilities; to obtain access to specific markets; to reduce political 

risk; to achieve or ensure competitive advantage etc.,. The types of alliances range from mutual service 

consortia to joint ventures and licensing arrangements to value-chain partnerships. A mutual service 

grouping is a partnership of similar companies in similar industries that pool their resources to gain a 

benefit that is too expensive to develop alone, such as access to advanced technology. For example, IBM 

of the United States, Toshiba of Japan, and Siemens of Germany formed a consortium to develop new 

generations of computer chips. As part of this alliance, IBM offered Toshiba its expertise in chemical 

mechanical polishing to help develop a new manufacturing process using ultraviolet lithography to etch 

tiny circuits in silicon chips. IBM then transferred the new technology to a facility in the United States. A 

licensing deal is an agreement in which the licensing firm grants rights to another firm in another country 

or market to produce and/or sell a product. The licensee pays compensation to the licensing firm in return 

for technical expertise. Licensing is an especially useful strategy if the trademark or brand name is well 

known, but the MNC does not have sufficient funds to finance its entering the country directly. This 

strategy also becomes important if the country makes entry via investment either difficult or impossible. 

The danger always exists, however, that the licensee might develop its competence to the point that it 

becomes a competitor to the licensing firm. Therefore, a company should never license its distinctive 

competence, even for some short-run advantage. 

The value-chain partnership is a strong and close alliance in which one company or unit forms a longterm 

arrangement with a key supplier or distributor for mutual advantage. Value-chain partnerships are 

becoming extremely popular as more companies and business units outsource activities that were 

previously done within the company or business unit. An example of a value-chain partnership is the 

long-term relationship between a company or business unit with a supplier or distributor. To improve the 

quality of parts it purchases, companies in the U.S. auto industry, for example, have decided to work 

more closely with fewer suppliers and to involve them more in product design decision. Such 

partnerships are also a way for a firm to acquire new technology to use in its own products. A company 

should buy or license technology from others instead of developing it internally. A company should buy 

technologies that are commonly available, but make those that are rare, valuable, hard to imitate, and 

having no close substitutes. In addition, outsourcing technology may be appropriate. 

3. THE STABILITY STRATEGY IN MANAGEMENT 

A corporation may choose solidity over growth by continuing the current activities without any 

significant change in direction. Although, sometimes viewed as a lack of strategy, the stability family of 

corporate strategies can be appropriate for a successful corporation operating in a reasonably predictable 

environment. They are very popular with small business owners who have found a niche and are happy 

with their success and the manageable size of their firms. Stability strategies can be very useful in the 

short run, but they can be dangerous if followed for too long as many small town businesses discovered 

when Wal-Mart came to town. Some of the more popular of these strategies are the pause/proceed with 

caution, no change, and profit strategies. A pause/proceed with warning strategy is, in effect, a timeout an 

opportunity to rest before continuing a growth or retrenchment strategy. It is a very deliberate attempt to 





make only incremental improvements until a particular environmental situation changes. It is typically 

conceived as a temporary strategy to be used until the environment becomes a more hospitable or to 

enable a company to consolidate its resources after prolonged rapid growth. 

Recall that the decision as to whether growth should be based on the special competences an SBU has 

relative to its competitors or relative to other SBUs in the corporate portfolio. If the company does not 

have any special distinctive competences, an obvious objective should be tried to attain such 

competencies. In this connection, all the strategies discussed above for improving profitability, product 

attractiveness, and so forth are available. A company can be better than its competitors in R&D, 

marketing, production, possession of patent or other rights, ability to influence the government, 

management expertise, and/or work-force qualifications and motivation. In short, anything, which helps a 

company win out over competitors, is a distinctive competence. In addition to trying to build strengths 

and eliminate weaknesses, SBUs can select from among certain strategies, which are especially 

applicable to periods of stabilization. Two of these are efficiency improvement and risk management. 

Page | 33 

3.1. Stability Strategy: Efficiency & Risk Management 

A particularly useful strategic focus during periods of stable sales is efficiency improvement. Labor costs 

can often be cut through various motivational strategies. Efficiency improvement can also be obtained 

through fixed-asset management of reduction. If sales are not increasing, any improvement in fixed-asset 

efficient can allow the elimination of some of these assets. For example, Cabot Corporation., a major 

producer of corrosion-resistant pipe, located in Kokomo, Indiana, made major improvements in its plant 

in Arcadia, Louisiana, during a recent recession. Machines were rearranged, and the workflow, 

redesigned to shorten and speed up the production process. Some machines and materials-handling 

devices were completely eliminated unit product costs have declined significantly. Now that the 

company has a significant advantage over its competitors, a distinctive competence, it might choose to 

pursue a growth strategy. On the other hand, Cabot may decide to raise prices during periods of 

economic resurgence, thereby reaping current profits rather than a growth in sales. It is not intended here 

to dwell much on the details of proves improvement, but merely to suggest that a period of planned sales 

stability offers a good opportunity for improving efficiency. 

In addition to efforts to improve current and future profitability through more efficient use of people and 

machines and efforts to develop distinctive competencies through product development, quality 

improvement and so forth, the strategists must also consider the riskiness of the company’s situation. If 

stock values are in fact determined in risk-return space, as modern portfolio theory suggests, it is as 

useful to reduce risk, as it is to increase return. During periods of stabilized sales, the strategists have a 

good opportunity to earn high returns, and since investment needs are diminished, to distribute those 

returns to stockholders in the form of dividends or repurchase of company stock. But the strategists can 

also refuse the riskiness of the company by debt reduction, making long-term supply and marketing 

contracts, negotiating favorable labor agreements, and establishing solid customer relationships. 

4. GROWTH STRATEGY: A STRONG MANAGERIAL MOTIVATION 

Expansion strategy, also called as growth strategy signifies something different from stable growth 

strategy or stability strategy. When a firm increases the level of objectives higher than what it has 

achieved in the immediate past in terms of market shares, sales revenue, etc., or strategic decisions 

Centre round increased functional performance in major respects, we have typical cases of growth 

strategy. Another kind of growth strategy is typically found when new products are added to the existing 

line, or dissimilar products are taken up for production and sale, or business activities are expanded 

through acquisition, merger or amalgamation of firms. In a sense, growth strategy differs from stability 

strategy in that the former implies exponential growth while the latter implies an extrapolation of growth 

based on past performance. Growth strategy is associated with strong managerial motivation in its favor. 





Expansion is a rewarding phenomenon in several ways. Larger size means higher executive 

compensation. It satisfies power and recognition needs. To seize market share from competitors or to 

enter challenging new fields is not only exciting and satisfying but also leads to a sense of achievement. 

Besides, growth is often perceived as an index of effectiveness which has greater news value than 

stability. 

