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Nenad Vunjak, University of Novi Sad, Faculty of Economics in Subotica, Serbia

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Jelica Trninić, University of Novi Sad, Faculty of Economics in Subotica, Serbia

National Editorial Board

Esad Ahmetagić, University of Novi Sad, Faculty of Economics in Subotica, Serbia Jelena Birovljev, University of Novi Sad, Faculty of Economics in Subotica, Serbia Jovica Đurković, University of Novi Sad, Faculty of Economics in Subotica, Serbia Nebojša Janićijević, University of Belgrade, Faculty of Economics Belgrade, Serbia Tibor Kiš, University of Novi Sad, Faculty of Economics in Subotica, Serbia Božidar Leković, University of Novi Sad, Faculty of Economics in Subotica, Serbia Vesna Milićević, University of Belgrade, Faculty of Organizational Sciences, Serbia Aleksandar Živković, University of Belgrade, Faculty of Economics, Serbia

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Ilona Bažantova, Charles University in Prague, Faculty of Law, Czech Republic André Boyer, University of Nice Sophia-Antipolis, France Ivan Brezina, University of Economics in Bratislava, Faculty of Economic Informatics, Bratislava, Slovakia Ferenc Farkas, University of Pécs, Faculty of Business and Economy, Hungary Agnes Hofmeister, Corvinus University of Budapest, Faculty of Business Administration, Hungary Pedro Isaias, Open University Lisbon, Portugal Novak Kondić, University of Banja Luka, Faculty of Economics, Banja Luka, Bosnia and Herzegovina Mensura Kudumović, University of Sarajevo, Faculty of Medicine, Bosnia and Herzegovina Vujica Lazović, University of Montenegro, Faculty of Economics, Podgorica, Montenegro Martin Lipičnik, University of Maribor, Faculty of Logistics Celje-Krško, Slovenia Pawel Lula, Cracow University of Economics, Poland Emilija Novak, West University of Timisoara, Timisoara, Romania Elias Pimenidis, University of East London, England Vladimir Polovinko, Omsk State University, Russia Ludovic Ragni, University of Nice Sophia-Antipolis, France Kosta Sotiroski, University „ST Kliment Ohridski“ Bitol, Faculty of Economics Prilep, Macedonia Ioan Talpos, West University of Timisoara, Faculty of Economics, Romania

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Marton Sakal, University of Novi Sad, Faculty of Economics in Subotica, Serbia Vuk Vuković, University of Novi Sad, Faculty of Economics in Subotica, Serbia Lazar Raković, University of Novi Sad, Faculty of Economics in Subotica, Serbia

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Željko Buljovčić Zora Trninić

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Strategic Management International Journal of Strategic Management and Decision Support Systems in Strategic Management ISSN 1821-3448, UDC 005.21 Strategic Management is a quarterly journal addressing issues concerned with all aspects of strategic management. It is devoted to the improvement and further development of the theory and practice of strategic management and it is designed to appeal to both practicing managers and academics. Specially, Journal publishes original refereed material in decision support systems in strategic management.

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All scientific articles submitted for publication in Journal are double-blind reviewed by at least two academics appointed by the Editor's Board: one from the Editorial Board and one independent scientist of the language of origin - English. Reviewers stay anonymous. Authors will timely receive written notification of acceptance, remarks, comments and evaluation of their articles.

Strategic Management International Journal of Strategic Management and Decision Support Systems in Strategic Management www.ef.uns.ac.rs/sm

ISSN 1821-3448 UDC 005.21 2014, Vol. 19, No. 2

Contents

Oleg Roy Modern Trends in the Development of Russian Regions Under the Conditions of International Integration

03-06

Petr Fiala Strategic Project Portfolio Management

07-13

Zlatica Ivaničová, Eva Rublíková Management of Regional Consumption

14-18

Jelica Trninić, Jovica Đurković, Lazar Raković, Nenad Mirkov Open Source ERP as Supply Chain Management Support

19-26

Jelena Birovljev, Biljana Ćetković The Role of Organic Production and Permaculture in Ensuring Economic Efficiency of Agroeconomy of Serbia

27-32

Žarko Popović, Snežana Radukić, Milica Radović Optimization of Economic and Environmental Goals by Multicriteria Analysis Models

33-40

Aleksandar Grubor The Role of the Marketing Aspects of Market Integration in Achieving Competitiveness

41-46

Beba Rakic, Mira Rakic Who Has the Power in Digital Marketing: Customer or Content?

47-55

STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 003-006 UDC 332.146.2(470):339.56

Received: February 15, 2014 Accepted: May 20, 2014

Modern Trends in the Development of Russian Regions Under the Conditions of International Integration Oleg Roy

Omsk State University F.M.Dostojevsky Omsk, Russian Federation

Abstract The article analyzes the development trends of Russian regions taking into account the intensification of foreign trade activities at the regional level, determines the foreign investment behaviour in the Russian regions, and finally, defines problems caused by the weakening of interregional relations and the low fiscal capacity of the regions. Based on a comparison of statistical key figures of the federal districts, this article highlights the existing regional imbalances caused by the delay of most federal districts in relation to the Central Federal District, and also evaluates the implementation of foreign investments in certain selected Russian regions. Keywords Russian Federation, region, foreign trade activity, federal district, foreign investment, interregional relations, economic integration.

Economic integration Economic integration is an objective process of constant merging of economic mechanisms of two or more states, which are usually located in the same region, have approximately the same level of development, and have compatible social, economic and political systems and priorities, and which espouse an integration policy. The goal of integration is to optimize the production and technological structure of the national system of production and distribution of goods based on interstate cooperation, mutually beneficial exchange of goods and technologies between enterprises and realization of joint long-term projects. Due to the integration tendencies in the economy, the participating countries enhance competitiveness of their goods, gain the right to have access to perspective technologies, boost their production, develop new markets, seem more attractive for foreign investors, etc. Russia is quite attractive for international corporations, which eagerly invest their assets in the Russian economy. The current foreign investment in Russia amounts to $264 billion, 38.7% of

which are direct investments and 7.5% are portfolio investments. Other investments include 53.8%. Direct investments into local companies are the most important for the analysis of the level of regional integration. The purchase of controlling interest of a local company, which gives an investor the right to manage the company, falls under the category of direct investments. Since direct investments are made for a long period of time, investors are interested in the development of a company in which they place their assets. Direct investments can be made in a special fund which accumulates funds for purchasing a company’s block of stock. Portfolio investment is an investment in securities which allow investors to gain revenues from the change of stock market rates of companies’ securities during stock trading. Unlike direct investments, portfolio investments do not give investors the right to manage a company since they are made for a short term, and their rate depends on a current situation on the market. The percent of a company’s shares giving the right to control over a company is determined differently. According to the International Mone-

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Modern Trends in the Development of Russian Regions Under the Conditions of International Integration

tary Fund documents, the chart capital has to include no less that 25% of direct investments; in Canada it has to contain no less than 50%, in Australia and New Zealand the direct investment is no less than 50%; in EU countries the direct investment comprises 20-25% of the charter capital and 10% in the USA. According to Federal Law № 160-FZ “On Foreign Investments in the Russian Federation,” the following investments qualify as foreign direct investments: an acquisition by a foreign investor of no less than 10% of shares in the charter capital of a commercial organization established on the territory of the RF; investments into basic capital funds of a foreign legal entity’ branch; leasing of equipment whose customs cost is no less than one million roubles; and reinvestment of profits gained on the territory of the Russian Federation (Экономическая сущность иностранных инвестиций, 2012; Иностранные инвестиции в РФ, 2012).

regional trade: in 2009, the share of all goods imported from other districts was only 1.73% (cf. 24.6% in Central Federal District). The share of imported goods in most federal districts does not exceed 7% within GRP, which testifies about protectionist policy of regional authorities and limited access for businesses from other regions. A half of products manufactured in Russian regions do not cross regional borders and are consumed within regions. This situation changes when it comes to foreign economic relations. Table 1 provides a comparative analysis of the share of inter-regional and international economic trade in GDP of the RF districts which is carried out on the basis of data provided by Гусев (2011). Table 1 A comparative analysis of the share of interregional and international economic trade in GRP of the RF districts

Inter-regional and international economic trade in GRP of the RF The share of foreign direct investment In Russia has decreased in the last 9 years. In 2003, direct investments were 40.4%, whereas in 2011 direct investments dropped to 9.7%. Such decrease can be explained by the fact the increase in other investments, especially short term loans (up to 80 days) , the percentage of which to the total share increased from 18.6% in 2003 to 40% in 2011. (Россия в цифрах, 2012, p. 482). Russia received most investments from Switzerland (91,827million dollars (48.2%)) in 2011 and transferred to Belorussia 9,231,893 million dollars (71.9%). Among the CIS countries, Belorussia allocates the largest investments in the Russian economy (43.3%), while Kazakhstan invests 33.7%. Oil production and refinery industry still remains the attractive sector for foreign investors in Russia. Of course, the shortage of international investments can be compensated by a more active participation of regions in attracting funds of other regions. However, as Russian authors note (Гусев, 2011), Russian regions are involved into foreign trade relations with foreign countries more than in trade relations within the country. Among other federal districts, Central Federal District is engaged in trade with Russian regions more than any other federal districts. It accounts for 41.5% of all exported commodities and 52.3% of all imported commodities, whereas the Far East Federal District is not integrated into the system of interSTRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 003-006

Federal District

Central District Northwestern District Southern District NorthCaucasian District Privolzhsk District Ural District Siberian District The Far East District

Share of Share of goods goods eximported ported from FD from FD regions regions to reto other gions of regions other of FD in FD in GDP of GDP of the the District, region, % % Domestic trade

Share of export from a FD in GDP of the District, %

Share of import from foreign countries in GDP of the FD, %

Foreign trade

3.37

5.96

35.22

26.84

12.29

5.22

29.68

27. 29

6.8

6.17

13.32

11,3

6.31

6.80

4.41

3.37

7.50

3.19

21.02

5.57

0.15

3.54

33.83

5.4

2.66

3.45

23.93

5.46

0.45

2.77

21.97

9.11

Source: Гусев, 2011

Table 1 shows that federal districts are more engaged into international trade, except NorthCaucasian Federal District, rather than in interregional. This can be explained by several reasons.

Oleg Roy


Firstly, low competitiveness of goods manufactured by Russian enterprises and their high production costs make enterprises replace products from foreign sources. Secondly, the current system of budget federalism in Russia has strengthened competitive goals of regions and got regional authorities to see rivals in the neighbouring federal subjects while competing for budget funds and investments. Thirdly, priority of international integration over inter-regional can be explained by ineffective federal policy that has not created adequate conditions for consolidation of regions in order to resolve urgent issues. Foreign economic activity should be a natural reaction of a region to the limitations of inter-regional relations that stimulated regions to enter new markets which are not typical for them. The possibilities of inter-regional cooperation in Russia are still not exhausted. In general, economic well-being of Russia depends on twenty regions which provide about three quarters of the total revenue and ensure even a larger share on the revenue side of the federal budget. These regions take a key place in foreign economic cooperation of Russia. International economic activities, which are accompanied with receiving foreign credits and investments, have a increasingly considerable influence on social and economic situation in regions and trigger their division into successful and depressed regions. In this context, the shortcomings of the Russian law regulating credit and investment sphere determined detachment of Central Federal District from other regions. Certainly such tendency threatens integrity of the country and might lead to the loss of tolerance to changes in the world economy.

Foreign trade activity of Russian regions Along with capital investments, export/import operations are an important criterion of regional integration. With the help of these operations regions develop a system of economic cooperation with foreign companies. Export indicators can be used to determine the share of foreign investment into regions, while import indicators show the dependence of a local market on foreign supplies. The mechanism of international economic activities in the RF regions include various forms of these activities: international trade, cooperation in production, establishment of joint ventures, attraction of international investments, cooperation between frontier regions, and the use of benefits of

free enterprise zones. One of the key indicators of district’s integration into the world economic space is the share of a district in foreign export and import. Table 2 indicates again leadership of the Central District and the Northwestern District in the structure of export/import operations of the federal districts in Russia taking into account their share in GDP of the district. Table 2 The Structure of export and import of goods across federal districts, 2009 (foreign trade)

Share of export from FD to foreign countries Federal District

Central District Northwestern District Southern District North – Caucasian District Privolzhsk District Ural District Siberian District The Far East District

Share of import from foreign contrives to FD In the total In GRP volume of the of District, import % to FD, %

In the total volume export from FD, %

In GRP of the District, %

44.69

35.22

60.47

26.84

11.21

29.68

18.30

27.29

2.94

13.32

4.42

11.30

0.39

4.41

0.53

3.37

11.47

21.02

5.39

5.57

16.49

33.83

4.67

5.40

9.0

23.93

3.64

5.46

4.22

21.97

3.10

9.11

Source: Гусев, 2011

It is noteworthy that the share of export in GRP of the District is larger than the share of import in GRP of the District. Only the Ural Federal District, with its oil producing areas, which is the main Russian exporter, has a higher indicator. Dynamics of the development of enterprises with foreign capital has a positive trend in Russia. Despite crisis-related phenomena in the economy, the number of enterprises with foreign continues to grow. In 2000, their number accounted for 12,563, whereas in 2008 the number was 16,396, and in 2010 it was 19,650. A half of these enterprises were concentrated in Central federal District (9, 577). The fact that the largest share of enterprises’ capital is allocated in Cyprus (4,625) testifies about the speculative character of foreign participation in the development of Russian business. More than one quarter of the total number of enterprises with foreign capital are located in CySTRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 003-006

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Oleg Roy


prus, which makes one wonder about motives of such integration. A significant increase in the number of enterprises registered in Cyprus has occurred during the last three years, from 2009 to 2010. China is a leader of international cooperation, along with offshore zones. Most enterprises with foreign capital were established in the Siberian Federal District (284 out of 1,534) and the Far East Federal District (382 out of 979) in cooperation with China. Despite the fact that the share of China in the foreign turnover of Siberian Federal District was 19.7% in 2011 compared to 26.3% in 2008, China remains the most important partner of Siberian and the Far East Districts. According to the data provide by the Siberian Customs Department, the share of China in the structure of international economic activities of Siberian regions was 7.48 billion USD. Among European countries, the leader in the cooperation with Russian region is Germany, which has more than 6% of the total number of enterprises (1,478 out of 19,650). At the same time, the largest part of enterprises with German capital are located in two subjects: Moscow (530) and St Petersburg, along with the region, (163). Nevertheless, other regions (Kaliningrad (96) and Krasnodar (54)) have begun to set up enterprises with German capital lately. The policy of the federal centre concerning the development of foreign economic activities is reflected in the fact that the passports of earmarked programs on the development of Kaliningrad region and the Far East allow a large volume of foreign capital. Thus, Kaliningrad region is supposed to receive 367,343.51 million roubles only from non-budgetary sources. However, the trade deficit of the region testifies about serious concerns in regard to the pre-set goal. The situation is significantly better in Primorsky Krai. During the last two years, the number of enterprises with foreign capital has increased there from 243 to 316. Sakhalin has also seen an impressive increase in the number of enterprises (from 93 to 159). Kamchatka Krai, Khabarovsk Krai, and Amursk region also show positive dynamics. The total number of enterprises with for Correspondence

Oleg Roy Omsk State University F.M.Dostojevsky Prospect Mira 55a, 644077, Omsk, Russian Federation E-mail: [email protected]

STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 003-006

eign capital registered in the Far East Federal District is 681. Sakhalin region has the largest share of foreign investments (4,582,121 thousand USD out of 6,132,350 thousand USD in the Far East Federal District). The main international partners of the Far East Federal District are the USA and China, which allocated their investments into 240 and 98 enterprises respectively. It is noteworthy that there are not many Cyprus-based offshore companies (27) in the Far East Federal District. For instance, there are 40 enterprises with foreign capital out of 600 registered in Cyprus in Southern Federal District (Рой, 2012) The role of regions in the current global economy is growing significantly. This process reveals positive and negative outcomes of countries’ joining international unions. Regions should be ready to carry out an active and wise policy when promoting domestic products on international markets and attract foreign investors. Russia’s joining the WTO opens new perspectives for the region connected primarily with the attraction of additional funds to the development of the region’s potential. However, Russia’s membership in the WTO might cause risks to the regional economy. In these economic conditions the regions have to develop their own policy oriented towards the realization of their foreign economic potential. SM

References Экономическая сущность иностранных инвестиций (2012) Retrieved Januay 15, 2014 from: http://www.ecollege.ru/xbooks/xbook178/book/index/index.html?go= part-003*page.htm Иностранные инвестиции в РФ. (2012): Retrieved Januay 15, 2014 from E-college: http http://www.investprofit.ru/banki/analitika/835-inostrannye-investicii-vrossijskoj-federacii.html Россия в цифрах (Russia in Figures) (2012), Statistical Handbook. Гусев, А. (2011) Ослабленная экономическая интеграция регионов России – угроза территориальной целостности страны. Общество и экономика, 10, 50-66. Рой, О.М. (2012) Проблемы интеграции российских регионов в экономическое пространство других государств. Управленческие науки, 1(2), 108-112

STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 007-013 UDC 005.8

Received: March 16, 2014 Accepted: May 20, 2014

Strategic Project Portfolio Management Petr Fiala

University of Economics, Prague, Czech Republic

Abstract Project management is the discipline of planning, organizing, securing and managing resources to bring about the successful completion of specific project objectives. Project opportunities come in time and it is necessary to decide which will be accepted for creating a dynamic portfolio of projects and which will be rejected. The use of project portfolio management is increasingly becoming a tool for promoting the strategy of the organization, which is a very important role. Using of standard methods or trying to design and apply sophisticated methods based on quantitative analysis is possible for portfolio management. Selection of project portfolio is a dynamic multi-criteria decision-making problem under risk. The paper presents an approach for dynamic project portfolio management based on the Analytic Network Process (ANP) model. The ANP model consists of four basic clusters (projects, resources, criteria, and time) with their elements and influences. An important factor of the proposed ANP model is time. A hybrid procedure for dynamics of the project portfolio management is proposed. Project management is associated with a significant level of risk in project implementation because each project is unique. The paper proposes the use of decision trees and multi-criteria decision making methods for modelling and solving this problem. Keywords Strategy, projects, project portfolio, resources, criteria, dynamics, ANP, decision tree.

