Engineering and technology management for sustainable business ...

J. Eng. Technol. Manage. 34 (2014) 1–8

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Editorial

Engineering and technology management for sustainable business development: Introductory remarks on the role of technology and regulation

Introduction and the role of technology This special issue of the Journal of Engineering and Technology Management on ‘‘Engineering and Technology Management for Sustainable Business Development’’ complements special issues published in other journals on the nexus of sustainability, ethics, innovation and entrepreneurship (e.g., Boons et al., 2013; George et al., 2012; Hall et al., 2010; Hall and Wagner, 2012; Harris et al., 2009) by providing a dedicated operational and technical perspective on the challenge of innovation for sustainable business development. The Brundland definition of sustainable development can serve as a reasonable starting point for such a venture, which states that ‘‘sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs’’ (World Commission on Environment and Development, 1987, p. 43). Technology has a crucial role in fulfilling the promise of sustainable development whether as technological change or as a choice set at a given point in time. Interestingly, despite this fact, the debate is often centred on economic aspects such as the business case for sustainability. The notion of a business case poses an interesting challenge when defining sustainability as a bundle of public goods (including intra- and inter-generational equity, improvement or preservation of environmental quality and protection of human health). If a firm pursues an activity aimed at sustainable development with the intention to profit economically, stakeholders (Mitchell et al., 1997; Phillips et al., 2003) might voice concerns about the true social benefit of the activity. As a result, the reputation of the firm may be put in doubt, ultimately negatively affecting economic performance. Hence the initial assumption of a business case is contradicted. Conversely, if a firm pursues sustainable development activities initially based on purely altruistic motives, their reputation might improve since at least some customers have a positive willingness to pay for certain reputational characteristics. Again, such a scenario leads to the basic assumption of the firm acting altruistically and without accruing benefits to themselves is thus contradicted. This results in a paradox and the question arises, whether technology can help to resolve such a dilemma.1

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For a more in-depth treatment see e.g. Wagner (2012a).

http://dx.doi.org/10.1016/j.jengtecman.2014.10.003 0923-4748/! 2014 Elsevier B.V. All rights reserved.

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Editorial / Journal of Engineering and Technology Management 34 (2014) 1–8

One possibility is the role of technology as the basis of innovation and entrepreneurship. In many ways, technology is at the heart of the new combinations as proposed by Schumpeter (1934). Hence, one needs to clarify if a business case for sustainability based on technology-based entrepreneurship and innovation reduces the conflicting tensions described in the above paradox. The technology and innovation management literature has developed several concepts that are indispensable for understanding the role of technology for sustainable business development. Amongst these are radical and incremental innovation (Henderson and Clark, 1990) and the distinction between product, process, service, organizational, institutional, system-oriented, and function-oriented innovation (Afuah, 1998). Furthermore, the difference between discrete and complex product architecture types is important as appropriation of profits from innovation differs between these two types with implications especially concerning the choice of business model (Davies and Brady, 2000; Hall and Martin, 2005; Matos and Silvestre, 2013). Innovation for sustainable development requires both radical (technological) innovations that massively improve the environmental or social performance of goods or production processes while not altering consumer benefits, and utility and incremental (product- and process-related) innovations in the existing production and consumption systems due to (partly irreversible) path dependencies causing at least temporal lock-in and inertia. In this context incremental innovation makes an important contribution in the short term, at least to some degree, by improving the ecoefficiency of production processes and environmental performance of goods. Yet, incremental innovation is frequently unable to realize a globally optimal system configuration in a multidimensional production and consumption system space (Frenken et al., 2007; Larson, 2000). Table 1 summarizes different realizable combinations with regard to a business case and types of innovation and relates this to the seminal work by Teece (1986), who argues that profiting from an innovation ultimately depends on the interplay of complementary assets, appropriability regimes and the existence of dominant designs (Utterback, 1994).2 According to the stylized facts of innovation economics it is well established that different types of firms pursue different types of innovation. More specifically, large firms prefer incremental innovations while young/small firms’ gravitate to radical innovation. Similarly, product innovation has a more prominent role before a dominant design is established and process innovation thereafter. The stated position of innovation economics changes in the case of innovation for sustainable development and also the effect of complementary assets needs to be accounted for as can be seen in Table 1. For example, in the automotive industry, after the dominant design incumbents perform better with regard to innovation, whereas entrants are more successful before the establishment of a dominant design. More specifically, entrants pursue radical product innovation while incumbents prioritize incremental product innovation before the dominant design emerges in the automotive industry, whereas after the dominant design emergence, entrants shift to a mix of radical and incremental process innovation and incumbents to mainly incremental process innovation.