4.1. Expansion Strategy: It’s Variants 

Growth or expansion in the volume of a business of a company implying a substantial stepping up of 

sales revenue, market share or net earnings may be achieved by different approaches. The variants of 

growth strategy can be differentiated as intensive growth strategy, diversification strategy. Types of 

diversification strategy, which may be considered as alternatives are horizontal diversification- 

Concentric diversification, Conglomerate diversification & Vertical diversification- Forward integration, 

backward integration. At some point of time in the process of intensive growth, it is no longer possible 

for a firm to expand in the basic product market. It is not able to grow any more through market 

penetration. Then it must consider adding new products or markets to its existing business line. This 

approach towards growth is known as diversification. Diversification strategy is thus defined as a 

strategy in which, the growth objective is, sought to be achieved by adding new products or services to 

the existing product or service line. Internal growth, which consists of increasing the sales revenue, 

profits and market share of the existing product line or services, is generally known as intensive growth 

strategy. It involves concentration of resources in a high growth product or market segment and is a 

widely used growth strategy. If the product is not in the maturity stage of the life cycle, this is a 

particularly attractive strategy. It is often suited to firms with a small market share irrespective of 

whether the product is in the high growth stage or maturity stage of its life cycle. 

Page | 34 

5. RETRENCHMENT STRATEGY: IMPLEMENTING RETRENCHMENT STRATEGIES IN 

CORPORATE WORLD 

Another grand strategy, usually reserved for emergencies is retrenchment. Retrenchment means, 

reduction, curtailment, cut back and few corporate-managements are willing to do that. When a 

retrenchment strategy is followed, the goal is often survival. Actually, retrenchment should be considered 

as viable an option as growth. Prompt excision of losing businesses has been the hallmark of many 

successful corporate level managers. Although growth often an objective per se; retrenchment seldom is. 

So we can say that retrenchment means cutting back reducing sales or production capacity. It is a strategy 

to be followed only after competitors have ‘gained the outer work’ and defeat is imminent. This suggests 

that retrenchment is to be pursued as a strategy only when the company has been outdone by its 

competitors or is threatened by market force. It is true that few companies intentionally cut back on sales. 

Thus, retrenchment is often viewed as a reactive strategy rather than proactive. The focus here is not 

upon retrenchment as an objective, but upon strategies, which tend to be successful in meeting 

organizational goals during periods of retrenchment. It is doubtful that retrenchment per se is often 

adopted as a goal. But, the goals of profitability, risk reduction, enhancement of future earnings 

capability, and so forth, are as relevant during periods of retrenchment as any other time. 

5.1. Retrenchment Strategy: Implication & Profitability 

There are several ways that a company can retrench effectively. First, it is possible to cut back on sales 

by simply increasing the price. This does not mean that the company has given up. Rapid retrenchment 

might often be a good strategy for business segments, which are declining. Then attention can be paid to 

developing replacement products and markets. Retrenchment is often considered a kind of turnaround 

strategy. If sales and/or profits have declined because of market forces or internal weaknesses, the 

organizational strategists may decide upon, one of three approaches first, increase sales with the 

expectation of improving profits at some time in the future, second, increase sales and profits, third, 

increase profits while allowing sales and productive capacity to decline. If the first approach is taken, 





sales might be obtained through aggressive price competition, additional marketing expenditures, and of’ 

forth. This is particularly useful for companies that have high fixed costs. For such companies, when 

sales exceed the breakeven point, profits increase rapidly with additional increases. Expending 

promotional funds or forgoing revenues through price breaks can be viewed as an investment for building 

company sales to a profitable level over time. This can certainly be overdone, though. If sales and profits 

are to be increased together, it is often best to take a dual approach, paying attention to marketing and 

production. Marketing expenditures might be increased and efforts made to spend marketing funds more 

efficiently. At the same time, unless sales increase rapidly, it may be necessary to decrease production 

costs. This can be accomplished through more efficient use of capital and/or labor. This kind of dual 

focus is probably the most common king of turnaround strategy except for extreme cases. 

Page | 35 

An extensive study showed that, for industrial product business units, successful turnarounds were 

related to efficiency improvements and market share increases. Reducing sales and production capacity 

intentionally is usually reserved for extreme cases. In these situations, turnaround may be accomplished 

by lopping off poorly performing segments of the business, disposing of related assets, and enhancing the 

best performing parts of the business. Often a turnaround specialist is employed such purposes. In the 

classic style of turnaround specialists, Dunlop released hundreds of employees, sold assets, established a 

new organizational structure and attempted to increase the profitability of his division. 

5.2. Retrenchment Strategy: Bankruptcy & Liquidation 

The federal bankruptcy law allows companies to seek protection from creditors while attempting to 

reorganize and become profitable again. Prior to 1978, it was assumed that companies would declare 

bankruptcy only if they were insolvent. However, the 1978 bankruptcy code contains no reference to 

insolvency as a prerequisite for filing. In order to obtain court protection against creditors, a company 

need only file’ a bankruptcy petition with one of the U.S. bankruptcy courts. Unless the petition is 

deemed by the bankruptcy judge to be in bad faith, creditors are immediately barred from taking action to 

collect debts, labor agreements and other contracts are voided at the option of the company, and the 

company comes under the control of the U.S. Bankruptcy Court. The court’s control is usually exercised 

through the office of the U.S. Trustee, a specialist in bankruptcy matters, in each bankruptcy district. The 

company has 120 days, a period which can be extended indefinitely by the bankruptcy judged, to prepare 

a plan of reorganization. Typically, the reorganization plan provides for the repayment of some portion of 

the debts, which were outstanding at the time of the filing and discharge of the rest. In the rare 

bankruptcy cases where creditors are eventually paid in full payment is usually made without interest, 

except to certain secured creditors. In the early 1980s the business failure rate in the United States was at 

a post-depression high. 

The most extreme retrenchment strategy is outright liquidation, either under the provisions of the U.S. 

Bankruptcy Code or without filing for bankruptcy. In a sense, the public is liquidating publicly traded 

companies, continuously through the sale of their stock. When we think of liquidation, however, we 

normally mean the sale of the company’s assets. Since few companies liquidate without being insolvent, 

proceeds from such sales normally do not cover all creditor claims. Stockholders, common and preferred, 

usually receive nothing. Liquidation does not have to be the result of bankruptcy. It may logically be 

chosen as a strategy if corporate Strategists believe that he stock market undervalues the company stock. 