Introduction Project management is the discipline of planning, organizing, securing and managing resources to bring about the successful completion of specific project objectives. In an accelerating economic world, projects become tools for promoting the objectives of the organization. There is a very extensive literature on the management of individual projects and project portfolios. We start from a publication (Larson & Gray, 2011) that describes project management as a managerial process very clearly. In the accelerating world rhythm, projects are the right option for solving problems of lot of organizations. Nothing is permanent, everything is temporary, and that makes pressure on companies to finish new products or services faster, cheaper and definitely not to fail. Risk is a very important factor in project management. Most project organizations exist in a multi-project environment. This environment creates the problems of project interdependency and the need to share resources. Projects are the way to implement the organization's strategy. Strategic alignment of projects is of major importance to

effective use of organization resources. Selection criteria need to ensure each project is prioritized and contributes to strategic goals. Ensuring alignment requires a selection process that is systematic, open, consistent, and balanced. All of the projects selected become part of a project portfolio that balances the total risk for the organization. Management of the project portfolio ensures that only the most valuable projects are approved and managed. Projects are considered as a tool for achieving the strategic goals of organizations. Continuous innovation, renewal and organizational learning are considered vital for survival. Intense global competition is forcing many organizations to look for new methods of management. The key to success in project portfolio management is to select the right projects at the right time (Levine, 2005). The project selection process is considered a major component of project portfolio management. This should be accompanied by periodically repeated inspections of project portfolio, which would identify projects that should be terminated. Effective portfolio management helps to achieve

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Strategic Project Portfolio Management

outperformance, making strategy real through organizational change. Strategic project portfolio management enables present a framework for organization to complete significant strategic projects. Portfolio management is a process. This process must improve over time. Building feedback into every stage of the process is critical for the improvement. There are basically two approaches to selecting a portfolio of projects; one is based on standard methods used in practice, and the other approach is based on searching and applying new sophisticated methods based on quantitative analysis. The paper focuses on the of project portfolio selection problem solved by applying sophisticated models. The aim is to develop a general model, which would be completed for the specific needs of problems. This is not about managing individual projects, but their networks where relationships exist among projects. This paper aims to verify the ability to model and solve the problem of dynamic project portfolio using the Analytic Network Process (ANP) model. Portfolio management is a process. This process must improve over time. Building feedback into every stage of the process is critical for improvement. The organization must decide under risk whether to assign all available resources to present proposals or to reserve a portion of the funds unused for some time and wait for better alternatives that may occur later. We propose to complete our ANP model by a decision tree with multiple criteria and interactive multi-criteria analysis for solving this problem.

1. Project portfolio selection problem The network economy is a term for today’s global relationship among economic subjects characterized by massive connectivity. The central act of the new era is to connect everything to everything in deep web networks at many levels of mutually interdependent relations, where resources and activities are shared, markets are enlarged and costs and risk are reduced. Network systems contain both positive and negative feedbacks. A variety of feedback processes create complex system behaviour (Fiala, 2006). The portfolio management domain encompasses project management oversight at the organization level through the project level. Full insight of all components of the organization is crucial for aligning internal business resources with the requirements of the changing environment. Project portfolios are frequently managed STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 007-013

by a project office that serves as a bridge between senior management and project managers and project teams. Project opportunities come in time and it is necessary to decide which will be accepted for creating a dynamic portfolio of projects and which will be rejected (see Picture 1).

Figure 1 Dynamic flow of projects Source: Author

Project portfolio is the set of all projects that are implemented in the organization at that time. The basic objectives of the project portfolio management include:  optimizing the results of the entire project portfolio and not individual projects,  selecting projects to start,  interrupting or discontinuing projects,  defining priorities for projects,  coordinating internal and external sources,  organization learning from each other project. It is generally expected that the portfolio should be designed in such a way as to maximize the possibility of achieving the strategic goals of the company. This is consistent with the notion that portfolio selection problem is a multi-criteria decision making. The main goal of each project is to increase the value of the organization, so most managers prefer financial criteria for project evaluation. The most commonly used indicators include net present value, internal rate of return, payback period, and the rate of return. In addition to these financial indicators, however, in selecting a portfolio of projects should be taken into account other characteristics, which include for example:  the probability of completing the project on time, within budget and within the proposed quality;  consistency between strategic and tactical plans;  the balance between investment projects and maintenance projects;  efficient use of resources;  relations between projects;  the scope of each project;

Petr Fiala

 time-dependent consumption of resources on projects;  allocation of expenditure and resources for research and development;  allocation of marketing spending and resources.


sources, criteria, and time) that share a set of attributes. At least one element in each of these clusters is connected to an element in another cluster. These connections indicate the flow of influence between the elements (see Figure 2).

Numerous professionals have tried to find sophisticated way to improve techniques for project management in different ways. The paper presents an approach for dynamic project portfolio management based on the ANP model.

2. Analytic network process The Analytic Hierarchy Process (AHP) is the method for setting priorities. A priority scale based on reference is the AHP way to standardize non-unique scales in order to combine multiple performance measures. The Analytic Network Process (ANP) is the method (Saaty, 1996) that makes it possible to deal systematically with all kinds of dependence and feedback in the performance system. The well-known AHP theory is a special case of the Analytic Network Process. The ANP approach seems to be a very appropriate instrument for project portfolio management. Another issue is the appropriate selection of clusters, which would be the basis of the basic model and their fulfilment by system elements. Another specific problem is the creation of subnetworks in the ANP model characterizing the specific important circumstances of the model. The current economic environment is characterized by significant changes. An important problem of the model will be to capture the dynamics that would represent appropriate changes. The ANP method is suitable for the determination of priorities in network systems where there are different types of dependencies between the elements of the system. Time dependent priorities play an increasingly important role in a rapidly changing environment of network systems. Longterm priorities can be based on time dependent comparisons of system elements. Short-term predictions can be based on using compositional data exponential smoothing. A hybrid procedure that combines the advantages of both approaches is proposed. 2.1. Elements of the ANP method

The structure of the ANP model for dynamic project portfolio (DPP) is described by clusters of elements connected by their dependence on one another. A cluster groups elements (projects, re-

Figure 2 Flows of influence between the elements Source: Author

The ANP model consists of four basic clusters with their elements and influences: Projects

This cluster consists of potential alternatives of projects which will be selected a dynamic portfolio. There are priorities among projects for inclusion in the portfolio. The cluster has connections to all other clusters. Resources

Resources are necessary for the implementation of projects. Main resources are human resources between which are relations important for creating project teams. The cluster has connections to all other clusters. Criteria

Projects are evaluated according to criteria which include benefits, opportunities, costs, and risks (BOCR). The cluster has connections to all other clusters. Time

Time is measured in discrete units. Elements of other clusters vary in time and theirs values depend on the values in previous time periods. Sub-networks

The basic ANP model is completed by specific sub-networks. The sub-networks are used to model important features of the DPP problem. The most important features in our ANP-based framework for DPP management are captured in sub-networks:


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Petr Fiala


 dynamic flow of projects,  time dependent resources. Dynamic flow of projects

Project opportunities come in time and it is necessary to decide which will be accepted for creating a dynamic portfolio of projects and which will be rejected. The sub-network connects clusters: time and projects. Time dependent resources

A specific sub-network is devoted to model time dependent amounts of resources. The time dependent amount of resources is given by. The subnetwork connects clusters: time, resources and projects. 2.2. Dynamics of the ANP method

An important characteristic of project portfolio management is dynamics. Time dependent priorities in the ANP model can be expressed by forecasting using pairwise comparison functions (Saaty, 2007) or by predictions based on the use of compositional data exponential smoothing (Raharjo & Brombacher, 2009). Time-dependent comparisons

Dynamic extensions of ANP method can work with time-dependent priorities in a networked system. There are two approaches for timedependent pairwise comparisons:  structural, by including scenarios, and  functional by explicitly involving time in the judgment process. There are analytic or numerical solutions for the functional dynamics. The basic idea with the numerical approach is to obtain the time dependent principal eigenvector by simulation (Saaty, 2007). Judgment matrix in dynamic form ( ) ( )… ( ) ( ) ( )… ( ) ( )= . ⋮ ⋮ ⋮ ( ) ( )… ( ) Forecasting using pairwise comparison functions produces a problem with keeping the consistency of paired comparisons. A procedure based on exponential smoothing was designed, which is suitable for short-term predictions (Raharjo & Brombacher, 2009).


Compositional Data Analysis

The compositional data are everywhere where we need to work with data containing only relative information, which is useful for working with weights. The following operations are defined on the simplex space = = ( , , … , ), > 0, = 1,2,…, , =1 =1. Closure operator C(x): For any vector = ( , ,…, ) ∈ ( )=

,∑

∑

,…,∑

.

Perturbation: For any two vectors from simplex space X, Y ∈ ). , ,…, ⊕ = ( Power transformation: For any vector from simplex space X ∈ and ∈ ⊗ = ( , ,…, ) Difference: ⊖

=

⊕ (− ⊗ )

Exponential smoothing with compositional data can be used for predicting weights ), =( , ,…, > 0, = 1,2, … , ,

= 1,

in a short time. Simple exponential smoothing

Vector of observations at time t =( , 1,2, … , , ∑

), ,…, = 1,

> 0, =

elements of simplex space. Vector of predictions at time t ), = ( , ,…, > 0, = 1,2, … , , ∑ = 1, elements of simplex space. The formula for simple exponential smoothing of compositional data: = ⊗ ⊕ (1 − ) ⊗ . Double exponential smoothing

We introduce for trend modelling a vector of trend values , a vector of slopes , a smoothing constant 0 ≤ α ≤ 1, a trend constant 0 ≤ β ≤ 1.

Petr Fiala

Formulas for double exponential smoothing of compositional data: = = =

⊗ ⊕ (1 − ) ⊗ ( ⊕ ⊗( ⊖ ) ⊕ (1 − ) ⊗ ⊕ .

), ,

Hybrid procedure

For the prediction of time-dependent priorities ANP method we propose a hybrid procedure that combines the benefits of long-term forecasting of pairwise comparison functions and short-term weight predictions using exponential smoothing compositional data. This procedure also mutually enriches both procedures obtaining more accurate data. Both procedures were presented in the previous sections and here we limit ourselves to a brief summary of the hybrid procedure steps. Step 1: Formulation of pairwise comparison functions. Step 2: Testing and improving consistency of pairwise comparisons. Step 3: Collection of historical data by ANP priorities over time. Step 4: Use of compositional exponential smoothing. Step 5: Selection of the best coefficient α, β with lowest value of error. Step 6: Forecasting priorities for next time periods. Step 7: Re-formulation of pairwise comparison functions based on short-run model. Go to Step 2.

3. Decisions under risk In each period, the portfolio of projects is reviewed in line with the strategic objectives of the organization. Management may decide to initiate new projects, but also to end some others that are currently being implemented. Even if the organization has available funds, it is sometimes better to decide not to initiate a new project and wait for a better one. However, while the set of projects that are currently ready for implementation is clearly defined, it is not so easy to predict what new projects will appear in the future. The organization must decide under risk whether to assign all available resources to present proposals or to reserve a portion of the funds unused for some time and wait for better alternatives that may occur later. We propose to use a decision tree with multiple criteria and interactive multi-criteria analysis for solving this problem.


3.1. Decision trees

Sequences of partial decisions which follow one another frequently occur in assessing potential projects. They are multi-stage decision processes. The task of the decision maker is to select one of the possible sequences that leads to the best final goal solution. Decision-making takes place in periods t = 1, 2, ... , T. The decision trees are used to solve these problems successfully. Solution of multi-stage decision problems proceed in two phases. The first phase is the construction of a decision tree and the second phase is its evaluation. The graph tree structure is used by the construction of decision trees that appropriately models the branching options. The decisionmaker creates and evaluates its parts in order to find the optimal sequence of decisions. Two types of nodes are considered, decision and chance nodes. The decision nodes are represented by squares, and chance nodes are represented by circles. The edges of the tree represent branching of decision and chance possibilities. We start with the decision node from which they emanate lines that represent the possible decisions ai. The ends of these edges are chance nodes on which they place edges representing sj possible situations that may occur with conditional probabilities pj. These edges can be followed by another decision nodes with possible decisions, as well as chance nodes with possible situations, etc. Large decision trees may arise by combining these basic elements. End edges, which are not followed by further decision and chance nodes, represent the possible end sequences of partial decisions that are evaluated. Evaluation of the decision trees proceeds in the opposite direction from the end edges back to the starting node of the decision. The decisionmaker selects the decision that cannot affect the occurrence of situations and must take into account all situations with their conditional probabilities of occurrence. The decision that delivers a better evaluation is always chosen from possible decisions. The principle of maximizing the expected value is used in the selection. The optimal sequence of decisions is obtained in this manner. 3.2. Multi-criteria analysis

Multi-criteria decision trees (Haimes & Tulsiani, 1990) are used to select the most suitable strategy for a dynamic project portfolio management use. We use standard methods of multi-criteria decision-making for their analysis. We will seek a final compromise strategy for dynamic project


11

12

Petr Fiala


portfolio selection. This strategy should be called effective. Effective multi-criteria strategy is one to which no other alternative strategy exists that would be better at least under one criterion, and not worse under other criteria. Multi-criteria analysis is at two levels: 1. identification of all effective strategies for dynamic portfolio selection and 2. interactive procedure for determining the final compromise strategy for dynamic portfolio selection. The following simple procedure can be applied for the identification of effective strategies: 1. Starting from the last period t = T, identify sub-effective strategy for all decision nodes of the period T. 2. Go to the previous period t = t - 1. 3. Identify strategies that meet the conditions of effectiveness for each decision node of the period t. 4. If t > 1, go to step 2, otherwise the procedure stops. The number of effective strategies can be large. It is possible to use a simple interactive process between the decision maker and solver for the selection of the final compromise strategy from the set of all effective strategies. In each iteration q, a set of strategies S(q) is analyzed and the ideal alternative H(q) (vector of best values according to each criterion) and the anti-ideal alternative D(q) (vector of worst values according to each criterion) are determined. The decision maker compares between such values may vary criteria values. The decision maker is asked about the aspiration levels of criteria A(q), which he would accept as a compromise strategy. If the decision-maker is satisfied with the proposed strategy, the process stops. Interactive process to determine the final compromise strategy has the following steps: 1. Iteration q = 1, the set of all analyzed strategies S(1) is equal to the set of all effective strategies. 2. Determine the ideal alternative H(q) and the anti-ideal alternative D(q). 3. The decision maker is asked to accept antiideal values. If yes, go to Step 8. 4. The decision maker is asked to propose the aspiration levels A(q). If not, go to step 6. 5. The decision maker enters aspiration levels A(q) and determines the corresponding set


of acceptable strategies S(q+1). If S(q+1) = ∅, go to step 4, otherwise to step 7. 6. The decision maker is asked which antiideal value is unacceptable for him. A new set of strategies is defined S (q+1) which exceed the unacceptable anti-ideal value. 7. Set q = q + 1, go to step 2. 8. The decision maker is asked which criterion should reach the ideal value. The strategy that maximizes this criterion is the resulting compromise one.