The role of regulation and its interaction with technology Next to technology, regulation is another important element to be discussed in the context of engineering and technology management, since it always exists as a framework for action. For example, the EU recently announced a tightening of regulations on eco-labelling and eco-design. 3 Regulation is developed to address the average firm, however the effects on any one firm may differ substantially for any given level of stringency. For example, stringent regulations may place an unfair burden on SMEs (or potentially drive them out of the market), whereas for large international firms, they may quickly go beyond the highest level of requirements for a label and the costs of meeting the regulation requirements may not have a material impact. Firm demographics may thus play an 2 Note that, in the case of a weak appropriability regime and the need for complementary assets, entrant innovation is hardly possible because incumbents know they can eventually block further diffusion and entrants anticipate that incumbents will deny them access to complementary assets (except for the case when the entrant already has or acquires access to complementary assets). 3 See www.amiando.com/PolicyProductsConference2014.html?page=1052672.

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important role – i.e., the net benefit of regulation may be positive, but there are winners and losers. Technology has a key impact on how this distribution of costs and benefits evolves over time and what strategies SMEs have to mitigate their weaknesses for example by cooperating in networks. More specifically, it appears this unequal distribution of regulation implications effect is different from a linear regulation-innovation-competitiveness notion,4 as is visualized in Fig. 1, that at least for the regulation–innovation stage suggests a strongly nonlinear link with interaction effects. The potential positive effects of environmental regulation on firm competitiveness through so called innovation offsets were first considered by Porter and van der Linde (1995a, b) which led to the induced innovation hypothesis positing private (and social) benefits of firms from stringent environmental or social regulation. Porter (1991, p. 96) suggests ‘‘the conflict between environmental protection and economic competitiveness is a false dichotomy’’ and that ‘‘properly constructed regulatory standards, which aim at outcomes . . . will encourage companies to re-engineer their technology’’ and that ‘‘strict product regulations can... prod companies into innovating to produce . . . more resource-efficient products’’. Subsequent theorizing and formal modelling has shown there are factors related to capital structure (i.e., timing regulation with the investment cycle) that make the trade-offs implied by critics of the induced innovation hypothesis less stringent and thus the hypothesis more likely to hold, however these factors may also have reversed effects when learning effects are taken into account. This demonstrates the complexity involved with environmental regulations and hence the need for differentiated modelling. Furthermore, asymmetric reward structures for managers can provide incentives for them not to invest into R&D despite tightening environmental regulation whilst a favourable demand side can make the hypothesis more likely, as can firm-internal organizational features or organizational inertia.5 Case studies are suitable to provide empirical evidence of innovation offsets and to test theoretical propositions, while their detractors suggest large-scale survey data assures higher representativeness, thus a dual approach to research design seems most promising. The evidence shows that innovation offsets by means of stringent (but efficient) environmental regulation (Porter and van der Linde, 1995a) in principle are feasible and are likely most prevalent as concerns product innovation (where ecodesign is a key mechanism to bring them about). Yet the magnitude of the effect is variable and for dedicated eco-industries environmental (and social) regulation has stronger positive effects in terms of export of environmental technologies – that is, competitiveness is more strongly improved in the environmental technology sector than for manufacturing firms overall. Wagner (2011a) finds a Ushaped relationship of firm size and eco-patenting that provides evidence of the existence of dedicated eco-technology firms in Germany which account for a sizable amount of eco-patents (frequently triggered by prior EU regulation). The induced innovation hypothesis does not say that environmental or social regulation always drives sustainability innovation nor that through innovation regulation always increases competitiveness. Instead, both, conventional innovation and innovation for sustainable development are sometimes triggered by regulation, especially if environmental or social aspects are considered as conventional goals or additional constraints of the normal innovation processes. Therefore the link of regulation and innovation is not linear, but more complex with market pull, technology push, organizational routines or lock-in, and regulation mattering simultaneously and interacting with one another as outlined above in Fig. 1.6 This link also relates to the importance of thinking in terms of the overall regulatory systems, where ‘‘conventional’’ regulation can block the effects of environmental regulation (as was the case with architects and regulation for energy efficient buildings in Canada) and challenges implementation. Furthermore, from a legal perspective, such an analysis required in order to link into current higher-level policy development work. For example, instrument-oriented approaches, which capture much of the current debate about market coordination, vary in their firm-level effects between taxes/ subsidies, tradable permit systems and voluntary agreements or management systems. Areas where 4 5 6