If it is the company’s earning power, which is undervalued, seeking to be acquired is a reasonable 

approach. In this way, the whole company is sold as a unit. Sometimes the stockholders receive cash for 

their shares. At other times, they receive a combination of cash and debt or equity securities or just 

securities. When Manville Corporation bought Olin-Kraft in 1978 some Olin-Kraft stockholders received 

cash. Others received one Manville Corporation preferred share in exchange for each Olin Kraft common 

share held. Stockholders who received preferred shares were free to sell them on the open market for 

cash. If it is the company’s assets, which are undervalued and not the unique synergy among those assets 

represented by the company’s earning power, it might be desirable to liquidate, sell off the assets, pay the 





liabilities, and distribute the remainder of the proceeds to the stockholders. This is very rarely done. One 

reason for this is that the amounts invested in fixed assets tend to become an ‘exit barrier’ in the minds of 

the organizational strategists. 

5.3. Retrenchment Decision: Degree and Stability of a Company’s Distinctive Competencies. 

Most people and Americans especially believe that growth is not only desirable, but also essential. Grow 

or die is an accepted axiom. When a company actively pursues growth, as most do, this is called a growth 

strategy. Most organizational strategists view declining sales as a sign of failure. Even when strategists 

admit to following a retrenchment strategy, it is usually only seen as a necessity during an unhappy 

interlude, after which growth will resume. To the extent that company management is the constituency 

being served, sales growth is always desirable as long as the company remains profitable. Larger 

company size usually carries with it both prestige and higher executive salaries. So, growth becomes an 

objective, and profitability a constraint. However, if the objective is to maximize return for stockholders 

or for a corporate parent, this concentration upon growth may not be entirely appropriate. If growth is 

achieved at the expense of future profitability, it may be to the detriment of all concerned. For example, a 

company may choose to cut product costs by reducing quality and then compete in the market place on 

the basis of price. This may increase sales and profits until the change in product quality becomes 

apparent to customers. In the long run, sales may decline and the company’s reputation for quality could 

be permanently hurt. Like decisions about other objectives, those relating to whether and to what extent 

to seek sales growth should be based on sound business reasoning, not on an emotional aversion of 

retrenchment. There are cases where companies have followed the most extreme retrenchment policy, 

liquidation with distribution, of the proceeds to stockholders, with excellent results. If a company’s 

liquidation value is above the market value of its securities, liquidation may be a reasonable alternative. 

Page | 36 

5.4. Retrenchment Strategy and its Challenges 

Downsizing (sometimes called ‘rightsizing’) refers to the planned elimination of positions or jobs. This 

program is often used to implement retrenchment strategies. Because the financial community is likely to 

react favorably to announcements of downsizing from a company in difficulty, such a program may 

provide some short-term benefit such as raising the company’s stock price. If not done properly, 

however, downsizing may result in less, rather than more, productivity. One study of downsizing 

revealed that at 20 out of 30 automobile related U.S. industrial companies, either the wrong jobs were 

eliminated or blanket offers of early retirement prompted managers, even those considered invaluable, to 

leave. After the layoffs, the remaining employees had to do not only their work, but also the work of the 

people who had gone. Because the survivors often didn’t know how to do the departed work, morale and 

productivity plummeted. In addition, cost-conscious executives tend to defer maintenance, skimp on 

training, delay new product introductions, and avoid risky new businesses - all of which leads to lower 

sales and eventually to lower profits. A good retrenchment strategy can thus be implemented well in 

terms of organizing, but poorly in terms of staffing. A situation can develop in which retrenchment feeds 

on it and acts to further weaken instead of strengthening the company. Research indicates that companies 

undertaking cost-cutting programs are four times more likely than others to cut costs again, typically by 

reducing staff. In contrast, successful downsizing firms undertake a strategic reorientation, not just a 

bloodletting of employees. Research shows that when companies use downsizing as part of a larger 

restructuring program to narrow company focus, they enjoy better performance. 

6. STRATEGIES & ORGANIZATIONAL STRUCTURE 

Most business organizations use some type of blend/combination strategy, especially when they are 

serving several different markets. Certain types of strategies lend themselves to combination with, other 

strategies. For example, a divestment strategy in one area of an organization is normally used in 

combination with one or more strategies in other parts of the organization. Combination strategies which 

can be either simultaneous or sequential are the norm. A combination strategy is used when an 





organization simultaneously employs different strategies for different organizational units. A 

combination of strategies is used more often than any single generic strategy with the exception of 

growth strategies. In fact, most multi-business organizations use some type of combination strategy, 

especially when they are serving different markets. Certain generic strategies lend themselves to being 

used in combination with other strategies. For example, harvesting, divesting, and liquidating strategies 

are usually used in combination with one or more strategies for other parts of the organization. Coco-cola 

was pursuing a combination strategy in 1983 when it divested its wine spectrum at the same time that it 

was expanding Columbia Pictures and its soft drink business. 

Page | 37 

Focused Segment Strategies focuses on a particular market segment. A particular buyer group, a 

geographic market segment, may define the segment sought or a certain part of the product line. As 

opposed to low-cost and differentiation strategies, which have industry wide appeal, a focus strategy is 

based on the premise that the firm is able to serve a well-defined but narrow market better than 

competitors who serve a broader market. The basic idea of a focus strategy is to achieve a least-cost 

position or differentiation, or both, within a narrow market. While flexibility in a strategic plan will 

lessen the plan’s benefits by increasing cost, shortening planning and action horizons, and increasing 

internal uncertainty, an overly rigid stance in support of a particular strategy can be devastating to a firm 

faced with unexpected environmental turbulence. 

7. CONCLUSION 

In the light of strategic alliances the three important factors such as stability strategies, expansion 

strategies and retrenchment strategies have been discussed in this lesson. It is much useful for the 

business to take it in a right way. Strategic alliances become more and more significant and become very 

important form of cooperation between companies. This form of cooperation has objectives like 

diversification of risk, increase in resources, development of new and the use of current technologies, 

innovative development and increase of market share, along with maximum exploitation of economies 

of scale and improving competitive position. Strategic ways of thinking and strategic decision-making 

represent necessity for successful functioning of strategic alliances. Considering circumstances existing 

on the market, there is no right and universal behaviour that can be applied to all market participants, but 

the management of the alliance is expected to define successful innovation strategy according to detailed 

analysis of key success factors. 

REFERENCES 

Rigsbee, Ed (2000). Developing Strategic Alliances, First Edition. Library of Congress Cataloging-in 

Publication Data. ISBN 1-56052-550-9. 

Global Business Alliances: Theory and Practice, Refik Culpan - 2002 - 223 pages 

Harvard business review on strategic alliances, Harvard Business School Press - 2002 - 216 pages 

Researching Strategic Alliances: Emerging Perspectives, T. K. Das - 15-Jul-2010 - 267 pages 

The collaboration challenge: how nonprofits and businesses succeed through strategic alliances, James E. 