Conclusions The paper presents a proposed methodology for dynamic project portfolio management. The basic ANP model with clusters (projects, resources, criteria and time) was created. The proposed ANP model captures the relationships between the clusters and their elements. An important factor of the ANP model is time. The paper proposes a hybrid procedure for time-dependent priority setting. The methodology is verified on the projects of an engineering company. The experimental results will affect the specification, completing and extending the model. Decision making in the selection of project portfolio decisions is at risk. For most companies it is a continuous process of portfolio selection. various criteria are usually taken into account when selecting a portfolio of projects. As a result, this problem can be formulated as a dynamic multi-criteria decision making under risk. The procedure is an interactive method based on multi-criteria decision trees. The procedure is in two phases. effective strategies are selected in the first stage. In the second stage, preferred strategy is selected using interactive multi-criteria method. The procedure is flexible and can be modified and generalized. The risk attitude of the decision maker can be modified e.g. by using stochastic dominance rule. To select the preferred strategy is to use the additional multi-criteria method. Acknowledgement The research project was supported by the grant No. 13-07350S of the Grant Agency of the Czech Republic and by Grant No. IGA F4/19/2013, Faculty of Informatics and Statistics, University of Economics, Prague. SM

Petr Fiala

References Fiala, P. (2006). An ANP/DNP analysis of economic elements in today’s world network economy. Journal of Systems Science and Systems Engineering, 15 (2), 131-140. Haimes, Y., Li, D., Tulsiani, V. (1990). Multiobjective decision tree method. Risk Analysis, 10 (1), 111-129. Larson E. W., Gray C. F. (2011). Project Management: The Managerial Process. 2nd edition, New York: McGrawHill/Irwin. Levine, H. A. (2005). Project Portfolio Management, San Francisco: Jossey-Bas.


Raharjo, H.; Xie, M.; Brombacher, A. C. (2009). On modelling dynamic priorities in the analytic hierarchy process using compositional data analysis. European Journal of Operational Research, 194 (3), 834-846. Saaty, T. L. (1996). Decision Making with Dependence and Feedback: The Analytic Network Process. Pittsburgh: RWS Publications. Saaty, T. L. (2007). Time dependent decision making; dynamic priorities in the AHP/ANP: Generalizing from points to functions and from real to complex variables. Mathematical and Computer Modelling, 46(7-8), 860891.

 Correspondence

Petr Fiala University of Economics, Prague 3, Prague, Czech Republic E-mail: [email protected]


13

STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 014-018 Received: January 13, 2014 Accepted: April 18, 2014

UDC 336.226.11(437.6) 330.567.2(437.6)

Management of Regional Consumption Zlatica Ivaničová

University of Economics Bratislava, Faculty of Economic Informatics, Slovakia

Eva Rublíková

University of Economics Bratislava, Faculty of Economic Informatics, Slovakia Abstract Regions in the Slovak Republic are economically imbalanced, mainly in terms of employment and unemployment rates, in local budgets, in disposable incomes or consumption. The aim of this paper is to demonstrate a possible way to decrease disparity in consumption between regions using different individual income tax rates instead of the uniform, true flat tax rate of 19 percent only. To solve this problem, we have used the idea of van Hagen model (1998) to create an optimal tax rate for each region, by optimizing the variance of consumption. Having compared our results, we found out that varying tax rates for individual regions could be one of the internal sources for solving economic activity in these regions. Such an approach would provide possibility to decrease the existing regional disparities and to achieve balanced living standards in the different regions of Slovakia. Keywords Individual income tax rate, consumption equalisation, fiscal policy, internal risk-sharing.

Introduction Development of world economy has been unstable during the past years. It was caused partly by the depression on the one hand and by imbalanced development of regions or individual states of the world on the other. The reasons of high deficits of state budgets and permanent debts of individual states come from disharmony of their living standards with the efficiency of their economies. The gap between rich and poor countries, between regions and standards of living of their inhabitants is widening constantly. One of the basic tools used to enhance the growth of the population’s living standard of is to increase the manufacturing potential. The manufacturing potential correlates with the growth of consumption and the growth of disposable incomes. Moreover, disposable incomes are affected by the tax system in each country. Many countries have targeted their domestic economic policy to solve the problem of imbalanced development of their regions by means of direct state subsidies and by the established practice of differences in levels of taxation of the population in the regions. This is mentioned in

articles Ingram (1959), Bayoumi and Masson (1998), von Hagen (1998), Mélitz and Zumer (1998) and Obstfeld and Peri (1998). The USA is a typical example of individual states whose tax rates vary (for instance, personal income tax, sales tax, estate duty, etc.). Different measures of taxation of natural persons are also found in the cantons of Switzerland and in other economies of the world, too. The idea of enhancing the taxation methods of citizens is supported by various works published in Slovakia, such as Horváthová (2009), Ivaničová (2011), Neupauerová (2012), Sedmihradská (2012) and Radvanský (2013). Our article presents a simple way of calculating an optimal rate of income tax for economically active population of eight regions in Slovakia based on the work of von Hagen (1998). The aim of calculating such optimal tax rate is to create balanced incomes and consumption of the population in the region. For that reason we have only calculated the optimal income tax from dependent activity (direct tax is 19 %, which is currently the same for all regions). Other types of taxes are not analysed because of lack of available information from the regions.

Zlatica Ivaničová et al.

When we evaluate the development of Slovak Republic after its entry into the European Union, we could say that during the years 2005-2009 there was a strong revival of the economy judging, for example, by the increase in wages (app 8,3% per annum) or by the growth of consumption (app. 9,6 % per annum). These factors activated the expansion of production and the growth of the rate of employment. However, following the crises during the years 2010-2012 there was a strong deceleration of the wage increase (app. only 2,67 % per annum) and for the consumption (app. only 2,33 % per annum). These facts caused a fall in demand, rising unemployment rate and slowing down the expansion of production (growth of GDP was app. 4.3 % per year). Since the growth of GDP depends on the growth of consumption, the positive balance of economy in our country is demonstrated only by the export of automobile production of Volkswagen, Peugeot and KIA companies. We assume that there is a possibility to increase consumption by means of management of assessed taxes in individual regions. To prove that, we will perform the analysis of Slovak econ-

5 4,5

SR BA

4

TT TN NR

3,5

ZA BB

3

PR KE

2,5

20 08

20 06

20 07

20 05

20 03

20 04

20 02

20 00

2

20 01

Year 2004 2009 Rise/Fall** 2012* Rise/Fall*** GDP (mil. 45161 62794 39 % 71096 13 % EUR) Average monthly wage 525 744 42 % 805 8% of employees (EUR) Rate of unem18,1 12,1 -6% 14,0 1,9 % ployment (%) Final consumption of 25455 37637 48 % 40307 7% households (mil. EUR) Source: Statistical Office of the Slovak Republic, *preliminary data, **5-year period, *** 3-year period

19 99

Table 1 Chosen macroeconomic indicators

19 97

In order to create a projection about the development of Slovak economy during the years 2004 (accession to European Union in May), 2009 (joining the Economic and Monetary Union in January) and 2012, at this point we shall cite the data about the development of chosen indicators: the Gross Domestic Product (current prices, mil. EUR), average monthly salary of employees (EUR), rate of unemployment defined by LFS (%), and final consumption of households (mil. EUR).

omy during the years 1997-2009 in eight regions of Slovakia, classified by means of NUTS3. The year 2010 is not included because the methodology of data structure and database calculation has been changed. The economic potential of individual regions in the Slovak economy could be sufficiently described by means of labour productivity defined as the ratio of produced average monthly GDP to the average gross monthly earnings in EUR. Figure 1 shows that the labour productivity is the highest in Bratislava region. It is much higher than the labour productivity in the Slovak economy as a whole. The lowest labour productivity is in Presov region.

19 98

1. Development of Slovak economy during the years 2004, 2009 and 2012

Management of Regional Consumption

Figure 1 Ratio of produced average monthly GDP to average monthly wage Source: Authors based on Statistical Office of the Slovak Republic

We can state that the unstable development of economic potential and related disparity of individual regions in Slovakia is coupled with permanent deficiency of financial resources. Inadequate infrastructure of regions used to slow down the flows of foreign capital. There is also insufficient support for small and medium – sized entrepreneurships. On the one hand, inadequate salary administration (wages are very low, the smallest in the European Monetary Union), coupled with inadequate difference between the minimum wage and the social benefit, do not motivate people to seek employment. On other hand, high rate of unemployment causes a lower income to the state budget from taxes. Low earnings, high unemployment and low consumption of the population do not support an increase in economic activity in regions. There are no new job positions generated either, and many small and medium – sized enterprises are liquidated. Therefore, there are some questions on how to manage the decrease of disparity in the production potential of economically weak regions. Is it possible to increase consumption of the regional


15

16



population? What is the way to increase standard of living of regions? We shall try to answer these questions in section 3 of this paper.

2. Regional measure of taxation given by von Hagen Let economy be subdivided into n regions ( i  1,2,.., n ). Let us assume that a representative consumer in each region earns income yit in time

t , which is random variable with expected mean yi 0 and constant variance. For simplicity, the model does not consider savings. Let the consumption of the representative consumer cit in

 i is the coefficient of correlation of average gross income for inhabitants in the region i with average gross income of the total national population,

i 

cov ( yit y t ) ,   (1, 1 > var y it var yt

(3)

On the basis of model (1)-(3), it is possible to ascertain: optimal measure of taxation  i for region i depends on

 – correlation of the region i i

and on wi - ratio calculated as standard deviation

each region be cit  yit . If consumers are risk averse, then the government may enhance the financial situation of the population using the fiscal policy of distributing the risk among regions in such a way that will define various measures of taxation. The government would use three types of tools:

of incomes of the region i (in the numerator) and the standard deviation of regional average incomes (in the denominator). If all shocks accrued in regions are not correlated and equally distributed, then optimal value for equalization of all incomes is

1. Taxation independent of state  i 0 like regional taxation of property, road tax, etc... 2. Taxation dependent on state  i  y i  , which is the same for all regions. 3. Subsidies g i  y i  dependent on state, stated to supported consumption in the region.

In general, (4) is invalid. For regions with high risk, where wi  1 , the optimal value of taxation

If it is assumed, that there exists only taxation and subsidies dependent on state, fiscal policy does not have resources to evenly distribute risk among regions. Optimal distribution of consumption risk in the region is possible to obtain by means of selection of such tax  (personal income tax) which will minimize variance of consumption cit . In the study of von Hagen (1998), the optimal value of taxation for region i is defined as:

i 

wi wi   i  , 1  wi wi  2  i 

where

wi 

var y it  , var y t 


(1)

(2)

cit  yit   yt  y 0  .

increases

i 

with

the

(4)

correlation  i .

For

2 wi , the optimal value of taxation in1  wi2





creases because the relative measure of variability wi has increased. It means that regions with higher risk need higher insurance. It is possible to state that regions with a variety of factors of risk require different measures of taxation. For all reasons provided so far, it was assumed, that there is a possibility to find out a rate of taxation levied by the state, which could be optimal for all regions. To apply the described model (1) - (3) to the Slovak economy, we have modified some assumptions in the following way:  The income of the inhabitants of the given region is determined as wage fund in region i = average gross monthly earnings of employees in region i multiplied by the number of economically active persons (labour force) in region i.  Taxation independent from the state (  i 0 ) is determined by municipalities of each region (different taxation of property, road taxation, taxation of household animals,


etc.). Because this taxation is different for each region and remains in the region, we did not include it into the analysis.  Taxation dependent on state  i  y i  was calculated in two ways: first, we calculated the adjusted average monthly salary (adjusted from transfer to social and health in1 surance companies) which was taxed by the: 1. optimal measure of taxation given by (1)(3), 2. flat rate taxation 19 %.  Subsidies dependent on state g i  y i  , given for supporting consumption in the region, were not included.

3. Results of net income analysis for the regions of Slovakia We would like to present how the consumption volume of private persons could be increased by means of using optimal measure of taxation for net average monthly earnings (gross average monthly earnings adjusted from the payments of social and health insurance) in regions. To conduct this analysis, we used the theoretical ideas from Section 2 of this article. As it was mentioned, the analysis was done on data from the years 1997 and 2009 published in the Regional Statistical Year Book. The annual wage fund for every region and also for the entire state was calculated as gross average monthly salary multiplied by the number of active inhabitants of the given region, but pensioners were excluded. The population’s personal savings were not taken into account, according to the assumptions of the model. The formula (2) and (3) was used to calculate wi and  i respectively, for seven regions of Slovakia i = 1,2,..., 7. The Bratislava region was not included because of very high average monthly salary, higher than average monthly salary in Slovakia. Various measures of taxation  i , i  1,2,...,7 were calculated by formula (1). The results for each region are summarised in Table 2.

1

During analysed period there were several changes in tariff rates to social and health funds. These changes were not taken into the account.


Table 2 Optimal measure of taxation of

wi



i

together with

for each region

TT

TN

NR

ZA

BB

PR

KE

wi

0.115

0.101

0.119

0.110

0.086

0.096

0.117

i

0.130

0.112

0.134

0.123

0.094

0.103

0.132

Source: The authors’ own calculation

Some relations among values of wi and optimal measure of taxation  i are available in Table 2. The smallest optimal taxation (9.4 %) would be implemented in the region of Banska Bystrica. The average rate of unemployment in this region was the highest, amounting to 20.95%, and the average wage-fund the smallest during the analysed period, even though the average monthly salary was 30 EUR higher than the average monthly salary in the region Presov. Region Presov had the lowest average monthly salary during the analysed period. Table 3 shows the results of regional average net monthly earnings calculated in two ways: 1) with optimal taxation  i and 2) with taxation of 19 % together with their growth in percentage. Table 3 Growth of net monthly disposable earnings (in %) in 2009 Region

TT

TN

NR

ZA

BB

PR

KE

Average net monthly earnings after optimal

596.43

566.27

563.05

559.06

562.41

543.28

620.81

545.43

509.75

504.29

514.09

490.86

472.49

552.98

9.3

11.1

11.6

8.7

14.58

14.98

12.27

taxation

i

Average net monthly earnings after taxation

 i  0,19 Growth of net monthly disposable earnings (%)

Source: Statistical Office of the Slovak Republic and the authors’ own calculation.

It is clear from Table 3 that net earnings of employees taxed by the different taxation rates are higher than by means of true flat rate of taxation of 19 %. The average growth of net monthly disposable earnings in all regions was approximately 11,8% in 2009, in comparison to the total net disposable income. Average monthly net earnings calculated on the basis of optimal taxation could be higher in the region Presov (about 14,98 %) and also in the STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 014-018

17

18



region Banska Bystrica (about 14,58 %). As we know, both these regions are classified in Slovakia as very poor, with the lowest average gross monthly earnings and the lowest values of produced GDP per capita, coupled with the highest rate of unemployment. Based on a very simple assumption, we would propose that the value of net earnings determines the value of consumption, that various rates of taxation for individual regions would allow the population to increase their consumption, and thus it would also increase domestic demand. The increase in demand would result in the rise of economic potential of the regions, increase its employment rates, and also the income from taxation to the state budget in the long run. The living standard of inhabitants in Slovakia would increase as well; and this is the goal of good governance in each country, not only in Slovakia.

Conclusion This article proposes the way how to balance the unequal consumption across individual regions. It is provided based on several assumptions:

that additional increase in direct income tax for the population of Slovakia is an enormous obstacle to further economic development of the Slovak Republic. SM This paper is supported by Grant Agency of Slovak Republic VEGA, grant no. 1/0285/14 "Regional modelling of the economic growth of EU countries with concentration on spetial econometric methods".

References Bayoumi, T., & Masson, P. R. (1998). Liability-creating Versus Non-liability-creating Fiscal Stabilization Policies: Ricardian Equivalence, Fiscal Stabilization and EMU. Economic Journal, 108 (449), 1026-1045. Horváthová, L. (2009). Impact of fiscal decentralization on the local budget in Slovak Republic. In Theoretical and practical aspects in public finance (pp. 1-10). Praha: VŠE Praha. Ingram, J. C. (1959). Sate end regional payments Mechanisms. Quarterly Journal of Economics, 73 (4), 619-632. Ivaničová, Z. (2011). Theoretical principles of intraregional distribution of risks. AIESA the 14-th international scientific conference [electronical source]. Bratislava: EKONÓM, University of Economics Bratislava. Mélitz, J., & Zumer, F. (1998). Regional Redistribution and Stabilization by the Centre in Canada, France, the United Kingdom and the United States: New Estimates Based on Panel Data Econometrics (Discussion Paper 1829). London: Centre for Economic Policy Research.

1. The analysis was done for direct income tax (income taxation of private persons from dependent activity only). 2. Consumption is equal to income. 3. Based on abstracts of analyses comprising retail savings, it can be presumed that other types of taxes and subsidies flow to the regions as well (which cannot be confirmed due to lack of available of data).

Neupauerová, Z. (2012). Consolidation of the financial regional power based on the increasing of the taxes. The First International Internet Conference “Young Science”. Bratislava: University of Management and Public Administration.

Despite such simplicity of presented model, we can conclude that different taxation rates for the population of different regions could be used as an internal tool for supporting economic activity in the region, decreasing regional disparity and regularising their standards of living. We believe

Sedmihradská, L. (2012). Property tax in the Czech Republic and Slovakia since 1993, MPRA Paper No. 42259. Prague: University of Economics Prague.

 Correspondence

Zlatica Ivaničová Faculty of Economic Informatics, University of Economics Bratislava Dolnozemska cesta 1/b, 85235 Bratislava, Slovakia E-mail: [email protected]


Obstfeld, M., & Peri, G. (1998). Regional Non-Adjustment and Fiscal Policy. Economic Policy, 13 (26), 205-259. Radvanský, M. (2013). Creation of the Regional Models and their Application in Slovak Republic, unpublished dissertation thesis, University of Economics in Bratislava, Bratislava.

von Hagen, J. (1998). Fiscal Policy and Intranational RiskSharing (Working Paper B13). Bonn: Center for European Integration Studies, Rheinische FriedrichWilhelms-University.

STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 019-026 UDC 005:658.7:[004.4

Received: November 15, 2013 Accepted: May 14, 2014

Open Source ERP as Supply Chain Management Support Jelica Trninić

University of Novi Sad, Faculty of Economics in Subotica, Serbia

Jovica Đurković


Lazar Raković


Nenad Mirkov

University of Novi Sad, Faculty of Economics in Subotica, Serbia Abstract The article discusses the application and optimal adaptation of technological tools to support efficient operations and successful positioning companies and enterprises in the market competition. The strategy for superior execution of business processes implies technical support and integration of software solutions as well. Supply chain management is becoming increasingly significant in business, thus this article is concerned with analyzing and proposing one method for its implementation. Supply chain management is viewed through the implementation of ERP systems, since these systems can significantly improve the control over operations throughout the company or enterprise. Opting for open source, as a modern business paradigm, has its benefits, since the costs of open source software tools are much lower, and the software itself is reliable and efficient enough. Keywords Supply chain management, ERP, Open Source.

Introduction Especially over the past twenty years, technological innovations have been changing the way companies operate to a great extent (Fawcett, Wallin, Allred, Fawcett, & Magnan, 2011), and made a great impact not only on information technology, but also the economy and modern society in general. It is an indisputable fact that business processes undergo development and innovation at a growing pace (Đurković, Trninić, Vuković, & Raković, 2010). In order to maintain continuous development and gain competitive advantage, organizations need to modify their information support to appropriately meet contemporary requirements. In the midst of continuous change, especially in times of crisis, it is essential for all of the processes within a company to run as efficiently as possible. Supply chain management is becoming

recognized as a growingly significant an element of business, which can operate effectively only with a suitable software support. The essential and continuous intent to minimize costs may be carried out in the best possible way only by adopting a systematic approach to the integration of customers, suppliers, and storage, while simultaneously meeting customers’ needs (Symeonidis, Kehagias, Koumpis, & Vontas, 2003). Implementation of this integration requires a sophisticated approach to supply chain management. Supply chain management is becoming a key element of business operations (Heng, Wang, & He, 2005), one that virtually cannot be considered outside the context of ERP. This is exactly why the subsequent section provides a short overview of ERP.

Open Source ERP as Supply Chain Management Support

1. ERP ERP (Enterprise Resource Planning) is an integrated information system that is supposed to cover all functions and processes within an organization. These systems can significantly improve control over operations throughout the whole organization, thus facilitating more effective and efficient business. Balaban, Ristić, Đurković, Trninić and Tumbas (2006) state that they achieve their business goals by means of the organization’s ERP systems, specifically by introducing an integrated database enabling them to obtain necessary information for managing the organization. There are numerous ERP systems available in the market, but organizations often choose to build them themselves. ERP systems provide a variety of functionalities that are represented as modules or subsystems. Because of their diversity, there is no single classification of modules. Some of the modules are (Balaban, et al., 2006; Eresource, 2009) :     

Finance Module, Human Resources Module, Sales & Distribution Module, Inventory Management Module, Production Module etc.

In the beginning of the development of ERP systems, they mostly represented an independent concept; however, over time, as business requirement became more specific, numerous new technologies and services became adjoined with ERP systems. Leskovšek and Golob (2010) mention, among other, the following reasons for replacing and modifying the existing ERP systems: outdated technology, company growth, new business processes, partners’ demands, new market channels etc. Traditional ERP has evolved into the ERP II concept (Moller 2005; Bakht, 2006; Mattison, 2011), which nowadays symbolizes an interconnected infrastructure, without which modern business is impossible. ERP II concept consists of four layers (Figure 1) (Moller, 2005): 1. The core components: represents the integrated database and applications that communicate with the database. 2. The process layer: this layer represents the traditional ERP concept, the one that ERP II concept relies on. 3. The analytical layer: this layer incorporates new technologies, such as: Supply Chain Management (SCM), Customer Relationship Management (CRM), Supplier Rela-


tionship Management (SRM), Product Lifecycle Management (PLM), Employee Lifecycle Management (ELM) and Corporate Performance Management (CPM). 4. The e-business layer: this layer facilitates communication and integration between the ERP II system and external entities. This layer encompasses applications of following types: Business to Consumer (B2C), Business to Business (B2B), Business to Employee (B2E) and Enterprise Application Integration (EAI). EAI

SCM CRM

SRM

B2C

Jelica Trninić et al.

B2B

20

ERP CPM

PLM HRM

B2E

Figure 1 Conceptual framework of ERP II Source: Moller, 2005

As we can see, supply chain management is an integral part of ERP II concept’s analytical layer. We have briefly reviewed the main characteristics of components of SCM.

2. Supply chain management Information technology has transformed the way supply chain is managed, thus making the most efficient execution of the principal components of the supply chain possible (Huynh, & Chu, 2011). It is very important to retain existing customers, and certainly more cost-effective than attracting new ones (Vuković, Raković, & Đurković, 2011; Trninić, Đurković, Vuković, & Raković, 2012). This is incomparably easier by means of SCM and CRM application. According to Wailigum (Wailgum, 2008), supply chain management consists of five basic components: 1. Plan. This component is a strategic part of SCM, and is, among other things, associated with developing a set of metrics to monitor the supply chain. 2. Source. After defining the strategy and metrics, the following step is to select a supplier. A set of pricing, delivery and


payment processes are developed at this stage, as well as metrics, created to control these processes. 3. Make. After the strategy has been set and suppliers have been selected, it is necessary to create a schedule of activities that are required to complete production, testing, packaging and preparations for shipment. 4. Deliver. After the manufacturing process has been completed, it is necessary to coordinate the reception of purchase orders, storage system, and transporters, all for the purpose of delivering products or services to the customers. 5. Return. It is often necessary to take back damaged products and provide support to customers that experienced certain problems with the delivery. It is virtually impossible to execute all of the above components of SCM efficiently without a well-implemented ERP system. A well-designed ERP system can be an indispensable foundation of efficient supply chain management (Huynh, & Chu, 2011; Fawcett, et al., 2011). In recent times, software manufacturers have been implementing supply chain management modules into their ERP systems more often. According to Caruso (2009), there are four ways that an integrated ERP system can improve supply chain management: 1. The information stored in ERP systems provides an opportunity to better understand the customer's wishes. 2. Providing information about goods throughout the entire supply chain. This information enables the company to make the best production and purchasing plan. Certain information on goods must be made available to customers. 3. Integrated ERP systems should facilitate integration with suppliers and thus reduce costs manufacturing and warehousing costs. 4. Enabling supply chain performance management by means of defining key performance indicators and measuring their fulfillment using information stored in the ERP system. The open source community is on the rise; more and more applications coming from this community can almost equally rival ones coming from the commercial software industry. Since the costs of open source software tools are much lower, these tools are very appealing.


3. Open Source - the theoretical basis The Open Source Initiative did not emerge as an entirely new concept when it comes to terms of use and redistribution of software. Long ago in 1984, Richard Stallman founded the Free Software Foundation, which defined user rights thru the GNL license (Bona, & Ockman, 1999). Of the most important provisions that constitute this license, one should mention that it implies free software download, its free alteration or extension of its source code, with the obligation that further redistribution of altered or extended software has to be made with the same licensing rights. Although it was not promoted in the same fashion, the definition of open source encompasses many Stallman’s ideas and can be perceived as a derivative of his work and efforts. The definition was set by the Open Source Initiative, founded in 1998 by Bruce Perens and Eric Raymond. This definition represents a standard, presented as a document under the name of “The Open Source Definition”. This document is used when deciding whether a software product can be released under an Open Source license. For this to happen, the software must fulfill ten criteria set by Bruce Perens (The Open Source Definition, n.d.). The basic principles are inherited and represent identical or slightly modified rights compared to the license set by Stallman.Undoubtedly, the biggest advantage is the mandatory delivery of the complete source code along with the software, and freedom to modify and expand the software. This most prominent example of this is debugging performed by a vast number of users, where debugged versions are promptly available to everyone. Contrary to that, when it comes to commercial software, a significantly smaller number of programmers are engaged on debugging, so debugged versions have to be waited for. Another advantage that should be mentioned here is software localization, which is the reason why open source software can be downloaded in many languages. Owing to its liberty and independence from platforms and programming techniques, open source has instigated the development of numerous projects and foundations, such as Apache Software Foundation – creators of Apache web server, Eclipse Foundation with their Eclipse development environment and the Mozilla Foundation – the author of the most widespread web browser. New organizations opt for more sophisticated models of governance; their membership is therefore most commonly formed on a legal level (Letellier, 2008). STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 019-026x

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3.1 The economic paradigm

When considering open source software development, the issue of the economic viability imminently arises, since these projects are based on free licenses, where the source code is distributed and given to users free of charge. It is a fact that the advocates of open source inadvertently created a new and unexpectedly successful economic paradigm in the software industry (Perens, 2006). In order to understand the economic paradigm of open source software, we should consider the fact that nowadays software is an indispensable part of every large company’s business operations, without which the company would be less competitive or even cease to operate. This relates to companies that are not in software production business. Before open source licenses appeared, software was distributed through retail chains, while software prices were quite high, due to accumulated production and sales costs. Since the consumer has to pay for the software in advance, and then start using it, it often happened that only through the deployment of the software did consumers come to a conclusion that the software was defective or doesn’t meet all their requirements. The other solution implied utilizing the company’s own resources for software development, which was possible only in larger companies that had IT experts available in their team. This is a somewhat better option for a company that has a need for specialized software, but the costs are still there, as it is necessary to employ human resources over a long period of time required for software development, and subsequently for various upgrades and updates. Such software often has unused potential that can be noticed only if other companies start using it as well. It is this issue that stimulated the successful development of the open source paradigm, where a great number of entities (individuals, companies, academic institutions, etc.) jointly participate in the development and improvement of software. Development process usually begins with an individual initiative, very similar to software development by experts within a company. If this is a product that might be useful for others, it gets published, whether it is completed or not. Only when other entities begin to use this software product does the open source paradigm begin to function fully (Perens, 2006). In a nutshell, if the software is useful to others, they begin to use it more intensively, and given the fact that the source code is available, modify and expand its modules and return such expanded and modified STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 019-026

code to the community. Finally, it often happens that an individual or a company that started developing the software, get their software back debugged, expanded with some functionalities, completely free and without additional costs and employment of their own human resources. Linux operating system can be given as an example. It originated as an excellent replacement for previously widespread Unix OS. Many companies tried to develop an operating system that would outshine Unix OS. However, Linus Torvalds managed to do this himself, owing to the open source paradigm. Since 2006, it is believed that only two percent of the Linux kernel was written by Torvalds, and that the rest is the contribution by the open source community. 3.2 Benefits and risks of OSS

Development of open source software is much faster than the development of commercial applications. Given the access to the source code, software development lifecycle can be infinite, that is, while the need for extensions and development of new versions exists. At this point it would be useful to emphasize the risk associated with commercial software. If the company that developed the software goes out of business, the possibility of debugging, expansion and development of new versions ceases as well. As regards user support, open source tools once again have the upper hand, since companies involved in the development of commercial software need to allocate financial resources for their employees, while open source community provides support through forums or websites. Of course, there is a risk that this necessity will disappear, hence the company must determine the significance of the open source tool on the market and the size of the community that uses and develops it, since the likelihood of a tool’s survival and its support is directly proportional to the size of the open source community (Kenwood, 2001). The fact that a great number of developers and companies use and develop the software causes another problem, which is how to synchronize new versions and bug fixes. This problem can be resolved by means of revision control tools that automatically update software distributed via a centralized server. In order avoid branching of an open source software, a formal corporate structure is necessary behind the project. The Linux operating system, whose kernel is identical in 99% of cases, may serve as an example of best practice. Apache is another example of a company that


provides professional support for their of open source projects. Consistency is insured thru the use of Apache Subversion tools. Subversion project was initiated in early 2000, replacing the previous CVS revision control system (Pilato, Collins-Sussman, & Fitzpatrick, 2004). Open source solutions have proved to be exceedingly successful when it comes to enterprise resource planning and management tools, chiefly owing to these advantages in development and implementation. The Apache Company is behind the development of a open source project under the name of “Apache Open for Business” (OFBiz), which is used for electronic customer relationship management, supply chain management, human resources management and managing other corporate resources. A short overview of this project is provided in the following section.

4. Apache Open for Business Apache OFBiz is an open source development framework, designed to ease the development and implementation of enterprise resource planning (ERP) software. The framework itself is implemented in Java, and system configuration is based on XML. ERP software usually denotes systems that seek to integrate all business processes and data associated with them into a single unit. OFBiz development framework comes bundled with all necessary elements one might expect of an ERP software. The user can employ this tool as a fully complete and functional solution, or choose to spend time and money on customizing and developing a solution based on the OFBiz code, which would be in accordance with their needs, that is business requirements (Wong, & Howell, 2008). OFBiz is distributed under the Apache License Version 2.0, which allows the user to use, adjust, modify, upgrade, repackage, as well as to sell solutions they developed based on the OFBiz code, entirely free of charge. By downloading and installing the development framework, users get a fully functional tool for inventory management, accounting, supply chain management, manufacturing, with exceptional options for maintaining and modifying the system. By installing, users also get an e-commerce application that is can easily compete with applications worth millions of dollars, such as those used by the Amazon company (Wong, & Howell, 2008). In an attempt to illustrate the magnitude and the significance of this product, we may state that the complete solution consists of over 180,000 lines of Java code, and about 195,000 lines of


XML. The data model consists of over 700 domain classes, designed based on industry practice. Large companies such as British Telecom and the United Airlines can be mentioned as some of the many users of this software (Hessellund, & Sestoft, 2008). 4.1 Origin and development

OFBiz was created in May 2001, when David E. Jones and Andy Zeneski realized that they were working on the similar subject separately, and that the existing solutions were inadequate at that point. They concluded that these problems can be overcome by means of an open source model. Over the following five years, the OFBiz community has grown, as well as the number of companies that adopted this solution as their ERP system. In January 2006, Apache Incubator Project Management Committee accepted this project, and in December of the same year, the company’s Managing Board declared OFBiz the leading project. Up to now, OFBiz remains a very active, nonprofit project, driven by a community of users and volunteers (Wong, & Howell, 2008). 4.2 Architecture

OFBiz is an open source application, written using Java, Java Script, Groovy programming language and XML. During the installation, it uses Derby as a database, which is reasonable, since Derby is an Apache product and an open source relational database entirely implemented in Java. There is however, has a downside to this, which is reflected in the lack of a simple database management system with a user interface. Fortunately, this obstacle can be overcome by selecting another database during the installation. OFBiz supports all relevant databases, such as: Oracle, MSSQL, MySQL, Postgres, Sybase, Firebird and others. Structure of the database used by OFBiz is based on Silverstone’s Data Model Resource Book, which encompasses over 800 entities and more than 3000 relations. This universal model is widely accepted and used in numerous applications intended for supporting corporate operations. Structures of tables and relations between them are completely described in XML files, and thus can easily be modified and adjusted. The only limitation is that the code must be recompiled after each alteration of entity structure. OFBiz uses the three layer architecture model and controller.xml file as the main servlet for ac-

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cepting and processing requests, regardless of whether they are directed to a page or service. Data layer Entity Engine Business logic layer Service Engine

Presentation layer (user interface) OFBiz applications Controller.xml (request-map) , (view-map) Figure 2 OFBiz architecture Source: Authors

Data layer is responsible for managing the database. The Entity Engine is the basis of this layer. It is responsible for connecting to a database, searching and reading data, entering, and so on. Tables are defined within the entitygroup.xml file, while relations and primary keys are defined the entitymodel.xml file. Owing to this approach, even less experienced programmers can be productive, even without any knowledge of SQL. Business logic layer is based on serviceoriented architecture, web services (SOAP, XML). All definitions are stored within the servicedef directory, where the implementation of services is placed within the script subdirectory if it is XML or src if it is Java. Service engine is responsible for managing and calling these services. In a nutshell, services are simplified processes that execute a certain task. When defining a service, it is necessary to determine input parameters that service uses for processing, as well as output parameters, which the service will return as a result of processing (Jones, 2006). The top layer is the presentation layer that stands for applications OFBiz ERP's. Owing to the great flexibility of the work environment, developers can easily add their own applications, or modify the existing ones. OFBiz uses following the technologies to run: Event Driven Architecture (EDA - Architecture driven events) and ECA (SECA, EECA, MECA). ECA is an acronym for Event Condition Action (actions caused by events). SECA for services, EECA entities, MECA for mail (Jones, 2006). On account of ease of use, the XML Mini-Lang was STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 019-026

introduced as an addition to a vast number of tools used by OFBiz. It proved to be a great tool for simplifying the coding of different operations, often by two-thirds, compared to equivalent Java methods. Simplicity of the code enables even semi-professional users of OFBiz to understand it. This tool is most frequently used to process input data, connect services into superior units, communicate with the database and so on. Groovy programming language is used in newer versions of OFBiz, as a substitute for previously used Bean Shell. Groovy is an objectoriented programming language intended for the Java platform. 4.3 System Modules

Party is associated with CRUD (Create, Read, Update, Delete) functions for users who may be individuals (person) or legal entities (party group). This has proved to be the best solution for avoiding data redundancy in some other data models. This entity is closely related to Contact Mechanisms, which contains data on the address, telephones, email, web address etc. There is also a relation with the Roles table, which is associated with the entity’s role: customer, supplier, employee, manager, salesperson and so on. Practically, one entity can have multiple roles within the system (Jones, 2006). Product entities contain data on products that the company manufactures or uses (even the materials used in manufacturing). Products are generally divided into goods and services. Goods are divided into raw materials, intermediate products and finished products. Products are organized in categories. One product may belong to multiple categories, and even categories may be interrelated. Categories are further organized into catalogs, which represent a starting point when entering a group of products. Inventory management and promotions are related to catalogs, which enables different sales channels to use same product group in different ways. This module supports defining different prices for different customers, as well as the use of multiple currencies, with conversion according to a defined rate. It is also possible to define product availability with a start and end date, along with many other options (Jones, 2006). Order entities contain information on orders, generated by the customer through the ecommerce application, although there is a possibility to enter them from the application. Each new order is automatically recorded and presented


in this module, making it possible for the manager to further administer the order – send a pro forma invoice, record payments, dispatch goods etc. Facility represents a building or some other physical location. Examples of facilities include: warehouses, retail stores, company’s office buildings, private premises in a large office building, and so on. This module is related to the Contact Mesh information set. Facilities are related to individuals or legal entities (individuals work within a facility, legal entities control it, etc.) Products and product groups are also associated with objects (Jones, 2006). Shipment entities are used for monitoring incoming and outgoing shipments and updating quantities of goods in stock. Marketing module is used in various marketing campaigns within a company, as the entities belonging to this module facilitate efficient monitoring and analysis of a campaign’s success.