See Wagner (2011b) for an overview. See Wagner (2006) for an early systematic review of the literature and comprehensive set of references on these aspects. See also Wagner (2012a) for a more detailed empirical analysis of this.

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Table 1 Relationship between business cases and innovation based on Teece (1986). Type of innovation/phase

Appropriability regime strong and no complementary assets needed

Appropriability regime strong and complementary assets needed

Appropriability regime weak and no complementary assets needed

Product innovation before dominant design

Eco-entrepreneur or social entrepreneur (e.g. Tesla, Ballard Power, Better Place/Shai Agassi)

Incumbent managing or administrating sustainability or ecoentrepreneur

Process innovation after dominant design

Incumbent can take over innovation lead (e.g. Honda, GM Volt, Smart)

Early diffusion

Regulation to push/ accelerate diffusion (e.g. feed-in tariffs for renewable energies) has strongest impact because entrant does not depend on negotiations to access complementary assets Entrant or incumbent can take over market, but may not be achieved if process innovation does not reduce cost to commodity level (vertical product differentiation or market segmentation in ‘light’ green mass and ‘dark’ green niche suppliers is a likely result)

Incumbent takes over innovation lead (e.g. photovoltaics, wind energy) Regulation to push/ accelerate diffusion but problematic because mainly incumbents would benefit (may acquire ecoentrepreneur)

Social entrepreneur or lead user (e.g. car-sharing, especially relevant in case of service innovation), less strong incentives for ecoentrepreneur Incumbents can take over, but more difficult than with complementary asset need Regulation to push/ accelerate diffusion but problematic because entrants and incumbents both can imitate more easily

Innovation takes over the complete market (if process innovation brings down cost to commodity level without compromising sustainability benefits) and incumbent takes over full market

Diffusion less often pushed/accelerated by regulation because imitation is very easy (high potential that takes over the complete market but also prices quickly move to commodity level and profits are low)

Advanced diffusion

Fig. 1. Nonlinear links in the regulation–innovation-competitiveness relationship, extended from Wagner (2012b).