Austin - 07-Feb-2000 - 203 pages 

Partnerships, Joint Ventures & Strategic Alliances, Volume 1, Stephen I. Glover, Craig M. Wasserman - 

01-Dec-2003 - 1500 pages 

Digital deals: strategies for selecting and structuring partnerships, George T. Geis, George S. Geis - 23- 

May-2001 - 303 pages 

Trust and Antitrust in Asian Business Alliances: Historical Roots and Current Practices, John B. Kidd, 

Frank-Jürgen Richter - 03-Apr-2004 - 418 pages 

Strategic Business Alliances: An Examination of the Core Dimensions, Keith W. Glaister, Rumy Husan, 

Peter J. Buckley - 2004 - 212 pages 





Bowonder, B., Dambal, A., Kumar, S., Shirodkar, A. (2010), Innovation Strategies For Creating 

Competitive Advantage, Research Technology Management, Industrial Research Institute, Inc., 

May-June, pp. 19-32 

2. Carlopio, J. (2010), Strategy by Design: A Process of Strategy Innovation, Palgrave Macmillan, New 

York 

Croslin, D. (2010), Innovate the Future: A Radical New Approach to IT Innovation, Pearson Education, 

Inc., Massachusetts 

Cvetanović, S., i Ribac, S. (2004), Strategijske alijanse i inovaciona sposobnost preduzeća, Ekonomske 

teme, br. 3, Ekonomski fakultet u Nišu, str. 89-97. 

Dodgson, M., Gann, D., and Salter, A. (2008), The Management of Technological Innovation: Strategy 

and Practice, Oxford University Press Inc., New York 

Strategic Alliances for Value Creation, T. K. Das - 31-Dec-2011 - 402 pages 

Strategic Networks , J Carlos Jarillo - 11-Jan-2013 - 178 pages 

Management Dynamics in Strategic Alliances, T. K. Das - 15-Feb-2012 - 339 pages 

Page | 38 





Tunisian Bank Mergers and Acquisitions 

Efficiency: A Joint Analysis of Financial Ratios 

and Non Parametric Approaches 

Houda Ben Said 

University of Economic and Management, Sfax, Tunisia 

Department of Finance 

Page | 39 

ABSTRACT 

This paper provides an analysis of Tunisian bank mergers and acquisitions performance 

by employing a set of financial and accounting ratio analysis and Data Envelopment 

Analysis (DEA) approach. The empirical findings from financial ratio analysis provided 

evidence that the mergers have not resulted in generating profits from assets or in return 

to shareholders post-merger. The findings from the DEA approach suggested that, 

although an improvement in the overall efficiency scores by 30.77%, Tunisian banks 

remained, on average, totally inefficient. Our results indicated also that, as a source of 

improvement, the allocative component (24.76%) was more important than the technical 

component (5.32%). Thus, as a result of these transactions, Tunisian banks became more 

able to combine the inputs and outputs in optimal proportions, taking into account the 

prices, than to avoid the waste in using inputs. 

Key Words: Tunisian Banking Sector, Mergers-Acquisitions, Efficiency, Financial 

Ratios, DEA Approach. 


Over the last few decades, financial sectors worldwide experienced a remarkable consolidation process 

via mergers and acquisitions. Disintermediation, deregulation of banking activities, technological and 

financial innovations, the imperative of enhancing efficiency and value creation seem to be the principal 

forces that have fuelled this process. In theory, bank mergers and acquisitions may lead to changes in 

efficiency. Bank efficiency can be defined in terms of the extent to which a bank can increase its outputs 

without increasing its inputs, or reduce its inputs without reducing its outputs. Then, a bank will be 100% 

efficient if there is no scope for improvement in the ratio in which it converts inputs to outputs. 

Empirical academic studies concerning the impact of bank mergers and acquisitions on efficiency are 

abundant, using a wide range of methodologies (financial and accounting ratios, event studies and 

efficiency frontiers) even though the empirical evidence is generally ambiguous (Berger & Humphrey, 

1992). Worse again, several studies found little or no improvement efficiency following this type of 

transaction; and in practice, over of the half of mergers and acquisitions announced and completed are 

unfortunately a failure. Indeed, the stock market value of the merged entity two years after the operation 

is lower than the sum of both separated partners three months before. 

This study tries to answer a question with inconclusive responses by examining the efficiency effect of 

mergers and acquisitions on the Tunisian banking banks. We will use a set of accounting and financial 

ratios and a non-parametric DEA methodology. Then, the paper is structured as follows: Firstly, we will 

give a brief overview of the Tunisian banking system. Secondly, we will review related studies in the 





literature. Thirdly, we will outline the approaches to the measurement and estimation of efficiency 

change, and we will present and discuss the main results finally. 

1.1 The Tunisian banking sector 

Since its creation, the Tunisian banking sector underwent several mutations transforming it from a closed 

and protected system to an open, developed and dynamic system. This change wouldn’t be accrued 

without the sector engagement in number of reforms having important mutations essentially aiming the 

conformity to the international standards in a context of financial service internationalization impregnated 

more and more by the competition and the increased modernization of the international financial 

establishments. In July 2001, a relative banking law to establishments of credit had been promulgated. 

This law permitted to put in place a more liberal environment for the banking profession exercise and had, 

so, suppressed the legal partitioning between banks of development and banks of deposits. Henceforth, 

every establishment is accepted as universal bank (the bank to all to make) and can specialize according 

to its strategic choices. Repercussions are positive on the profitability and on the banking exploitation. In 

2006, a new project of law amending and completing the law of 1958 relative to the creation and the 

organization of the TCB came to reinforce the banking landscape. All these reforms allowed the Tunisian 

banking sector to experience a phase of restructuration having for finality to offer a panoply of varied 

services to meet the increasing demand of economic operators. In the same way, national authorities 

engaged a strategy of grouping and privatization of the banking system. In fact, this sector has 

experienced three privatizations during years 2000: the Société Générale (SG) acquired 52% of the capital 

of the Union Internationale de Banque (UIB) in 2002, the BNP Paribas possesses 50% of the Union 

Bancaire de Commerce et de l’Industrie (UBCI), and the Banque Tuniso-Kuwaitienne (BTK) has been 

taken at the end of 2007 by the Caisses d’Épargne (CE). However, the public sector controls 45% of the 

sector again with the the Société Tunisienne de Banque (STB) (53% of the capital), the Banque Nationale 

Agricole (BNA) (67%) and the Banque de l’Habitat (BH) (58%). The first banking group of the country 

has been born of the merger-absorption of the STB, the Banque de Développement Économique de Tunis 

(BDET) and the Banque Nationale de Développement Touristique (BNDT). 

Page | 40 

2. LITERATURE REVIEW 

Banking mergers and acquisitions can enhance efficiency through cost reductions, revenues increases, 

exchange of best practices and risk diversification. The increasing pace of this type of transactions has 

given rise to an extensive economic research and today there is an abundance of academic studies using 

several methodologies such as financial and accounting ratios, event studies, and efficiency frontiers. But, 

empirical results still no conclusive. 