Conclusion Adequate selection and implementation of software tools that ought to provide support in monitoring operations, decision-making and increasing companies’ competitiveness in the market is always a complex task. The process of designing and developing an information system never has, nor can have, all of the software components predefined. Information technology has transformed the way supply chain is managed, making the most efficient execution of the principal components of the supply chain possible. Analysis of functionalities of supply chain management systems that encompass business processes reveals that there are differences and specificities for each company, depending on its operations. The best solution would probably be to design a specific software solution for each company. However, the issue of cost-effectiveness of such solutions often arises. Another option could be to choice platform independent applications that be run on different software platforms. If we consider web applications as a possible choice, along with the efficiency of cloud computing and obtainment of complete open source solutions, choosing the right solution is obviously not an easy task. It is left to each company to assess the advantages and disadvantages and choose the tool, in accordance with their needs and material resources. Unanswered questions discussed above made it possible to deliberate over the obvious problems and present one of the possible solutions. SM


References Bakht, A. (2006). ERP II: a new concept. Retrieved Mart 5, 2012, from Express Computer Online: http://www.expresscomputeronline.com/20061106/tech nology02.shtml Balaban, N., Ristić‚, Ž., Đurković, J., Trninić, J., & Tumbas, P. (2006). Informacione tehnologije i informacioni sistemi. Ekonomski fakutet Subotica: Subotica. Bona, C. D., & Ockman, S. (1999). Voices from the Open Source Revolution. O'Reilly Media. Caruso, D. (2009). 4 ways an integrated ERP system improves supply chain performance. Retrieved Mart 5, 2012, from Microsoft: http://www.microsoft.com/dynamics/en/za/industries/ma nufacturing-erp-supply-chain.aspx Đurković, J., Trninić, J., Vuković, V., & Raković, L. (2010). Software Support for Organizational Knowledge Management: Technological Aspects and Empirical Research Results. Strategic Management, International Journal of Strategic Management and Decision Support Systems in Strategic Management, 15 (3), 10-17. Trninić, J., Đurković, J., Vuković, V., & Raković, L. (2012). CRM Systems and Strategy Implementation: The Case Study. TTEM - Technics Technologies Education Management, 7 (3), 991-1000. Eresource. (2009, Maj 18). ERP Features and Functions. Retrieved Mart 15, 2012, from PRLog: http://www.prlog.org/10238508-erp-features-andfunctions.html Fawcett, S. E., Wallin, C., Allred, C., Fawcett, A. M., & Magnan, G. M. (2011). Information Technology as an Enabler of Supply Chain Collaboration: a DynamicCapabilities Perspective. Journal of Supply Chain Management, 47 (1), 38-59. Heng, M. S., Wang, Y. C., & He, X. (2005). Supply chain management and business cycles. Supply Chain Management: An International Journal, 10 (3), 157-161. Hessellund, A., & Sestoft, P. (2008). Flow Analysis of Code Customizations. Copenhagen, Denmark: IT University of Copenhagen. Huynh, M. Q., & Chu, H. W. (2011). Open-Source ERP: Is It Ripe for Use in Teaching Supply Chain Management? Journal of Information Technology Education: Innovations in Practice, 10, 181-194. Jones, D. E. (2006). Apache OFBiz Project Overview. Retrieved Mart 14, 2012, from Apache OFBiz™ Documentation: http://tiny.cc/n4o9cw Kenwood, C. A. (2001). A Business Case Study of Open Source Software. Bedford, Massachusetts: The MITRE Corporation. Leskovšek, D., & Golob, J. (2010). FIŠ_PŠ_1 dan_Prepoznavanje potreb po ERP sistemu v podjetju. Retrieved Januar 15, 2012, from Fakulteta za informacijske študije: http://poletnasola.fis.unm.si/gradivo Letellier, F. (2008). Open Source Software: the Role of Nonprofits in Federating Business and Innovation Ecosystems. Mattison, D. (2011, Jun 22). Could Open Source Supply Chain Software Become Disruptive to Proprietary Software Industry? Retrieved Mart 15, 2012, from Kinaxis: https://community.kinaxis.com/people/dustinmattison19 74/blog/2011/06/22/could-open-source-supply-chain-

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software-become-disruptive-to-proprietary-softwareindustry Moller, C. (2005). ERP II: a conceptual framework for nextgeneration enterprise systems? Journal of Enterprise Information Management, 18 (4), 384-426. Perens, B. (2006). The Emerging Economic Paradigm of Open Source. Cyber Security Policy Research Institute, George Washington University. Pilato, C. M., Collins-Sussman, B., & Fitzpatrick, B. F. (2004). Version Control with Subversion. Massachusetts: O'Reilly Media Inc. Symeonidis, A. L., Kehagias, D., Koumpis, A., & Vontas, A. (2003). Open Source Supply Chain. Retrieved Mart 15, 2012, from CiteSeerX: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1. 1.79.7339 The Open Source Definition. (n.d.). Retrieved Retrieved Mart 15, 2012, from Open Source Initiative: http://www.opensource.org/osd.html  Correspondence

Jelica Trninić Faculty of Economics in Subotica Segedinski put 9-11, 24000, Subotica, Serbia E-mail: [email protected]


Vuković, V., Raković, L., & Đurković, O. (2011). CRM sistemi - ključna podrška u implementaciji CRM strategije. XV internacionalni simpozijum iz projektnog menadžmenta (pp. 197-201). Beograd: Udruženje za upravljanje projektima Srbije - YUPMA. Wailgum, T. (2008, Novembar 20). Supply Chain Management Definition and Solutions. Retrieved Mart 15, 2012, from CIO: http://www.cio.com/article/40940/Supply_Chain_Manag ement_Definition_and_Solutions Wong, J., & Howell, R. (2008). Apache OFBiz Development. Birmingham: PACKT Publishing.

STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 027-032 UDC330.13:631.147(497.11)

Received: December 11, 2013 Accepted: April 22, 2014

The Role of Organic Production and Permaculture in Ensuring Economic Efficiency of Agroeconomy of Serbia Jelena Birovljev


Biljana Ćetković

University of Novi Sad, Faculty of Economics in Subotica, Serbia Abstract Consumer awareness of the necessity of eating and living healthy has become an indisputable issue. Organic farming effectively solves the problem of food quality and safety for human and animal consumption, respecting the natural ecological balance. Investment in the development of organic farming on the principles of permaculture is of permanent significance because they serve as the basis of efficient conservation of biodiversity and survival of humanity. Organic farming and permaculture are focussed on the future and the development, not only in terms of environmental protection and improvement of human health, but also from the standpoint of economic prosperity. Keywords Organic farming, sustainable development, permaculture, agriculture.

Introduction Organic farming takes up an especially prominent place in the overall modern-day economic conditions. Unlike the times of industrial revolution, when the foundations of the business operations of modern-day enterprises were laid, people feature as a less scarce production factor nowadays, whereas natural resources and the ecosystem, i.e. the natural capital, providing the basic prerequisites for life, is diminishing dramatically and becoming an increasingly costly resource (Davčik, 2004). Organic farming and permaculture (PERMAnentagriCULTURE) emerged as a result of seeking a solution for re-establishing the disrupted balance in the availability of individual production factors and preserving the natural resources. In its initial development stages, the idea of permaculture was considered as subversive and revolutionary, only to become a basis on which entire urban communities are formed today. People have started shifting back from consumerism

to sustainable lifestyle, as a result of the crisis and awareness that a change in lifestyle and social organisation system were necessary. Permaculture is often understood as a mere return to the traditional patterns of the past, although it is far more complex, as it represents a synthesis of traditional agricultural practices and innovative technologies, utilising the knowledge of many scientific disciplines to represent a new lifestyle, with recognisable standards and principles. The implementation of environmental principles and strategies reestablishes the balance in disrupted ecosystems. Without disregarding the positive impact of the green revolution in solving the problem of “food-poverty-population” in the developing countries, the incessant favouring of chemicalbased strategy in food production is causing concern for the future of our planet. The world must turn to finding a possibility to rely on renewable energy sources, available at hand. Organic production places primary focus on recycling organic waste as a substitute for using

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The Role of Organic Production and Permaculture in Ensuring Economic Efficiency of Agroeconomy of Serbia

chemical fertilisers, coupled with the use of available sources of energy, introduction of and adherence to crop rotation that would enable a natural balance of pests and reduce the use of pesticides, higher reintegration of cattle and crop farming, etc. A real breakthrough in the technology of radical farming is associated with establishing new priorities in the research domain. The most significant one is reaching full agreement on what should be the fundamental issues of postindustrial agriculture. This area is full of incongruity. A considerable number of researchers still start from the basic assumption such as: that the most important objective in agriculture is achieving high yields: that the need for energy in agriculture will keep being satisfied with cheap energy sources; that the primary agricultural production segment can function efficiently in an already created industrial environment (Zakić & Stojanović, 2008). It is certain that the world is faced with another reality. Inexpensive energy sources are becoming increasingly scarce. An important role of agriculture is to harmonise the use of its resources with environmentally acceptable methods. The strategy of developing farming chemicals, mechanised cultivation and genetic engineering opens even more alternatives in agriculture. All this is leading towards new areas of scientific research in agriculture. Modern agriculture, with its tendency to merging plots of arable land, monoculture, increasing use of machinery and chemicals year after year degrades the soil, destroys natural biodiversity and pollutes the environment (Sep Holcerova knjiga “Permakultura”, 2012). Small farmers are an endangered species, exposed to legislation and unpredictable changes on the market. Is there a way to meet our needs cooperating with the nature rather than fighting it? Organic production relies on natural principles in use for thousands of years already. Permaculture goes a step beyond, emphasising sustainability and collaborating with the environment. The popularity of permaculture is growing as more and more people realise that this cheap and simple cultivation method is an excellent way of obtaining healthful fruit, vegetables, and medicinal herbs – more exactly, a healthful lifestyle. The 20th and the first decade of the 21st century testify that man has reduced nature as well as himself to an object, i.e. a resource to which he relates specifically, which is being returned to him


as the nature’s revenge, that is, the ubiquitous climate change resulting in jeopardised entire global environment. The danger of endangering the global environment, the survival and existence of mankind emerged with the development of technology, science and scientific breakthrough. Awareness, however, of the evident danger for the survival of human race is spreading in parallel with the environmental crisis. The concept of sustainable development for sustainable future entails a balance between the use of resources and the ability of ecosystems to meet the needs of future generations. Industrialisation has disrupted the ecological balance to the extent that challenges the survival of life on earth. Production based on developed production forces neglects the impossibility to recover the eco-sphere. Neither man nor nature can recover the destroyed. The environmental crisis emerged as a consequence of globalising economic production activities aimed at acquiring profit. Humanity is facing the problem of exhausted and limited natural resources. Nowadays, humans must respond to questions pertaining to energy crisis, demographic explosion, pollution of the natural environment and other questions related to harmonising the natural development with environmental laws. Bearing this problem in mind requires shedding light on man’s moral responsibility, and also social responsibility to the environment, as regards the environment. This problem is nowadays contemplatively and critically reflected by the discipline known as environmental ethics, based on moral responsibility, for this is the only way of creating conditions for a higher-quality lifestyle.

1. The interdependence of organic production and biodiversity Biodiversity has been of key importancefrom the very beginning of developing the system of organic farming, focussing on two issues. The first is the impact of agriculture on process quality and concerns the issue of benefit for nature, and the other one concerns biodiversity and the beauty of natural or wild species, habitats and biotopes, down to the landscape level. The interdependence of organic farming and biodiversity stems from the basic environmental principles of circulation of substances and all forms of life intertwined in nature. Agroecology has always been the basis of agriculture, but emphasising its role (as cited in Lazić, 2012), signifi-



cance and application has been changing with the growth and development of agricultural system. Traditional agriculture has always relied on agroecology, and so does it now. In addition to providing enough food and other commodities, conventional agricultural production has also produced a range of negative impacts, not only environmental, but also social and economic. Numerous agroecological production systems (Lazić & Lazić, 2008) aimed at achieving sustainability of farming, that is, overall sustainable development, have emerged in response to such a condition. Organic farming, regarded as the model of sustainable farming in the EU, is prominent among those systems. Many studies comparing the impact of different agricultural systems clearly show the positive impact of the organic farming methods on biodiversity parameters, such as more various taxa, greater diversity and greater abundance of species, etc (Bengtsson, Ahnstroem, & Weibull, 2005; Fuller et al., 2005). Unlike conventional agricultural system, oriented to purchasing inputs, organic farming places focus on its own inputs in creating production systems adapted to its locality. An organic farming structure is organised in compliance with the system of low external input utilisation levels, relying on its own resources to the maximum possible extent. The holistic approach of multifunctional organic production, which was created as a supplement to agricultural production with nonagricultural products and services, does not allow the application of synthetic chemicals and GMOs. Biodiversity enables variety of production manifested through an extended crop mix shift, growing intercrops and cover crops, as well as green manure crops and predators, provided of course, that resistant, indigenous varieties and breeds are chosen. In addition to preserving natural resources and ecosystem, multifunctional organic farming offers additional employment opportunities and achieving higher yields as a basis for a higher quality life in the countryside. Organic farming focuses on product quality, respecting environmental principles and natural cycles, with a high degree of protection of the eco-system and the environment. Organic farming is defined as a production management system based on environmental principles, high biodiversity level, preservation of natural resources, and application of high animal welfare standards, with production methods using natural substances and

methods. Organic farming is not merely agriculture that avoids the use of mineral fertilisers, pesticides and other synthesised chemicals; it is much more complex than that. With express environmental principles, it is sometimes difficult to understand, because it requires understanding, knowing and applying the integrated production system and technology, rather than individual agrotechnical measures (Lazić, 2012). Today, amid the conditions of evident environmental and climatic changes, organic farming is of crucial importance. Undoubtedly, the greatest contribution of organic farming is the production of high-quality, healthful, safe food, and protection of biodiversity.

2. The basic principles of permaculture Permaculture is a holistic approach applicable to all aspects of life. The essence of any sustainable design and practice contains the basic set of values and ethical principles, constant regardless of the situation. The essence of permaculture is in the ethics and design of principles permeating all structures in order to enable the conditions for sustainable development. Developing awareness and adopting traditional values enabling biological and cultural survival define the ethics of permaculture and contribute to biological and cultural survival. Unlike the concept of currently existing social norms and thinking patterns, permaculture is retro-innovation.