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this is particularly relevant are in Germany that is mainly driven by EU regulation, such as the electronic waste directive (WEEE), the EU Emissions Trading System (ETS), the EU commitment to the Kyoto protocol (requiring substantial CO2 emission reductions), and the recent REACH regulation in the EU. The challenge here is the complexity of regulatory design. For example, in Germany the EU ETS has been said to be implemented as a traditional command-and-control regulation that in turn limits the economic efficiency of the regulations. The data on which results are based was derived from the analysis of manufacturing firms in a multi-method design. Exploratory case studies were carried out to gain a better understanding of qualitative links using also secondary data sources such as websites, corporate reports or newspaper articles. German survey data was analyzed to corroborate the links at a more representative level.7 As a novelty, innovation offsets relating to product and process offsets can be separated in the data. This is important since innovation offsets through products such as from higher quality, safer products or higher scrap value versus process offsets from for example material savings or lower handling costs may well be of differing importance. From the case analysis, as concerns the role of regulation, it emerged that guidelines for energy efficiency in the construction sector may lead to innovation in the construction sector, such as novel building materials or techniques such as the introduction of exterior insulation and finish systems, but may also be a recursive process where proactive firms try to push regulation in their own interest. As concerns the types of innovation offsets that regulation can bring about, the following main benefits were identified: ! First mover advantages in new markets and export opportunities. ! Certainty of future demand and a reliable investment climate. ! Weak signals for long-term R&D strategies where small R&D efforts can be leveraged into high R&D returns in novel areas. ! Positive spillover effects from regulations in case of worldwide firm activities. ! Increased awareness and heightened ability for firms to push for standardization with demanding standard levels. As can be seen, several of the benefits strongly relate to better utilization of technologies or identification of relevant new technologies. Hence, a clear link between regulation and technology can be identified, where both represent a co-evolutionary system. Overview of the special issue and future research needs In recent years, engineering and technology management increasingly engages with issues of sustainable development (Bocken et al., 2014; Ittipanuvat et al., 2014). Our special issue is an attempt to synthesize these efforts in a more systematic manner by collecting relevant and well-developed papers that can provide a comprehensive overview on the state of the art. As a result, from a total of 33 submissions we selected five contributions to be included in the special issue, which are briefly introduced in the following paragraphs. Johnson and McCarthy (2014) in their paper ‘‘Product Recovery Decisions within the Context of Extended Producer Responsibility’’, present a model for determining the Optimal Recovery Plan (ORP) for a given product, which is based on the analysis of the economics of re-manufacturing versus demanufacturing consumer products in the context of Extended Producer Responsibility (EPR) legislation. They provide an illustration of the model and discuss its implications. Specifically, they show that product re-use and re-manufacturing can lead to sustainable business development opportunities that are more economical than achieving the minimum recovery rates of materials recycling as stipulated by EPR legislation. Fargnoli, Minicis and Tronci’s (2014) paper ‘‘Design Management for Sustainability: An Integrated Approach for the Development of Sustainable Products’’ suggest a specific procedure of design for sustainability, named Design Management for Sustainability (DMS) and test it through application to 7

See also Wagner (2011b) for more details on the survey content.

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the re-design of an engine-driven grass trimmer. Based on this application they show their proposed framework provides an effective design management tool, allowing one to perform design activities in compliance with the goal of sustainability. The paper from Brook and Paganelli (2014), ‘‘Integrating Sustainability into Innovation Project Portfolio Management: A Strategic Perspective’’, present a five-step framework for integrating sustainability into innovation project portfolio management process in the field of product development. Their framework can be applied for the management of a portfolio of three project categories that involve breakthrough projects, platform projects and derivative projects. This paper is based on the assessment of various methods of project evaluation and selection, and a case study in the automotive industry and enables the integration of the three dimensions of sustainability into the innovation project portfolio management process within firms. Another benefit of the framework is that it enhances the ability of firms to achieve an effective balance of investment between the three dimensions of sustainability. Ngai et al.’s (2014) paper, ‘‘Design and Development of a Corporate Sustainability Index Platform for Corporate Sustainability Performance Analysis’’ describe design and development of a corporate sustainability index platform for analysing corporate sustainability performance. In this paper, platform design is guided by management organizational theories corporate sustainability performance and prototype system developed and evaluated to demonstrate feasibility of the design and usability of the corporate sustainability index platform functions. Finally, Dong et al. (2014) in their paper ‘‘Effects of Eco-Innovation Typology on Performance: Empirical Evidence from Chinese Enterprises’’ address if categorizing the type of eco-innovation (in terms of end-of-pipe technologies, process-integrated eco-innovations, product eco-innovations or organizational eco-innovations) can help to clarify if there is an association between environmental performance and competitiveness. Analyzing 245 Chinese firms they found the type of eco-innovation pursued by a firm determines both environmental performance and competitiveness. They also show the level of environmental regulation in parallel influences the environmental performance and competitiveness of firms whereas implementation of environmental regulation has an effect only on the environmental performance of a firm. Finally, they show that firm size has a differential effect on environmental performance and competitiveness and in doing so can comprehensively show that contingency factors affect the link of environmental performance and competitiveness and thus need to be comprehensively accounted for. The articles of this special issue in their totality provide a good overview of the current status of research in the field, and they also highlight some areas of research that can inform future work on how engineering and technology management relates and contributes to sustainable business development. More specifically, they suggest there is a need to adress new challenges from stakeholder involvement in innovation projects (Hall and Martin, 2005; Hall et al., 2014) as well as the inclusion of quantitative data into environmental new product design decision-making and to identify novel tools based on big data and social networks (i.e., Web 2.0 and beyond approaches) to make addressing these challenges more efficient and effective. Furthermore, the articles point to the need to account for firms simultaneously using more than one eco-innovation type, e.g. in terms of frequencies and complementarities such as those of product stewardship and pollution prevention. They also suggest linking the role of engineering and technology management for sustainable development to the concept of sectorial systems of innovation from the evolutionary economics literature. On the operative side, the articles highlight the need for simultaneous, multiple-system development research for engineering tools and prototypes (i.e., a rapid prototyping approach aimed at quickly gauging the global sustainability potential of emerging technological solutions and related adaptation needs). This on the one hand relates to identifying general conditions for design frameworks and system architectures that are suited for platform design and system innovation on a worldwide scale. For example, this could concern the development of frameworks integrating life cycle analysis-based assessments of ecological savings into corporate and public-sector decision making across multiple supply chains and product life-cycles with de-manufacturing and remanufacturing in corporate EPR context and beyond these to allocate resource for maximum sustainability contribution.