Most empirical studies have been conducted in the USA and have shown little evidence of cost savings 

and that scale economies are exhausted at fairly low levels of output (Peristiani, 1997; Akhavein et al. 

1997), especially when both banks were relatively inefficient before the merger (Rhoades, 1998). Such 

economies cease to exist or become negative for very large banks (Hunter & Timmer, 1995). 

Furthermore, Berger and Humphrey (1992), Srinivasan (1992) and Pilloff (1996) indicate that when scale 

economies are present, their measured effect is small. Several studies such as Miller & Noulas (1996) 

argue that X-inefficiency may dominate scale and product mix. Talking size, some studies found that, in a 

substantial portion of M-As, a more efficient, larger financial institution tends to take over a smaller, less 

efficient one (Berger & Humphrey, 1992; Pilloff & Santomero, 1998). 

Avkiran (1999) employed DEA and financial ratios to a small sample of 16 to 19 Australian banks during 

the period of 1986-1995 to study the effects of mergers on efficiency and the benefits to public. He 

adopted the intermediation approach and two DEA models. The author reported that acquiring banks were 

more efficient than target banks. He also found that acquiring banks do not always maintain their pre- 





merger efficiency, but that, during the deregulated period, overall efficiency, employees’ productivity and 

return on assets (ROA) had been improved. 

For Europe, there is evidence of scale economies both for very small banks and medium-sized banks 

(Altunbas et al. 2001). Study by Vander Vennet (1996) indicated there may be potential efficiency gains 

from mergers between small and medium-sized European credit institutions due to scale economies. In 

addition to any effects of operational synergies, the study of Haynes & Thompson (1999) indicates that 

bank mergers-acquisitions may have a potential impact on bank performance via one of the three 

following ways: first, via the selective redeployment of assets; second, via the transfer of asset control to 

better quality managers; and third, via the renegotiation of implicit labor contracts. However, the extent to 

which the aforementioned gains could be exploited via bank mergers-acquisitions might be elusive in 

large, complex institutions. French studies have shown little variation in cost and profit efficiency scores 

in function of bank size (Burkart et al. 1999). 

Page | 41 

In 2002, Focarelli et al. found that Italian deals that consist on the purchase of a majority of the voting 

shares of the target appear to result in significant improvements, mainly due to a decrease in bad loans. 

They also observed that these banks aim to change their business focus towards providing a boarder range 

of financial services and thus increase their non-interest income, rather than to obtain efficiency gains. 

Following the merger, the authors observed an increase in profitability in the long run that is also related 

to a more efficient use of capital. 

In 2002 too, Rezvanian R & Mehdian S employed both the translog cost function and a nonparametric 

approach to examine the production performance and cost structure of a sample of 10 fully licensed 

Singaporean commercial banks during the period 1991 to 1997. They found that the average cost curve is 

U-shaped for these banks and there are economies of scale for banks of small and medium size. However, 

authors found economies of scope in all banks regardless of size. Hence, the joint production of outputs is 

less costly than producing each output separately. The results from the non-parametric analysis suggested 

that the Singapore banking groups could have produced the same amount of outputs by employing only 

57% of the inputs it uses. Their findings suggested then that banks’ cost inefficiency was caused almost 

equally by allocative and technical inefficiencies. 

More recently, Randhawa & Lim (2005) used DEA to investigate the locally incorporated banks in Hong 

Kong and Singapore X-efficiencies during the period 1995 to 1999. They found that during the period the 

seven domestic incorporated Singapore banks have exhibit an average overall efficiency score of 80.4% 

under the intermediation approach and 97.2% under the production approach. They suggested that the 

large Singapore banks have reported higher overall efficiency compared to the small banks under the 

production approach while on the other hand the small banks exhibits higher overall efficiency under the 

intermediation approach. They also suggested that pure technical inefficiency dominates scale 

inefficiency under both approaches during the period of study. The Singaporean bank mergersacquisitions 

efficiency was studied too in 2007 by Sufian, F, Abdulmajid, M & Haron, R using a joint 

estimation of non-parametric, parametric and financial ratios analysis. The findings from financial ratio 

analysis suggested that the merger has not resulted in a higher profitability post-merger. However, the 

merger has resulted in a higher mean overall efficiency. In most cases, the acquiring banks mean overall 

efficiency improved (deteriorates) post-merger resulting from merger with a more (less) efficient bank. 

Mehdian et al. (2007) studied a sample of 131 small and 131 large banks in the USA between 1990 and 

2003. The study used descriptive statistics and non-parametric tests. Statistical evidence shows that large 

banks are generally more efficient than small banks for most efficiency indices. The results suggest that 

the mergers did not seem to enhance the productive efficiency of banks as they do not indicate any 

significant difference. 





Sufian F & Habibullah (2009) studied efficiency of a sample of 22 banks in Malaysia between 1997 and 

2003. The analysis consists of two stages. The first used the Data Envelopment Approach to calculate the 

technical, pure technical and scale efficiency of individual banks. The second used a series of parametric 

and non-parametric tests to examine changes in the efficiency of the Malaysian banking sector during the 

pre and post periods. The result suggests that, although was popular, perceived by the market as 

impractical and controversial, the merger program among Malaysia was driven by economic reasons. 

Kaur & Kaur (2010) studied public and private bank mergers accruing in India between 1991 and 2008. 

The study used non parametric Data Envelopment Analysis. The result suggests that to same extent 

merger program has been successful in the Indian banking industry. 

Page | 42 

After reviewing the findings of the main empirical studies related to our subject in the world, we will 

show whether mergers and acquisitions are able to enhance efficiency for Tunisian banks implied. Then, 

this paper uses the DEA (Data Envelopment Analysis) approach in conjunction with financial ratios. 

3. METHODOLOGY AND CHOICE OF VARIABLES 

3.1 Data 

For the empirical analysis, all Tunisian bank mergers and acquisitions will be incorporated. These 

operations are: the merger achieved in the year 2000 between three public banks: the Banque de 

Développement Économique de Tunis (BDET), the Banque Nationale de Développement Touristique 

(BNDT) and the Société Tunisienne de Banque (STB). The acquisition in November 2002 by the Société 

Générale (SG) of 52% in the capital of the Union Internationale de Banque (UIB) to a transfer price of 

102,7 mTD for 28,2 TD the action. The acquisition in 2003 by the BNP Paribas of 50% in the capital of 

the Union Bancaire de Commerce et de l’Industrie (UBCI). This operation consisted in the regrouping by 

the UBCI of some of its activities and took the shape of a merger absorption by the UBCI of its four 

subsidiaries: the Leasing UBCI, Real estate Union, Med Finance SICAF and UBCI Asset Management. 