Figure 2 The basic principles of permaculture Source: The Principles of Permaculture Extend Beyond the Landscape, 2013

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2. Care for people – developing love of and respect for oneself as a prerequisite for understanding and love of others, social cooperation, focussing on the positive and developing the opportunities it offers, accepting personal responsibility 3. Fair share – moderation in the consumption of natural and social goods, gaining personal and social benefit from established balance, mastering oneself. “Man who has mastered himself can behave appropriately at any opportunity in an appropriate manner. Such a man is rightfully referred to as the artist of living” (Cuvari prirode, 2013). Permaculture is based on twelve universal principles enabling creative redesigning of the environment, as well as a personal attitude and treatment of natural resources and sustainable communities. They are applicable to various segments of the society. Permaculture is the solution for preservation of rural environment through the organic redesign of the society and culture.

and blueprinting may result in high amounts of saved energy. Some of the common and available solutions for households are solar collectors for warm water, wind turbines and solar cells for electric energy, solar cookers, biogas, use of wood for fuel, installing stoves with large thermal mass, etc. 2. Water Water resources are exposed to most polluting systems, because, eventually, all waste waters, oil spills on land and at sea, chemicals from agriculture, and urban sewage systems reach subterranean waters, rivers and seas. Due to abrupt climate changes, the level of subterranean waters is dropping, thus endangering pumping facilities and wells. Due to all of the above, it is essential to know how to manage water sustainably, save water, build rainwater accumulation systems, gather precipitation water for agriculture, purify waste water, use composting toilets and purify grey water with plant-based purifying facilities. 3. Soil Soil is the habitat of people, animals and plants, and also the main source of food for them. As it serves as a filter of precipitation waters, soil quality influences water supplies. Conventional agriculture, with supporting agro-biochemical industry, degrades soil permanently. A response to this destructive trend lies in all types of environmentally friendly agriculture and organic food production. The application of permaculture and other organic solutions in agriculture, construction and infrastructural intervention does not destroy soil or pollute subterranean waters.

Figure 3 The principles of permaculture Source: The Principles of Permaculture Extend Beyond the Landscape, 2013

Permaculture solutions strive to harmonise the needs of modern-day man with environmental preservation. In permaculture, man and his actions return to the natural circulation of things, as a part of a cyclical system without waste and wasting energy. Permaculture merges traditional skills with modern achievements and methods. 1. Energy Energy used nowadays is mostly of fossil origin, and its application raises great environmental problems. It is recommendable to use energy from renewable sources. Renewable energy sources are the energy of wind, sun, biomass, tide, and geothermal energy. Sustainable design STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 027-032

4. Air Just like other above mentioned elements, air is exposed to all types of polluters, and is essential for life on the Earth. Nature needs to be protected from air pollution, although everyone may influence the quality of air in their own area, at least by their positive example. The use of bicycles, public transport, electric bicycles and moped, biodiesel fuel and bio-ethanol, common automobile use and planting trees that will absorb carbon monoxide can influence the air pollution statistics. 5. Construction One-third of waste on the world’s landfills is accounted for by construction waste, remaining from conventional construction. In addition to



being a great ecological problem on the planet, the newly constructed facilities are unhealthy environment, teeming with toxic substances, and also electromagnetic, light and sound pollution. Investors rarely comply with quality regulations, and new structures are not insulated in accordance with energy standards that are inadequate anyway, so that these facilities use huge amounts of energy from fossil fuels for heating, cooling and maintenance. Sustainable construction is full of inexpensive, natural and healthy solutions. The use of local resources supports the development of local communities and reduces CO2 emissions. The past thirty years have seen a rise in the popularity of compressed straw boards, earthship structures, houses made of natural material like wood, brick, adobe, stone, clay etc. Structures are insulated with cellulose, wool, expanded clay, straw, coconut fibre etc. Green roofs are constructed where food can be grown; buildings are designed with vegetable gardens and orchards incorporated in the architecture itself or immediate surroundings. Real productive green oases, healthy neighbourhoods have been created in the centres of many modern cities. 6. Organisation / society A large number of books have been written and many discussions have been held, criticising modern political systems. The political system only presents tangible profit as a goal, not choosing the means of achieving it, responsible for almost all disasters that have happen or will happen to the civilisation and the planet Earth. Political changes are occurring slowly. There are many positive initiatives and projects offering a higher-quality and more integrated view of the perseverance of human communities. These are, primarily, the eco-village movements, numerous towns and cities incorporating into their policies environmental and sustainable principles, commendable projects of many ministries, projects of enterprises acting along ethical principles, and a large number of networked organisations and individuals devising a better future. Care for people is the key factor for successful projects. Real synergy among people will occur only if things are set up transparently, and if the principle of consensus is applied in decision making.

Conclusion Organic farming contributes to socio-economic and environmentally sustainable development, especially in underdeveloped countries, owing to

the application of organic principles, implying efficient local resource management, and thus cost efficiency. The organic product market at the local and international level is characterised by huge growth prospects, and it offers creative producers and exporters excellent opportunities for increasing income and improving standards of living (Berber, Đokić, & Kočić-Vugdelija, 2011; Birovljev, Đokić, & Ćetković, 2013). Supporting the thesis that organic farming can contribute to the sustainable development of Serbia, we can state that the overall goal of the National Strategy of Sustainable Development of Serbia related to agriculture is conceived as the creation of cost-effective and environmentally acceptable agricultural production, which should be the basis of livelihood of rural population in areas where there are natural conditions for achieving a competitive level adequate for entry into European and other markets (Official Gazette of the Republic of Serbia, 2005), while the goals of organic agricultural production can be summed up as (Subić, Bekić, & Jeločnik, 2010):  increasing the productive ability (fertility) of soil,  minimising energy input on farms,  reducing environmental impact, and  maintaining the achieved production level (Subić, Bekić, & Jeločnik, 2010). The main obstacle to developing the national organic food market is insufficient demand, mainly caused by two factors: the population’s low purchasing power and inadequate level of information about the advantages of these products in comparison with conventional ones (Birovljev & Štavljanin, 2011). Various activities are required in order to raise environmental awareness and create the consumers’ nutritional culture (Birovljev & Dujić, 2004, p. 219). This endeavour requires involvement of national institutions, the National Association and all the stakeholders willing to get involved more actively into developing organic farming and establishing the standards of this production in the sphere of production, technological, scientific, cognitive and other processes. Permaculture as such is still inadequately researched, although it does not require high investment and projects. Accepting permaculture as a lifestyle and bringing it closer to people would present a significant leap for Serbia, as it makes itself concrete and possible. As it has already been stated above, bearing in mind that a large segment

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of Serbian population has rural roots, in villages that are neglected, empty, overgrown with weeds and surrendered to extinction, permaculture is offered not only as a benefit, but also as a salvation (Imanje za uživanje, 2012). Another reason is the necessity for Serbia to turn to massive-scale organic food farming which, practically, relies on permaculture, Moreover, bearing in mind that an increasing number of modern people want and try not only to purchase products labelled as ‘bio’, but also to choose and pick them themselves, this possibility and orientation is becoming not only increasingly acceptable, but also inevitable (Imanje za uživanje, 2012). Bearing in mind all the above, a whole range of facts, internal and external factors point to the inference that the further development of organic farming is based on permaculture principles as not only likely, but essential not only for the world but also for Serbia. Its contribution to sustainable development unifies all the stated facts. SM

References Bengtsson, J., Ahnstroem, J., & Weibull, A. C. (2005). The effects of organic farming on biodiversity and abundance: a meta-analysis. J. Applied Ecology, 42, 261-269. Berber, N., Đokić, N., & Kočić- Vugdelija, V. (2011). Organska poljoprivredna proizvodnja kao element strategije održivog razvoja Srbije. . In Agrarna i ruralna politika u Srbiji nužnost ubrzanja reformi (pp. 129-147). Novi Sad: DAES – Agrarian Economists Association, University of Novi Sad, Faculty of Economics in Subotica. Birovljev, J., & Dujić, B. (2004). Proizvodnja zdrave hrane i mogućnosti za povećanje izvoza. Proceedings of the Interntional Scientific Conference on Capital in Agriculture (pp. 217-224). Subotica: Faculty of Economics in Subotica. Birovljev, J., & Štavljanin, B. (2011). Development of Organic Food Production in European Countries with Comparable Resources. Strategic Management, 16 (3), 23-33.  Correspondence

Jelena Birovljev Faculty of Economics in Subotica Segedinski put 9-11, 24000, Subotica, Serbia E-mail [email protected]


Birovljev, J., Đokić, N., & Ćetković, B. (2013). Economic effects of investing in conventional and organic agriculture. TTEM (Technics, Technologies, Education, Management), 8 (4), 1914-1920. Cuvari prirode. (2013). Permakultura. Retrieved September 10, 2013 from Cuvari prirode: http://cuvariprirode.org/index.php?option=com_content &view=category&layout=blog&id=8&Itemid=11 Davčik, N. (2004). Marketing strategija proizvoda u industriji hrane: ekološki pristup. Retrieved January 12, 2014 from http://www.freewebs.com/davcik/Radovi/Marketing%20 strategy%20in%20food%20industry.pdf Fuller, R. J., Norton, L. R., Feber, R. E., Johnson, P. J., Chamberlain, D. E., Joys, A. C., et al. (2005). Benefits of organic farming to biodiversity vary among taxa. Biol Lett, 1 (4), 431-434. Imanje za uživanje. (2012). Retrieved September 8, 2013 from Zov: http://www.zov.rs/code/navigate.php?Id=199&editionId= 101&articleId=531 Lazić, B. (2012). Međuzavisnost organske poljoprivrede i biodiverziteta. In Organska proizvodnja i biodiverzitet (pp. 25-35). Pančevo: Research and Development center Pančevo. Lazić, B., & Babović, J. (2008). Organska poljoprivreda. Novi Sad: Institute of Field and Vegetable Crops. Official Gazette of the Republic of Serbia. (2005). National Strategy of Sustainable Development of the Republic of Serbia 55/05. Belgrade: Official Gazette of the Republic of Serbia. Sep Holcerova knjiga „Permakultura“. (2012). Retrieved September 15, 2013 from Kroz prostor i vreme: http://kpv.rs/?p=2029 Subić, J., Bekić, B., & Jeločnik, M. (2010). Značaj organske poljoprivrede u zaštiti okoline i savremenoj proizvodnji hrane. Škola biznisa (3), 50-56. The Principles of Permaculture Extend Beyond the Landscape. (2011). Retrieved September 12, 2013 from HABITAT Re-Imagined: http://www.habitatreimagined.com/permaculture/theprincilples-of-permaculture-extend-beyond-thelanndscape/ Zakić, Z., & Stojanović, Ž. (2008). Ekonomika agrara. Belgrade: Publication centre of the Faculty of Economics in Belgrade.

STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 033-040 UDC330.15:330.4 ; 330.112:502/504

Received: July 11, 2013 Accepted: January 24, 2014

Optimization of Economic and Environmental Goals by Multicriteria Analysis Models *

Žarko Popović

University of Niš, Faculty of Economics, Serbia

Snežana Radukić

University of Niš, Faculty of Economics, Serbia

Milica Radović

Faculty of Legal and Business Studies, Novi Sad, Serbia Abstract The main goal of any society is to meet environmental standards with respect to basic economic requirements, despite all the problems it faces. After solving the major problems concerning the harmonization of environmental and economic goals, these goals could be adequately introduced in a mathematical model. In recent years, the economic theory of decision has been devoted to the methods of multi-criteria optimization of these problems. Minimum costs are regarded as an economic objective, and minimum emission as an environmental objective. In this paper we will emphasize the importance of introducing economic and environmental goals in models that deal with this problem. The implementation of successful economic policy is based on the optimal solutions of environmental modelling. Keywords Optimization, economic goal, environmental goal, multi-criteria analysis, decision making process.

Introduction The concept of sustainable development is a multidimensional concept comprised of economic, social, environmental, technological and ethical components. For this reason, there can be a high level of conflict among the goals of sustainable development. Modern economic literature and practice have confirmed that the conflict between economic growth and environmental protection can be successfully overcome. By introducing environmental objectives in the economic model may result in different methodological problems – from the general problem of competition between economic and environmental objectives, to the *

specific problem of formulating environmental objectives in the chosen model. After solving the major problems concerning the harmonization of environmental and economic objectives, these objectives could be properly introduced into the mathematical model. In recent years, economic decision theory has been intensively engaged in multi-criteria optimization methods of these problems. Goals can include optimization of time for performing activities, increasing marginal utility of income, risk avoidance, tendency toward engaging the workforce and meet the desirable, but not mandatory, restrictions.

This article is the result of the research project no.174013 and 44007of the Ministry of Education, Science and Techno logical Development of the Republic of Serbia.

The economic model of perfect competition market represents a radical simplification of things in relation to how they behave in reality. Due to its extreme simplicity, it may be surprising that this model can still be a way to describe significant drivers of economic activity and the nature of economic institutions (i.e. striving for profit or utility, competition and purchasing power in the market). Also, there is no doubt that this model is too roughly structured for direct application of economic and environmental policies. For example, it is obvious that in reality even individual suppliers can sometimes have a significant impact on the price of the product that they produce. This has important implications for the optimal balance in the market. Even in the extreme case of a monopoly, the supplier achieves optimal equilibrium at the point where the marginal costs are below the market price of the product. At the balance point, therefore, the marginal willingness to pay the price of the product and the marginal cost of the product are not identical, so that in this case, the social optimum amount of production cannot be achieved. Similarly, the optimality of market equilibrium is disturbed by state intervention through tariffs and taxes on certain products, leading to a significant difference between the price paid by consumers and the price received by producers. Here, again, the equilibrium between the marginal willingness to pay the price of the product and the marginal cost of production of the product has not been achieved. The result is a poor allocation of resources. Another aspect that is important in real life (and in rather complex economic models) is that the stakeholders do not have enough information for their activities, according to which they would behave in a way that has already been explained. In general, information (e.g. about product quality) can be asymmetrically distributed between the supplier and the customer. If the customer is unable to comply with all the relevant characteristics of the product before buying, poor allocation of resources may appear as a result. Indeed, the list of differences between real life and the previously mentioned ideal model is long. However, not every item on the list is of interest for each discourse. In this regard, it should be noted that the economic model formed in these specific conditions does not aim to reflect reality. We therefore need to focus on the differences between reality and model that are important for the analysis of environmental problems: the ideal previous presentation (implicitly) assumed that

only the producers and consumers are affected by the production of the product x (plus, of course, the market for suppliers of production factors which are required for its production). Of course, the divergence between the different simple economic models and the reality can be interacted. Each cost or benefit effect of the product x is, in the ideal model, transmitted through the operation of market: the benefit of consuming good x goes exclusively to consumers who pay to buy it in its market. The cost of produced goods is exclusively incurred by the companies that produce them, and they compensate their costs of production through market revenues. To produce goods, producers use only those production factors that are purchased in the market of production factors. In the model of commodity x, there are no other relations in the production and sale of good than market relations. This fact can be seen as a drastic simplification, given the current circumstances in reality. In economics, the interdependence between individuals is mediated through the action of the market known as internal effects. If the market mechanism does not work, one might think that it should be replaced by another mechanism as quickly as possible. However, caution should prevail in such cases. Maybe one can finally show (which is what actually happens) that real allocation mechanism cannot meet the ambitious optimality criterion that maximizes net social benefit. If we reject all concepts that do not meet this criterion, then nothing will remain. Consequently, literature tends to replace the collocation “market failure” with the collocation “government failure”.

1. The principle of consumer sovereignty According to the concept of economic optimality, the levels of different values (that is, production costs, environmental impact and benefits of consumption of goods) play a fundamental role. The central idea in the concept of value is that the base is positive or negative value that is good or bad, and decision makers can make their own assessment. The utility of a product for the consumer is estimated in economic model that is based on the consumer’s feeling of utility. The concepts of utility (preferences) of decision makers in the economy are taken as a given value. In academic and professional literature, economic theory is an extremely wide (and “biologically” dynamic) field. The subtle difference between (endogenous) preferences and (exogenous) meta-preferences is

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Optimization of Economic and Environmental Goals by Multicriteria Analysis Models

made by Cooter (1991) or Ebert and Hagen (2002), who distinguish between (exogenous) preferences and (endogenous) affinities. The process of generating preferences, in particular, their determining in the processes of social interaction and learning, was not analyzed by the “mainstream” economic academic literature, although it is undoubtedly of great importance in practice. Moreover, attention should be paid to the fact that the “mainstream” economics is the base of this paper, in order to simplify that individual preferences are associated exclusively with the outcome of the allocation process (and, therefore, especially with the provision of goods). Regarding the ways and means by which the outcome of the allocation takes place, individuals are presumably indifferent. These (and other) limitations do not mean that traditional economic theory is worthless for explaining human behavior, but it cannot explain a significant aspect of the dynamics of human society and therefore can only be a single voice (though very important) in the “polyphonic choir” approach to explanations in social sciences (with special emphasis on the relationship between economic theory and psychology). In consumer’s evaluation of positive and negative utility, observations of decision makers are essential. They are inevitably selective. However, there is a risk of rejection of the principle of consumer sovereignty related to the weak awareness of consumers about the characteristics of the goods and the negative effects of environmental impact. On the other hand, there is the danger of authoritarian solutions. In a democratic society, the assessment of individuals should have a central role, even though they are not fully informed. According to the fact that there is a significant risk of abuse by “expertocracy”, expert level information must also be assessed sceptical. They can usually see only one particular aspect of a complex and interdependent problems of environmental policy or economic policy. Although they may, therefore, provide significant contributions to complex social communication process, they have no way to change them. In relation to the role of economics in discussed problems of the level of awareness of consumers, it must be noted that there is significant improvement. Thus, the “information economy” in which the level of awareness of decision-makers is no longer treated as exogenously given, is integrated in the “body” of economic theory. The information process of production and processing is itself treated as an economic problem, based on which the statements

about the optimal equilibrium are possible. These issues are discussed in more detail Varian (2006) and Macho-Stadler and Pérez-Castrillo (2001).