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On the other hand, the issue of how engineering tools and technology management supporting sustainable development can be diffused faster and wider, for example by means of education and training, and ‘‘tunnel effects’’ needs to be addressed further. Put differently, how can human inertia or activation thresholds and challenges of the right behaviour in the wrong framework condition be surmounted by making the individual cost from acting more sustainably lower relative to societal benefits? This appears feasible through digital or mobile web-linked tools or open standards and interfaces for early and automatized information propagation, knowledge sharing and integration. Finally, more quantitative and comparable large-scale evidence on strategic management integrating sustainability aspects with innovation activities at different levels (individual project, project portfolio, division or subsidiary, corporation as a whole) across different industries appear desirable. Specifically, as also Bocken et al. (2014) point out, the need for this concerns small and medium-sized firms, as well as broad country coverage. An evidence base strengthened this way would enable more generalizable conclusions and provides a more comprehensive evidence base for policy-making. If these and related questions are addressed, it appears the promise of engineering and technology management for sustainable business development is no more and no less than providing a second best to a holy grail, namely robust heuristics for decision-making towards sustainable development! References Afuah, A., 1998. Innovation Management Strategies, Implementation and Profits. Oxford University Press, Oxford. Bocken, N.M.P., Farracho, M., Bosworth, R., Kemp, R., 2014. The front-end of eco-innovation for eco-innovative small and medium sized companies. J. Eng. Technol. Manage. 31 (January–March), 43–57. Boons, F., Montalvo, C., Quist, J., Wagner, M., 2013. Sustainable innovation, business models and economic performance: an overview. J. Clean. Prod. 45, 1–8. Brook, J.W., Paganelli, F., 2014. Integrating sustainability into innovation project portfolio management: a strategic perspective. J. Eng. Technol. Manage. 34, 46–62. Davies, A., Brady, T., 2000. Organisational capabilities and learning in complex product systems: towards repeatable solutions. Res. Policy 29 (7–8), 931–953. Dong, Y., Wang, X., Jin, J., Qiao, Y., Shi, L., 2014. Effects of eco-innovation typology on performance: empirical evidence from Chinese enterprises. J. Eng. Technol. Manage. 34, 78–98. Fargnoli, M., De Minicis, M., Tronci, M., 2014. Design management for sustainability: an integrated approach for the development of sustainable products. J. Eng. Technol. Manage. 34, 29–45. Frenken, K., Schwoon, M., Alkemade, F., Hekkert, M., 2007. A Complex Systems Methodology to Transition Management. (DRUID Working Paper Series) Copenhagen Business School, Copenhagen. George, G., McGahan, A.M., Prabhu, J., 2012. Innovation for inclusive growth: towards a theoretical framework and a research agenda. J. Manage. Stud. 49, 661–683. Hall, J.K., Bachor, V., Matos, S., 2014. Developing and diffusing new technologies: strategies for legitimization. Calif. Manage. Rev. 56 (3), 98–117. Hall, J.K., Daneke, G., Lenox, M., 2010. Sustainable development and entrepreneurship: past contributions and future directions. J. Bus. Ventur. 25, 439–448. Hall, J.K., Martin, M.J.C., 2005. Disruptive technologies, stakeholders and the innovation value-added chain: a framework for evaluating radical technology development. R&D Manage. 35 (3), 273–284. Hall, J.K., Wagner, M., 2012. The challenges and opportunities of sustainable development for entrepreneurship and small business. J. Small Bus. Entrep. 25 (4), 409–416. Harris, J., Sapienza, H., Bowie, N., 2009. Ethics and entrepreneurship. J. Bus. Ventur. 24 (5), 407–418. Henderson, R., Clark, K., 1990. Architectural innovation: the reconfiguration of existing product technologies and the failure of established firms. Admin. Sci. Q. 35, 9–30. Ittipanuvat, V., Fujita, K., Sakata, I., Kajikawa, Y., 2014. Finding linkage between technology and social issue: A literature based discovery approach. J. Eng. Technol. Manage. 32 (April–June), 160–184. Johnson, M., McCarthy, I., 2014. Product recovery decisions within the context of extended producer responsibility. J. Eng. Technol. Manage. 34, 9–28. Larson, A.L., 2000. Sustainable innovation through an entrepreneurship lens. Bus. Strategy Environ. 9, 304–317. Matos, S., Silvestre, B., 2013. Implementation issues of sustainable innovation: the case of the Brazilian energy sector. J. Clean. Prod. 45, 61–73. Mitchell, R.K., Agle, B.R., Wood, D.J., 1997. Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts. Acad. Manage. Rev. 22 (4), 853–886. Ngai, E.W.T., Chau, D.C.K., Lo, C.W.H., Lei, C.F., 2014. Design and development of a corporate sustainability index platform for corporate sustainability performance analysis. J. Eng. Technol. Manage. 34, 63–77. Phillips, R., Freeman, R., Wicks, A., 2003. What stakeholder theory is not. Bus. Ethics Q. 13 (4), 479–502. Porter, M., 1991. America’s green strategy. Sci. Am. 264 (4), 96. Porter, M., van der Linde, C., 1995a. Toward a new conception of the environment–competitiveness relationship. J. Econ. Perspect. 9 (4), 97–118. Porter, M.E., van der Linde, C., 1995b. Green and competitive: ending the stalemate. Harvard Business Review. 73 (5), 120–134.