The acquisition, in 2005, of a majority in the capital of the Banque du Sud (Attijari bank) by the Banco do 

Santander Group and Ettijari Wafa Bank, One year after having turned into universal bank, the Banque 

Tuniso-Kuwaitienne (BTK) has just lived, in this beginning 2008, a new historic stage to the favor of the 

acquirement of 60% of its capital by the Financial OCÉOR, the pole of commercial bank to the Caisses 

d’Épargne (CE). 

There are 5 mergers and acquisitions operations. The annual balance sheet and income statement used to 

construct the variables for the empirical analysis were taken from published balance sheet informations in 

annual reports of each individual bank. In the spirit of Rhoades (1998), data are required three years 

before and after the mergers. This choice is motivated by the unanimous agreement among the experts 

that about half of any efficiency gains should be apparent after one year whereas all gains should be 

realized within three years after the merger. 

3.2 Financial ratios 

To analyze the impact on bank efficiency following the mergers-acquisitions operations, number of prior 

studies used a set of financial ratios, including expense ratios, profitability ratios, and balance sheet ratios. 

The expense and profitability ratios were used to analyze efficiency and profitability during the pre- and 

post-merger periods. The balance sheet ratios provided information on other changes that may have 

occurred, aside from or as a result of the merger that might have affected efficiency or profitability 

(Rhoades, 1998). 

In our study, we will use three expense ratios such expenses to assets ratio, total expense to total revenue 

ratio and noninterest operating expenses to assets ratio; two profitability ratios such net income to assets 

ratio and net income to net income to equity ratio; and two balance sheet ratios such equity to total assets 





ratios and total loans to total assets ratio. In fact, the analysis of expense to assets ratio (TE/TA) would 

control for shrinkage and would be a better indicator of efficiency changes. It is an indication of a lack of 

cost control, of a reduction of efficiency, of an increase of the resource cost, etc. Total expenses to total 

revenue ratio (TE/TR) is analyzed as an alternative to the expenses to assets ratio. Using revenue as the 

denominator provides an alternative view of the expense ratio, reflecting the ability of the firm to generate 

revenue from its expenditures. The third expense ratio used is the ratio of noninterest operating expenses 

to total assets (NIE/TA) for all of the operating expenses, such as personnel, back-office operations, and 

branches that should be directly affected by the cost savings that are frequently cited as resulting from 

bank mergers, especially horizontal mergers. This ratio measures the importance of staff's loads and other 

non financial loads in relation to the total assets of the bank. Two profitability ratios will be analyzed. 

One is the ratio of net income to assets (ROA), the other is the ratio of net income to equity (ROE). The 

farmer is a good overall indicator of a banking organization's performance illustrating the ability of a firm 

to generate profits from the assets at its disposal. It is the most used ratio to compare the profitability of 

banks since it indicates incomes generated by assets financed by the bank. It is, however, biased upward 

for some firms due to profits generated from off-balance sheet operations. The latter is used as an 

alternative measure of profitability and is designed to reflect the return to owners' investment. The 

balance sheet ratios are used to determine whether major balance sheet items change from before to after 

merger and might be responsible for expenses or other performance changes unrelated to efficiency 

changes. Indeed, the equity to total assets (EQTA) measures the weight of the capital of the bank. It 

determines the distribution of financing sources of the bank between debt and equity. Thus, a high ratio 

EQTA is a weak indebtedness indicator and therefore of a weaker solvency risk. However, the relation 

between risk and profitability implies a negative tie between this ratio and the banking performance. The 

loans on assets ratio (TL/TA) is a ratio of the balance structure. Loans normally constitute the main 

source of incomes of the institution. This ratio judges therefore of the effort of the bank to optimize its 

balance in order to generate sufficient incomes. A bank having a very weak ratio doesn't contribute to the 

achievement of its mission. The ratio also gives an indication on the risk of the institution. Indeed, a high 

ratio means that the majority of assets is risky. 

Page | 43 

All ratios were analyzed for three years preceding the year of the merger and three years following the 

consolidation year. The three-year time period was used because of the almost unanimous agreement 

among the experts and academics that about half of the efficiency gains should be apparent after one year 

and all gains should be realized within three years. 

3.3 DEA approach 

DEA is a linear programming technique initially developed by Charnes et al. (1978) to evaluate the 

efficiency of public sector non-profit organizations and firstly used in banking by Sherman & Gold 

(1985). It is an efficient frontier technique that computes a comparative ratio of weighted outputs to 

weighted inputs for each decision-making unit (DMU) using linear programming. It scales the relative 

efficiency estimate between 0 and 1:1represents an efficient operation relative to others in the sample and 

a DMU with a scoreless than1 is defined as inefficient. A DMU is inefficient if it is possible to raise an 

output without raising any of the inputs and without lowering any other output or if it is possible to lower 

an input without decreasing any of the outputs and without increasing any other input (condition of Pare 

to optimality for efficient production). Under input- orientation, the objective is to estimate how much 

inputs can fall while maintaining existing levels of outputs. Alternatively, under output-orientation, the 

objective is to expand outputs for given levels of inputs. Unlike the parametric stochastic frontier 

approach, DEA does not allow for the presence of a random error term and attributes hence any deviation 

from the efficient frontier as being purely associated with inefficiency. 

3.3.1 Definitions of inputs and outputs 

The efficiency measure follows two different orientations such the input orientation and the output 

orientation. To determine what constitutes inputs and outputs of banks, we should first decide on the 





nature of banking technology. In the banking theory literature, there are two main approaches competing 

with each other in this regard: the production and intermediation approaches (Sealey & Lindley, 1977). 

Under the production approach, a financial institution is defined as a producer of services for account 

holders, that is, they perform transactions on deposit accounts and process documents such as loans. 

Hence, for this approach, the output is well measured by the number of accounts or their related 

transactions. The inputs considered are the number of employees and physical capital. Sherman & Gold 

(1985), Ferrier & Lovell (1990), and Fried et al. (1993) followed this approach. Under the intermediation 

approach, financial intermediaries are institutions that convert and transfer financial assets between units 

with surplus and units with deficit. According this approach, the output is defined as the value of deposits 

and loans. Inputs include labour, fixed assets and equipment and loanable funds. Charnes et al. (1990), 

Battacharayya et al. (1997) and Sathye (2001) adopted intermediation approach. 