2. Concepts of ordinal and cardinal utility The concept of consumer sovereignty is accepted with reservation (probably due to lack of better alternative), when often faced with new obstacles on the way to define the optimum, which should be achieved by internalization. Even if their assessment of usefulness is considered and it is assumed that it is crucial for the optimum position, we cannot yet say how it should be measured (conceptual and practical). In modern microeconomics, the utility is ordinal, not a cardinal concept. In many areas of application of economic theory (and research programs), it is also appropriate to use the concept of utility, according to which they are in a position to choose situations that are appropriate to their level of desirability without the possibility to assess the utility which is done quantitatively or interpersonally comparable. It is necessary to define the socio-economic optimum, for example, the optimal amount of emissions. The claim that the optimal amount of emissions defined by the fact that the marginal cost of reducing emissions and the marginal damages equal means that both quantities can be determined quantitatively in one the same dimension. In addition to the practical difficulties in measuring, it was pointed out to a conceptual problem: environmental damage and costs of reducing emissions entail the loss of utility. Later we will determine the utility losses of refraining from the use of resources for alternative (e.g. consumer) purposes (“opportunity costs”). According to the definition of the social optimum approximate value of utility, strictly speaking, cannot be measured as a cardinal, but it may take a willingness to pay (or demand for compensation, respectively) by the relevant decision makers. The demand curve that is used to estimate consumer goods shows, as already explained, nothing other than the relevant consumer’s marginal willingness to pay for a product. Similarly, the marginal damage curve shows the willingness of individuals to pay for damage reduction. The second (related) interpretation shows the demand of the injured party to pay for tolerating externalities. It is important to note that the use of market value, or substitutes derived from market analogous procedure, is introduced in the assessment in STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 033-040

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addition to preferences, as well as income and assets. Apparently, the “rich” decision-maker is able to manifest a greater willingness to pay on the market than the “poor”. One cannot consider whether it is basically wrong, but instead, each individual assessment should be placed in a social assessment of the same importance. However, it points to the incorrect use of the will to pay as value that implicitly accepts the existing distribution of income.

properly introduced into the mathematical model using the multi-criteria optimization method. Problem multicriteria programming can be most easily shown in the example of linear programming with two objectives. If one takes the minimum cost as an economic goal, and minimum imission2 as an environmental goal, and if there are a number of technological and other constraints, the criterion set of possible solutions, in principle, has the form shown in Figure 1.

3. Multi-criteria programming in ecology European urban areas are faced with a number of environmental challenges. Although the scope and intensity of the problems vary, a common set of issues to overcome problems can be identified. The problems primarily include poor air quality, high intensity of traffic and congestion, high noise levels, lack of areas for sport, play and recreation, neglect of the built environment, high levels of greenhouse gas emissions, urban sprawl and generating large amounts of waste and wastewater. These environmental challenges are serious and have a significant impact on the health, environmental and economic performances. These problems are caused, in part, to changes in lifestyle, and partly to demographic trends (a growing dependence on private cars, increasing of resource use per capita). Environmental problems in cities are particularly complex and interconnected. Environmental issues that are closely associated with the costs, revenues and benefits have a growing problem with modern companies around the world. Environmental management today in modern society involves very complex processes and procedures that require decision-makers to know the environmental, economic, social and other principles (Morrissey & Brown, 2004) that are relevant to the consideration of all possible problems in ecology. Multi-criteria optimization is a set of popular methods that are used to solve problems that are based on consideration of more different requirements, both qualitative and quantitative. One of the requirements may be finding and selecting optimal locations for management of environment, alternative, or its strategy (Chang, Wen, & Chen, 1996; Wen & Lee, 1998; Chang & Wei, 1999, Radukić, Popović, & Stanković, 2012). However, multicriteria analysis has difficulty in solving the problems that include both qualitative and quantitative objectives under consideration. Environmental and economic objectives should be STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 033-040

Figure 1 The criterion set by two goals (minimum costs and minimum imissions) Source: Authors

All points in hatched field ABCDEFG and all points on the border line represent possible solutions. The aim of minimal cost is achieved at point D, and the goal of minimal imissions at point A. All points on the line ABCD are effective solutions, i.e. effective compromises. The set of all efficient solutions represent a complete solution of the problem (Zimmermann, 1976, p. 455). The optimal solution, i.e. the optimal compromise, is determined on the basis of complete solution using additional criteria. Depending on the applied procedure, Martić and Zimmerman distinguish the following basic methods for determining the optimal compromise, i.e. the next groups of multicriteria linear models (Martić, 1977; Zimmermann, 1976):  models with valuation (weighting) goals,  targeted programming, and  interactive methods for seeking an optimal compromise.

2

According to the Law on Environmental Protection of the Republic of Serbia (Sl. glasnik RS, no.135, 2004) the emission means the release of pollutants or energy from the individual and/or diffuse sources in the environment and its media, while imission means concentration of pollutants materials and energy in the environment which expresses the quality of the environment at a particular time and place.



Methods of the third group were developed for those situations in which the decision-maker’s preferences cannot be formulated in advance, but only on the basis of additional information on possible alternative consequences, obtained in a dialogue with the computer (Martić, 1977). Zimmerman describes the other group of models as models in which the optimum compromise solution is determined in such a way as to minimize the distance from the ideal solution (Zimmermann, 1976, pp. 456-457). The ideal solution is presented at the point where all goals reached its optimum level (point I in Figure 1). At first glance, one can easily get the impression that the goal programming models provide a “purely mathematical” determination of unambiguous optimal compromise, without the need for any evaluation systems. However, Zimmerman suggests that the use of the parameter “distance” as a criterion of optimality just implies the existence of an appropriate system of preferences (Zimmermann, 1976, p. 457).

4. The formulation of the economic objective - the minimum cost objective According to the academic and professional literature on the optimization of energy structure, some authors take the position that the sum of the cost (which should be minimized) –comprised of the sum of the cost of primary production and transformed energy, as well as the cost of transport and distribution – should also be included, preferably, and all the costs to the consumer (Požar, 1977). This position can be justified by the fact that the process of energy does not end in energy management, but that it continues in the sectors of final energy consumption. Energy needs, in fact, are the needs for useful energy, and useful energy is characterised narrowly limited opportunities for transport and storage so, as a rule, it must be produced by the consumer. Therefore, each final consumer of primary and transformed energy is also the producer of the useful energy. As the energy structure of economy should be provided satisfying the overall energy needs, the optimal energy structure will be achieved, in a theoretical sense, in the case when the total social costs of produced useful energy in all sectors of economy are minimal. In addition, the concept of social costs also allows and includes all these costs (valued consumption of manpower and resources for operation) which result in non-

productive sectors of economy, for example, in the sectors of general, common and private consumption. In this context, one should note the fact that the “social costs”, as a rule, occur in the form of the damage cost and remedial measures that have been largely borne by final consumers, which has a negative impact on individual wellbeing and standard of living. These costs of the final consumers are indirectly included in the model over the cost of the protective (preventive) measures, which are, in our case, replaced by the cost of damage and remedial measures. The model, therefore, may introduce the useful energy production cost of non-productive sectors of final energy consumption, that is, estimated consumption of manpower and resources required for work in households. Similarly, the cost of damage and remedial measures, and labour consumption in the household, as well as the costs of energy installations, also affects the individual well-being and the standard of living. The protective measure in this case is to move the process of useful energy production from the household sector to the energy management, such as, for example, transfer of heat for home heating in private dwellings to district heating plants and boiler facilities. In this case, the operation reduces the consumption in the household, and increases the well-being of the individual. Thus, in the case of production of useful heat for space heating, using stoves within households themselves, the costs are large for consumers and should include the cost of procurement of fuel, the cost of transportation to the front of an apartment building, transport costs in the basement or storage, transport costs from the basement to the apartment and the removal of ashes. Another group of costs includes investments in the furnace, including the chimney, and the need to increase floor space for accommodation oven and storage of fuel, etc. The problems related to the method of determining these costs will not be discussed in this paper, but it is important here to emphasize that their introduction into the model, from a theoretical standpoint, is entirely justified. The view that the amount of costs to be included, if possible, and all costs of consumer, satisfies the above conditions for optimal energy structure, by which the optimal energy structure will be achieved in the case of the minimum social cost of useful energy produced in all sectors of the economy. Does this mean that the model should include the cost of useful energy production of all sectors and industries of the economy?


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If we start from the basic economic principle that it consists of the application of the planned target of an organizing system achieved with minimal investment, and if this principle is applied to create a model for optimizing energy structure, then the answer to this question is negative. The corresponding energy (output) model should, in fact, be created with a minimal investment of work and means for obtaining all relevant parameters in the (input) model, which means that we should ignore any parameter for the validity of the model that is not necessary. To find the optimal energy structure it is not necessary to introduce all the processes and costs of production of useful energy. On the contrary, only one process (with appropriate costs) should be introduced in the model, for which there is a realistic alternative options, in which, therefore, there is a possibility to choose the optimum expression, because the processes are not alternatives and their costs as do not affect the optimization of the process and its outcome. For this reason, we can formulate the following two principles for the optimal structure of the model: 1. The principle of symmetry between the length and volume of a series of the energy costs. The costs incurred by the consumer should be introduced in the model exactly to the extent to which energy arrays include energy processes in the consumer, i.e. the true costs should follow and complement all the processes in the energy bursts. 2. The principle of optimal length of power series. The energy arrays in the model should be extended only to the extent of transformation and transportation of energy, where there is a choice between alternative processes. Because of the tight interconnectedness, both of these principles in the process of modelling the optimal energy structure must always be performed together. It follows from their use that energy arrays in the model should not be unnecessarily extended to the useful energy, if at this stage a range of energy there are no real alternative options, that is, in this case, any extension of power series in the model with unnecessary burden on the technical and economic (cost) parameters. Also, when we determining the cost of complex economic systems, then there is always a danger that the same costs are calculated repeatedly. This is especially true for the cost of the enSTRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 033-040

ergy bursts, in which the output of the previous process has as input to the next process. The problem to compute the total cost is essentially the same as the problem of determining the gross domestic product in the overall economy.3 In a complex system, which needs to be optimized, costs add up in such a way as to avoid the duplication of cost elements. For a system which comprises, for example, coal mines, power plants, heating plants and gas works, this actually means that the objective function must not impose the costs of coal consumption and power generation in thermal power plants and heating plants, or the cost of consumption of coal, electricity and thermal energy in the gasworks. In order to achieve optimization of complex systems, flows of material between the various sub-systems should not be evaluated. The latter statement is true both for consumption as raw material for transformation, and the auxiliary energy consumption in all the processes of production, transformation, transportation and distribution of energy. In the multiplicative energy balance, the processes of transport and distribution are considered as energy processes. This fact should be taken into account in the models of and a target function set in such a way that, when summing up, the cost comes to the small “doubling” of certain cost elements. According to this concept, the entire cost (in the form of specific total costs) should be calculated only for the first level of power series, i.e. for primary energy production and imports of energy, as well as the transportation and distribution of energy. For the other energy processes, it is calculated with a certain “net cost”, as follows:  for the production process of transforming energy with (specific) fixed costs of energy installations, and  for the production processes of useful energy by the final consumer with the (specific) fixed costs of installations related to energy process, as well as with the (specific) variable costs for spent workforce (Požar, 1977, p. 31). 3

It is known that the gross domestic product is an economic category, which measures the performance of production in a way that excludes the multiple calculations. However, there is a risk that the intermediate products are calculated at least twice, first to the manufacturer of theraw materials, intermediate products, etc., and second time by the manufacturer of the finished product. Because of determining the results of production, itrequires the calculation of intermediate production of goods that enter the manufacture of other products as raw materials.



The concept of fixed and variable costs which is applicable to the production of useful energy in the final consumer should be definitely applied to all production processes of transforming energy, because auxiliary materials and other elements of production occur in all the processes of transforming energy. According to the invested elements of production, there are the three major groups of costs: the cost of materials, the cost of operating funds and the labour costs. On the other hand, by the dynamics of spending we distinguish between: the fixed costs, the relatively fixed costs, and proportional costs. For the purpose of modelling the structure of the energy, it is sufficient to group the costs in the following manner:  the costs of funds for construction work and technical installations as a fixed cost,  the labour cost and non-energy auxiliary materials4 as variable (i.e. proportional and relatively fixed) costs. Therefore, these two sets of costs should be provided so as to produce useful energy, and transformed energy for the production, then estimated from the available data. Finally, it is worth noting that even in the production of primary energy, and also in the transport and distribution of energy, strictly speaking, the full (i.e. specific total) cost should not count, but only the total cost less the value of the auxiliary consumed energy in these processes. So, in cost of the coal should not include the cost of consumed electricity in the coal mine, and in cost of rail transport of coal should not enter the cost of energy used in transportation of coal, so as to avoid duplication of such costs in the target function. However, in practical modelling procedure, the elimination of these costs due to scarce data is very complex, and error greater than the error of “doubling” of costs may be introduced in the model. For this reason, a compromise between the theoretical justification and practical application of this concept should be found in exercising the net-cost concept. Also, all other objectives are introduced in the model as a target limit. In terms of the logical unity of objectives and measures, the adopted concept of economic and environmental goals determines the range of measures that can be in4

In complex energy systems, the costs of “energetic material” (energy as a raw material) and auxiliary power is not introduced into the sum of the total costs.

troduced into the model. The economic objective of minimum costs based on the concept of the cost of the protective (preventive) measures, plus the environmental objectives, are formulated as a maximum allowable emission of pollutants and waste heat. It follows that the model mainly includes safeguards to somehow influence the reduction of total emissions.

Conclusion The use of mathematical models and methods of optimization in defining sustainable development strategies is imposed as a modern scientific standard. These procedures are an important tool in the process of harmonization of conflicting objectives related to modern business and the environment. In this article, the authors describe the optimization procedure, as well as the main problems and conflicts between economic and environmental goals and ways to overcome them. Starting with the most important model for planning energy structure, on one hand, and a general theoretical model of the process of pollution and protection of the environment on the other, the most important goals for the economic and environmental optimization of energy structure of the economy are formulated. There is a general applicability of this methodology, as well as the general theoretical and methodological considerations in this paper, such as, for example, a general theoretical model of pollution and protection of the environment, the discussion of the mutual relations of the economic and environmental goals, and the manner of their introduction into models of energy and economic development, establishing a logical unity between the appointed objectives and selected measures in the model and so on. A possible practical application of the model for economic and ecological optimization of energy structure of the economy will depend on, above all, the availability of suitable input data for all the observed processes and regions (data on energy requirements, technical and economic coefficients, energy processes), among which the most important data related to the processes of pollution and protection of the environment are:  the information on maximum permitted levels of emissions of certain pollutants and waste heat for each type of pollution and each region based on the maximum allowable imissions, as well as a transmission characteristics of each region,


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 the information on the technical characteristics and the specific costs of the all protective (preventive) measures in the model,  the information about specific programs of energy processes, and  the data on emissions of non-energy processes in each region. Some of these data are difficult to determine for various reasons, such as, for example the different meteorological, climatic and geographic conditions in each region. However, in the long run, each region will have to have such data in their own interest, in order to implement effective local environmental policies. In line with global trends, the use of quantitative optimization methods in defining a sustainable development strategy in Republic of Serbia is limited. In fact, only a few studies dealing with this issue. On the other hand, the implementation of a strategy for sustainable development in Republic of Serbia is still more or less a political issue and a matter of a political consensus. This article presents a theoretical basis for the application of multi-criteria programming for solving environmental problems. It also indicates the possibility of introducing environmental targets in models of multi-criteria analysis. So, the intention of the authors is to pay attention to the scientific approach in defining strategies and policies for sustainable development. SM

References Chang, N. B., & Wei, Y. L. (1999). Strategic planning of recycling drop-off stations and collection network by multiobjective programming. Environmental Management, 24 (2), 247–263. Chang, N. B., Wen, C. G., & Chen, Y. L. (1996). A grey fuzzy multi-objective programming approach for the optimal planning of a reservoir watershed: B. Application. Water Research, 30 (10), 2335– 2340. Cooter, R. (1991). Lapses, conflict and akrasia in torts and crimes. International Review of Lay and Economics, 11 (3), 149-164. Ebert, U., & von dem Hagen, O. (2002). Exogenous preferences and endogenous tastes. Jahrbucher fur Nationalokonomie und Statistik, 47, 270-283. Macho-Stadler, I., & Perez-Castillo, J. D. (2001). An introduction to the economics of information. Oxford: Оxford University Press. Martić, L. (1997). Primjena matematičkih metoda u ekonomskoj analizi. Zagreb: Informator. Morrissey, A. J., & Browne, J. (2004). Waste management models and their application to sustainable waste management. Waste Management, 24 (3), 297–308. Požar, H. (1977). Pristup određivanju optimalne opskrbe gradova energijom. Paper presented at the Stručni skup IV međunarodnog sajma opreme za gradove „URBANEX“ u Zagrebu, Beograd. Radukić, S., Popović, Ž., & Stanković, J. (2012). Тhe goals and limitations of multicriteria models of environmental protection. Economic themes (4), 669-681. Varian, H. R. (2006). Intermediate microeconomics – A modern approach. New York: W. W. Norton & Company Inc. Wen, C. G., & Lee, C. S. (1998). A neural network approach to multi-objective optimization for water quality management in a river basin. Water Resources Research, 34 (3), 427–436. Zimmermann, H. J. (1976). Optimale Entscheidungen bei mehreren Zielkriterien. Zeitschrift für Organisation 45, 455-460.