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Schumpeter, J.A., 1934. The Theory of Economic Development. Harvard University Press, Cambridge. Teece, D.J., 1986. Profiting from technological innovation: implications for integration, collaboration, licensing and public policy. Res. Policy 15, 285–305. Utterback, J.M., 1994. Mastering the Dynamics of Innovation. Harvard University Press, Cambridge. Wagner, M., 2006. A comparative analysis of theoretical reasoning and empirical studies on the porter hypothesis and the role of innovation. Zeitschrift fu¨r Umweltrecht und Umweltpolitik 3, 349–368. Wagner, M., 2011a. Nachhaltigkeit und Innovation: Empirische Befunde zu Unternehmensgro¨ße und Unternehmenskooperationen. Zeitschrift fu¨r Umweltrecht und Umweltpolitik 4, 495–514. Wagner, M., 2011b. Sustainability-related innovation and competitiveness-enhancing regulation: a qualitative and quantitative analysis in the context of open innovation. Int. J. Innov. Sustain. Dev. 5 (4), 371–388. Wagner, M., 2012a. Entrepreneurship, Innovation and Sustainability. Greenleaf, Sheffield. Wagner, M., 2012b. The role and effectiveness of environmental and social regulations in creating innovation offsets and enhancing firm competitiveness. In: Costantini, V., Mazzanti, M. (Eds.), The Dynamics of Environmental and Economic Systems. Springer, Berlin, pp. 83–98. World Commission on Environment and Development, 1987. Our Common Future. Oxford University Press, Oxford.

Marcus Wagner Vernon Bachor* Eric W.T. Ngai *Corresponding author Available online 10 November 2014