Page | 44 

To measure bank efficiency, this study uses the intermediation approach such it has been found to be 

more relevant for financial institutions as it is inclusive of interest expenses which often account for onehalf 

to two-thirds of total costs (Berger & Humphrey, 1997). Therefore, banks can be seen as 

intermediating funds between savers and investors. In this case, funds and interest expenses they generate 

can be seen as a main input variable. The inputs are capital (operational expenses net of personnel 

expenses) and labor (personnel expenses) and purchased funds (X3). The outputs are classified into four 

groups, such real estate loans (Y1), commercial and industrial loans (Y2), consumer loans (Y3) and all 

other loans (Y4). This selection of inputs and outputs follows the study of Aly et al. (1990). 

3.3.2 The DEA model 

In this study, we will use the DEA approach under intermediation approach, in the case of input 

orientation and under variable returns to scale to obtain the efficiency scores. The linear program will 

be specified as follows: 

S/C: 

Where 

: Efficiency score 

: Quantities of outputs of the bank of which we measure efficiency 

: Quantities of outputs of the « j » bank (bank of reference) 

: Quantities of inputs of the bank of which we measure efficiency 

: Quantities of inputs of the “j” bank (bank of reference) 

: Weighted coefficients 

4. FINDINGS AND DISCUSSIONS 

4.1 The Analysis of the financial ratios 

The summary of the empirical findings of the financial ratios is presented in Table 1. It should be noted 

that Tunisian banking groups’ average total expenses on total assets ratios have stagnated. Then, Tunisian 

banks didn’t succeed in diminishing their resource costs following consolidation. Worse again, total 

expenses on total revenue ratio average have decreased slightly suggesting that these banks lost from their 

ability to generate revenue from their expenditures. Tunisian banking groups’ average post-merger cost, 

measured by the non-interest expense/total assets have decreased suggesting that some banks were able to 

reduce their labor costs in the post-merger period. This can be due the fact that consolidation would 





reduce the amount of back office personnel. Concerning the two profitability ratios, they have decreased. 

Then a deterioration in the ability of Tunisian banks to generate profits from assets and in the return to 

shareholders can be deduced. On the balance sheet side, the two ratios have decreased. Then, Tunisian 

banks have decreased their equity post-mergers and didn’t succeed in optimizing their balance in order to 

generate incomes sufficiently. 

Bank 

Table 1. Changes in operational performance of the Tunisian banks participating in a merger 

or acquisition operation 

TE/TA 

(%) 

TE/TR 

(%) 

NIE/TA 

(%) 

Pre-merger 

ROA 

(%) 

ROE 

(%) 

EQTA 

(%) 

TL/TA 

(%) 

TE/TA 

(%) 

TE/TR 

(%) 

NIE/TA 

(%) 

Post-merger 

ROA 

(%) 

ROE 

(%) 

EQTA 

(%) 

Page | 45 

TL/TA 

(%) 

STB 0.048 0.76 0.022 0.058 0.153 0.409 3.483 

0,03827 0,8134 0,02252 0,00906 0,08617 0,10435 0,7768 

BNDT 0.079 0.582 0.080 0.010 0.631 0.160 0.9906 

BDET 0.049 0.655 0.007 0.105 0.087 0.117 0.745 

UIB 0.046 0.643 0.021 0.039 0.064 0.382 0.545 

0,0566 0,871 0,03 5,95E-06 7,92E-05 0,08867 0,803676 

UBCI 0.070 0.667 0.344 0.013 0.098 0.138 0.8624 

0,0609 0,7536 0,039 0,0073 0,054 0,135249 0,8539 

BS 0.054 0.791 0.024 0.0006 -0.066 0.057 0.8284 

0,0578 0,7755 0,02552 -0,023642 -0,5235 0,0444 0,75 

BTK 0.0508 0.667 0.023 0.024 0.055 0.436 0.73 

0,04 0,591 0,021266 0,0187 0,07 0,196 0,8525 

Average 0.057 0.680 0.074 0.035 0.146 0.242 1.292 0.05 0.76 0.027 0.0023 -0.062 0.113 0.807 

Note : 

TE/TA: Total Expenses/Total Assets 

TE/TR: Total Expenses/Total Revenue 

NIE/TA: Non-Interest Expenses/Total Assets 

ROA: Return on Assets 

ROE: Return on Shareholders’ Equity 

EQTA : Equity/Total Assets 

TL/TA: Total Loans/ Total Assets 

Calculations are based on the 3 years averages before and after the transaction, the year of the merger or acquisition 

is considered a transaction year and therefore is skipped. 

Source: Authors own calculations 

4.2. Analysis of Pre- and Post-Merger Efficiency: the DEA model 

The descriptive statistics of the DEA model variables (inputs and outputs) in the pre- and post-merger 

periods are available in tables 2 and 3. Such statistics concerned the variable average and median, 

minimal and maximal values and the standard deviation. Comparison of different variable values 

indicates that all of the outputs (Y1, Y2, Y3, and Y4) have enhanced a lot their averages following 

mergers-acquisitions operations by 97.3%, 209.788%, 73.9% and 45.93%, respectively. This 

improvement is enforced by an improvement of median values for Y1, Y2, and Y4 by 118.63%, 447.47% 

and 148.43% respectively, and although a decrease of median value by 80.14% for Y3. Maximal values 

of the first three outputs have been enhanced while the fourth output maximal value has been diminished 

by 90.64%. All of the outputs have improved their minimal values. 





Table 2. Descriptive statistics of DEA model variables (inputs and outputs) in premerger 

period (in mDT) 

Variables Average Median Minimum Maximum Standard Deviation 

Outputs 

Y1 

Y2 

Y3 

Y4 

Inputs 

X1 

X2 

X3 

69782.00 

86122.14 

809519.3 

146138.7 

985.3333 

130786.9 

981938.8 

25886.00 

26594.00 

681860.0 

54170.00 

850.0000 

67427.00 

850564.0 

10.00000 

476541.0 

199358.0 

28376.00 

139.0000 

10134.00 

93392.00 

683816.0 

2.000000 

1784099. 

537007.0 

2671.000 

672079.0 

2173915. 

151012.6 

125132.9 

449298.7 

146134.7 

880.7267 

177925.0 

694835.3 

Page | 46 

Note: 

Y1: Real estate loans 

Y2: Commercial and industrial funds 

Y3: Consumer loans 

Y4: Other loans 

X1: Capital: operational expenses net of personnel expenses 

X2: Labor: personnel expenses 

X3: Purchased funds 

The comparison also indicates that labor (X1), capital (X2) and purchased funds (X3) have all enhanced 

their average values by 38.4%, 117.32% and 94.22%, respectively. This enhancement is enforced by an 

improvement of their medians by respectively 53.76%, 105.18% and 90.76%. For minimal and maximal 

values, the Tunisian bank mergers-acquisitions impact was totally benefic for all the inputs. This 

enhancement was the most clear for the second input (labor), followed by the third (purchased funds). 

Consolidation transactions were less benefic for capital. 

Table 3- Descriptive statistics of DEA model variables (inputs and outputs) in postmerger 

period (in mDT) 

Variables Average Median Minimum Maximum Standard Deviation 

Outputs 

Y1 

Y2 

Y3 

Y4 

Inputs 

X1 

X2 

X3 

137707.9 

266796.7 

1407776. 

213269.1 

1363.733 

153448.7 

1907193. 

56596.00 

145595.0 

1353934. 

134575.0 

1307.000 

138350.0 

1622606. 

8124.000 

28284.00 

334400.0 

32173.00 

171.0000 

41945.00 

296059.0 

1078941. 

934545.0 

2944102. 

505239.0 

2963.000 

325107.0 

3803953. 

271275.6 

274676.2 

771465.2 

161630.7 

925.2781 

107708.5 

1193438. 

The overall efficiency estimates are presented in Table 4 (pre-merger period) and 5 (post-merger period) 

along with its decomposition into technical and allocative efficiency estimates. From the observation of 

these tables, it is apparent that, during the premerger period, Tunisian banks have exhibit average overall 

efficiency score of 68.9%, suggesting that the Tunisian banking system has performed relatively worse in 





its function, with a mean input waste of 31.1%. The result implies that during this period, the Tunisian 

banking groups could have produced the same amount of outputs with only 68.9% of the amount of 

inputs used and could only have reduced its inputs by 31.1% to produce the same amount of outputs 

produced during the pre-merger period. 

During the post-merger period, it is apparent from Table 5 that the banking groups have exhibited a mean 

overall efficiency of 90.1% suggesting an important improvement of 30.77% in its mean overall 

efficiency level relative to the pre-merger period. Such improvement is more due to an improvement in 

the allocative efficiency (24.76%) than to an improvement in the technical efficiency (5.32%). Hence, the 

Tunisian banks had improved their capacity of combining inputs and outputs in optimal proportions, 

taking into account available prices than avoiding the waste. However, these transactions didn’t succeed 

in making Tunisian banks totally efficient. 

Page | 47 

These results supported those found by the most of American studies (Peristiani, 1997; Rhoades, 1998; 

Berger, 1998), by Burkart et al. (1999) following a study of French bank sector, by Athanasglou & 

Brissimis (2004) following a study of Greece bank sector, by Sufian & AbdulMajid (2007) employing 

DEA approach and some financial ratios and studying Singaporean sector. While financial ratio results 

concluded that mergers were not traduced in a more high profitability and that this can be attributed to 

engaged high costs, mergers were traduced by a high average total efficiency. These results are 

contradictory with those found by Vander Vennet et al. (2002) following a study of 52 European 

horizontal mergers happened between 1994 and 1998 and by Isik & Hassan (2002) estimating Turkish 

cost and profit efficiency. 

Table 4- Pre-merger efficiency scores of Tunisian banks (in percentage) 

Banks First year Second year Third year 

T.E A.E C.E T.E A.E C.E T.E A.E C.E 

STB 

77.7 

80.0 

62.2 

100.0 

47.7 

47.7 

100.0 

100.0 

100.0 

BNDT 

95.0 

61.9 

58.8 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

BDET 

81.4 

35.1 

28.5 

88.6 

35.0 

31.0 

79.4 

55.6 

44.1 

UIB 

100.0 

69.1 

69.1 

90.9 

100.0 

90.9 

93.2 

82.7 

77.1 

UBCI 

100.0 

99.8 

99.8 

81.2 

82.0 

66.6 

94.4 

88.7 

83.8 

BS 

59.2 

73.7 

43.6 

100.0 

75.5 

75.5 

97.7 

94.5 

92.3 

BTKD 

100.0 

100.0 

100.0 

94.4 

37.5 

35.4 

100.0 

41.2 

41.2 

Note: 

TE: Technical Efficiency 

AE: Allocative Efficiency 

CE: Cost Efficiency = TE*AE 

On this post-merger period, the STB which was totally efficient before the consolidation operation lost 

from its technical and allocative efficiency for the first year. For the second year, it improved its overall 

efficiency. This improvement continued for the third year without being totally efficient. The UIB has lost 

from its overall efficiency on the first year. A loss witch continued on the second year. On the third year, 

this bank became technically efficient and improved its allocative efficiency to become totally efficient. 





The UBCI became technically efficient, improving then its efficiency score on the first year post-merger. 

Its inefficiency was attributed solely to the allocative inefficiency. On the second year, it lost from its two 

efficiency components. It regained its technical efficiency on the third year. The BS has improved its 

technical and allocative efficiency to become totally efficient on the whole post-merger period. The 

BTKD which was technically efficient improved its allocative efficiency and became totally efficient on 

the second and the third year post-merger. Then, it improved its capacity of combining inputs and outputs 

in optimal proportions, taking into account available prices. 

Page | 48 

Table 5- Pre-merger efficiency scores of Tunisian banks (in percentage) 

Banks First year Second year Third year 

STB 

UIB 

UBCI 

BS 

BTKD 

T.E A.E C.E T.E A.E C.E T.E A.E C.E 

89.1 91.3 81.4 95.7 93.3 89.3 92.2 90.0 83.0 

91.0 82.9 75.4 87.5 85.2 74.6 100.0 84.6 84.6 

100.0 91.3 91.3 99.6 84.8 84.5 100.0 88.9 88.9 

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 

100.0 98.3 98.3 100.0 100.0 100.0 100.0 100.0 100.0 

Note: 

TE: Technical Efficiency 

AE: Allocative Efficiency 

CE: Cost Efficiency = TE*AE 

5. CONCLUSION 

The paper analyzed the impact of the merger and acquisitions that have been taken place in the Tunisian 

banking sector during the past decade on efficiency of merged banks. A set of financial ratios and a nonparametric 

frontier approach, Data Envelopment Analysis (DEA) have been used. The sample period is 

divided into two sub-periods (pre-merger and post-merger periods) to compare the difference in these 

banks’ mean efficiency levels during the two periods. 

From the analysis of the financial ratios, the findings show that the Tunisian merged banks didn’t succeed 

in diminishing their resource cots following consolidation. Worse again, these banks lost from their 

ability to generate revenue from their expenditures. Some banks were able to reduce their labor costs in 

the post-merger period. Results revealed too a deterioration in the ability of these banks to generate 

profits from assets and in the return to shareholders. 

From the DEA model results, we can deduce that Tunisian banks had improved their overall efficiency by 

30.77% to become 90.1%. Such improvement was more due to an improvement in the allocative 

efficiency (24.79%) than to an improvement in the technical efficiency (5.32%). Hence, Tunisian banks 

improved their capacity of combining inputs and outputs in optimal proportions, taking into account 

available prices than avoiding the waste. However, mergers-acquisitions operations didn’t succeed in 

making Tunisian banks totally efficient. 

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