 Correspondence

Žarko Popović Faculty of Economics, Niš Trg kralja Aleksandra 11, 18000, Niš, Serbia E-mail: [email protected]


STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 041-046 UDC 005:339.137.2

Received: March 12, 2014 Accepted: May 29, 2014

The Role of the Marketing Aspects of Market Integration in Achieving Competitiveness Aleksandar Grubor


Abstract A crucial characteristic of the modern-day world economy is global economic disbalance. Whereas the developed segment of the global economy, with its overall and particular interests, diverges on the one side, the remainder of the global economy remains of the other. The shifts noted over the past three decades have resulted in differences in the global economic leadership, and the pivotal points of such leadership. In such circumstances, transition countries should promote mutual conditioning of national economies with the trends of global market integration, as this is the basis of sustainable economic prosperity and enhancing their own competitiveness, as testified by the positive experiences of the economically most prosperous countries such as Switzerland, Japan, South Korea, Singapore etc. The relatively small countries (including Serbia), lacking particularly noteworthy available resources, with the orientation to workforce training and qualification, as well as active incorporation into international market integrations, have the opportunity to attain the key factor of economic success, which is increasingly shifting towards the market. The shortage of traditional resources, especially natural resources, can be successfully substituted with market expansion, as those who have larger markets in the 21st century will also have larger production. The globalisation process has been acting as a catalyst in the international market integration. The increasingly apparent market integration has resulted in the growth in the off-shore financial market, mergers and acquisitions, and the global restructuring of entire industries, which has further reflected on enhanced international competitiveness. In addition, the global homogenisation of the consumers’ needs, that is, equating the expectations and standards for products in international exchange bring into the foreground the role of marketing aspects of market integration in global competitiveness. Keywords Marketing, market integration, competitiveness.

Introduction As well as several significant economic phenomena keeping pace with the development of the globalisation process and overall market integration, the world economy has undergone significant radical over the past three decades. This particularly refers to relocating the mainstream industrial production from Western Europe and North America to East and Southeast Asia. In addition, regional economic integration has been strengthened by the regulation and institutionalisation of trade and financial flows, where the

value of international commerce transactions, where the value of international trade transactions remarkably exceeds the value of the total global production, which clearly indicates that the sources of economic growth in modern-day global economy are increasingly shifting in favour of active involvement in the global market. International companies have become the principal entities in international exchange, headed by superior cooperation, which have lead to a high degree of individualisation in international trade and highlighting the significance of international competitiveness, because international exchange is no

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The Role of the Marketing Aspects of Market Integration in Achieving Competitiveness

longer predominantly a macroeconomic phenomenon. The global extension of market integration has resulted in the establishment of the key factors of sustainable competitive advantage in terms of technological and marketing aspects, both through individual innovation of the production process and through encouraging the organisational and technological enhancement with appropriate decision making on the business and macroeconomic level. The predominant opinion in the reference marketing literature is that the key change in the marketing aspects of market integration is shift in the emphasis from the macroeconomic to microeconomic level of decision making, that is, functional connection of market-related integration and competitiveness.

1. Contemporary market integration The modern-day market integration was preceded by a significant growth in the level of international exchange of goods and services, and the values reached by this exchange. This growth emerged as a consequence of the following trends and tendencies (Jović, 2006, p. 70):  general liberalisation of international trade with an increasing homogenisation of international competition:  intensified international mobility of knowledge and capital, especially direct investment of the international private sector.  the growing effects of regional economic integration;  the shift of the pivotal point of the global economic cycles from internal to external demand;  strengthening the role of internationally oriented companies as the main holders and subjects of contemporary exchange of goods and services. Developing various forms of market integration, that is, strengthening economic and business relations reflects significantly on the operative activities of internationally oriented enterprises on the selected segments of the global market. Such market relations appear in various modalities, and signify strengthening and commercial relationships accompanied by gaining mutual benefits. The traditional logic of market integration was based on using potentials and benefits of a large market, while contemporary circumstances are increasingly characterised by specialisation and development of the marketing aspects of global STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 041-046

competitive advantage. In parallel with the liberalisation of the exchange of commodities, services, knowledge and investment, advances in the market integration expand the fundaments and forms of business cooperation of internationally integrated companies, bearing in mind the modern-day possibilities for fragmenting both production and other business functions. Viewed macroeconomically, the global economic interdependence also leads countries to deepen their economic relationships, for only in this way can the total economic activities be directed and developed appropriately. Market integration has undergone a long evolution. Historically, four forms of market, i.e. economic integration can be distinguished: free trade zones, customs unions, common market, and economic union. A free trade zone is the initial form of international market integration, and the best known example from recent past was EFTA, which has lost its significance due to full membership of Austria, Sweden and Finland in the European union. A customs union is a form of higher-intensity market integration, which, as a transitional form between a free trade zone and common market, does not exist in its literal sense in the contemporary world economy. In addition, customs duties are increasingly losing significance as a form of protection of foreign trade, whereas classical foreign trade transactions are being combined or replaced by other modes of entry into the world market. A well know example is the customs union of Belgium, Holland and Luxemburg in the period from 1921 until full EU membership. Common market refers to integration, which creates prerequisites for free mobility of capital and labour between member countries, and hence, free trade in commodities and services. The best known and probably most successful example of common market was the European Economic Community until 1992. In addition to the European common market, there are attempts at such integration of Latin American, Arab and African countries (CACM, LAIA, CARICOM, ANDEAN, ECOWAS, ACM, etc.). In essence, these integrations are closer to a form of creating regional connections, being burdened by the problems of overlapping export orientation, insufficient political consensus, or better to say, trust. Economic union is the highest form of integration of member countries, which also includes harmonising mutual economic policies, together with the policies of industrial and regional devel-

Aleksandar Grubor


opment. Such integration results in the formation of supranational, establishment of monetary union and common policies in many areas, starting from agriculture and social policies to enhancing competitiveness. The EEC has grown into such a union, as an entity of homogenous economy, with the idea of a single currency, unified fiscal and monetary policies. The contemporary economic relations also include non-conventional forms of market integration, resulting in various examples of marketbased association of modern countries, even associations of different market integrations. For instance, 1989 saw the inception of the APEC (Asia Pacific Economic Cooperation) as a regional integration for improving economic cooperation, and the effects of the association were adjusted towards forming an Asian-Pacific economic community. Thus conceived, the APEC features as a market integration of the Eastern hemisphere with the aim of eliminating trade and investment barriers by 2020. It is interesting to note that the APEC gathers countries previously integrated in ASEAN and NAFTA, as well as other globally significant economies. The contemporary market integration significantly extends the impact of marketing aspects in researching, planning and achieving competitiveness of internationally oriented companies, bearing in mind the potential and dimensions of a large market in implementing business strategies on a spacious geographic basis. In addition, the marketing implications of market integrations are also concerned with harmonising business-related and legal requirements as regards individual marketing mix, a common currency facilitating price comparison between countries, and encouraging economic development that should result in an increased number of solvent customers (Keegan, 2002, p. 50).

2. International competitiveness Market integration is functionally linked with achieving international competitiveness. Understanding a company’s international competitiveness requires an analysis of macro, meso and micro level of competitiveness in a broader perspective. A three-phase model (Hollensen, 2011, p. 104) was developed for the purpose of understanding this relationship:  analysis of national competitiveness, i.e. Porter’s diamond – the macro level

 analysis of competition within an industry, i.e. Porter’s five forces – the meso level, and  value chain analysis – the micro level. This model refers to individual competitiveness and competition and time-based competition. The factors influencing companies’ individual ability to achieve international competitiveness include internal abilities, skills, motivation and invested effort (Veliyath & Zahra, 2000). In the traditional approach to decision making, uncertainty leads managers to search more additional information based on which they will raise the level of certainty in decision-making. Managers, however, can increase competitiveness by using tactics that accelerate the analysis of gathered information and alternatives during the business decision making process (Kedia, Nordtvedt, & Perez, 2002). In this manner, competitiveness is achieved by simultaneous evaluation of various alternatives, and comparison with the traditional approach to decision making indicates accelerated analysis of strengths and weaknesses of individual options. The growing effects of market integration and operating under the conditions of globalisation have resulted in developing the concept of critical competitiveness (Rakita, 2009, p. 443). The globalisation process has led to changes in the nature of competition. Essentially, global competitors have grown in terms of size and market dominance, because, apart from having resources at their disposal on a global level, they also achieve competitiveness on the global market. A relatively small group of multinational companies, or their networks, achieve domination in many activities. The aggressive behaviour of global competitors is also increasingly manifest, as indicated by the growing number of aggressive measures taken by direct competitors. The earlier rules of loyal competitions are increasingly becoming a part of the past. In addition, competition on integrated markets exceeds the limits of the same industry, for the new competitors can be basically connected to some other industries. The traditional competitive analyses have therefore become imprecise and inappropriate. It is also interesting that the new competition increasingly occurs between strategic alliances and business networks. Shortened lifecycles of products leads to temporary or project-based company networking, so that independent competition is surrendering its place to competition between networks. Finally, the global competitors STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 041-046

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have also become a significant political factor, for their strategic developmental importance results in domicile states supporting them either directly or indirectly. The essential issue of international competitiveness is how contemporary market oriented companies should construct their attitude to global competitiveness. It must be borne in mind that there is no generally accepted answer to such a question. International competitiveness in the 21st century will be achieved by combining new abilities that will result in superior business qualifications of particular companies in comparison to their competitors. This, above all, refers to expressed innovativeness in technological, production-related and marketing-related sense. The contemporary international competition highlights the recurrent practice of extreme situations, because global market domination has resulted in hyper-competition, with the simultaneously occurring increasing fragmentation and growing competitive specialisation. Global competitors tend to find new ways of adding value to their offer. Global competitiveness results from a strategic approach stemming from the fact that it is essential to create future competitive advantage more efficiently than the competitors can reach the existing competitive advantage. By its strategic approach, the company opts for the best way of achieving long-term competitive advantage, developing its own knowledge and skills. In accordance with global integration, a company also opts for different modalities of market participation.

Global coordination/integration forces

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size and efficiency levels required for achieving and maintaining the adequate market position. Regarded as the fundamental criterion of business success on the national market, with regards to the selection principle, such a concept was earlier known in national marketing as the critical success zone concept. It must be borne in mind that the critical success zone is always defined in relation to competition and the standards of the target market, rather than being an absolute category. The critical zone of international competitiveness links two distinctive and interdependent criteria of market success: the differential advantage and the economies of scale. Achieving international competitive advantage, therefore, means that a company creates an optimum international marketing programme, and achieves the effects of the economy of scale. Critical competitiveness, in essence, features as the zone of successful market participation, which is why it is necessary to know the criteria for the peak and threshold of critical competitiveness. The critical competitiveness threshold refers to investment required for achieving advantage in relation to international competitor and achieving the appropriate market position. The critical competitiveness peak refers to achieving the leading market position, both in terms of market participation and the achieved business performance. Market orientation in operations on the integrated market is prominent in the critical competitiveness concept, by means of considering the existence and developing the company’s differential advantage, which means that the differential advantage is both the determinant and the objective of the international marketing strategy, However, the differential advantage is not an advantage by itself, as it primarily refers to advantage in combining marketing mix instruments in relation to competitors. The achieved differential advantage is a realistic guarantee of positive business results on the integrated market.

3. Creating marketing strategies on the integrated market

Figure 1 Global integration and market participation Source: Hollensen, 2011, p. 22

The concept of critical competitiveness, i.e. critical success zone, is based on the minimum STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 041-046

Creating marketing strategies on the integrated market begins by choosing the competitive strategy, determined by the current and future target markets. Generally, in doing business on the contemporary integrated market, marketing managers have three possible options for choosing a strategy (Porter, 1998):

Aleksandar Grubor


 cost leadership,  differentiation, and  focussing. The focussing strategy is characteristic of business operations on a single market segment, where orientation may turn to cost cutting or differentiation. Each of the three strategies can be applied both on the global and the regional market, and marketing managers can also combine strategies depending on the characteristics of the market and the product. As regards leadership strategy on the integrated market, the essence is offering identical products at a lower price than the competitors. Cost leadership is often preceded by investment in economies of scale, and implies a strict control of total costs, including research and development costs, and marketing logistics costs. Differentiation may be focussed on a single market segment, but it can also be applied on the market of the entire industry. In marketing practice, marketing differentiation may be real or apparent. In any case, differentiation should be noticeable to consumers, regardless of whether it is related to low prices, design elements, or aftersale service. When creating marketing strategies on the integrated market, the most frequent combination is differentiation with cost cutting, for this facilitates market penetration and increases market share

Figure 2 Marketing strategies Source: Porter, 1998

Developing market strategies on the integrated market does not mean that companies must serve the entire integrated market. Given the resources at their disposal, and the set marketing goals, every company decides on the extent of market participation on the integrated market. Various approaches are used on the integrated market, and companies often begin grouping the market by several criteria. In addition, various portfolio

models are used, due to observed positive analytical characteristics. Finally, when creating marketing strategies on the integrated market, companies make decisions based on market appeal and expected market position. It must be borne in mind that marketing expansion on the integrated market determines resource allocation by individual target segments. The basic alternatives in this sense are (Czinkota, Ronkainen, & Zvobgo, 2011, p. 174):  concentration on a small number of markets and  diversification through growth on a comparatively large number of markets. When deciding on the expansion strategy, it is necessary to consider the market’s specific features (such as growth rate, price stability, demand price elasticity of demand, etc.), marketing programme (competitiveness, need to adapt the product, market communication adjustment, economies of scale in distribution, etc.,) and the relevant factors controlled by the company management.

Conclusion Achieving competitiveness on the integrated market entails facing intensive competition of domestic and global brands, resulting in rising marketing costs and drop in corporate profits. In addition, competition on the integrated market includes all the existing and potential offers of competitors, and the offer of substitution products and services, which meet the same consumer needs, but in a different way. Competitors on the integrated market meet the needs of large market segments, parry each other directly, confronting each other while gaining adequate market share, which all results in reduced profit of all market participants. As the market growth slows down in such circumstances, it is further divided into smaller segments, which corresponds the market fragmentation process, as a process parallel to its integration. Just like fragmentation is accompanied by market integration, market consolidation is accompanied by its fragmentation. Market consolidation is the result of appearance of a new attribute, characterised by a high degree of appeal. Such a situation favours the expansion of certain areas of the integrated market. It must be borne in mind that the state of market consolidation is not a permanent feature of the contemporary integrated market either, given that it is mostly fluctuating between fragmentation and consolidation. SM STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 041-046

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References

Kotler, F. & Keller, K (2006). Marketing menadžment. Belgrade: Data Status

Czinkota, М. R., Ronkainen, I. A., & Zvobgo, G. (2011). International Marketing. Hampshire: South-Western Cengage Learning.

Porter, M. (1998). Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press.

Hollensen, S. (2011). Global marketing: a decision-oriented approach. Essex: Pearson Education Limited.

Rakita, B. (2009). Međunarodni marketing, od lokalne do globalne perspektive. Belgrade: Publishing Centre of the Faculty of Economics in Belgrade.

Jović, M. (2006). Međunarodni marketing (2nd ed.). Belgrade: IntermaNet. Kedia, B. L., Nordtvedt, R., & Perez, L. M. (2002). International business strategies, decision-making theories and leadership styles: an integrated framework. CR, 12 (1), 38-52. Keegan, W. (2002). Global Marketing Management. Upper Saddle River: Prentice - Hall International, Inc.  Correspondence

Aleksandar Grubor Faculty of Economics in Subotica Segedinski put 9-11, 24000, Subotica, Serbia E-mail: [email protected]


Veliyath, R., & Zahra, S. A. (2000). Competitiveness in the 21st century: reflections on the growing debate about globalization. ACR, 8(1), 14-33.

STRATEGIC MANAGEMENT, Vol. 19 (2014), No. 2, pp. 047-055 UDC 339.138:004.738.5

Received: March 12, 2013 Accepted: April 02, 2014

Who Has the Power in Digital Marketing: Customer or Content? Beba Rakic

Graduate School of Business Studies, Serbia

Mira Rakic

Graduate School of Business Studies, Serbia Abstract The literature in the field of marketing is based on customer orientation, which implies that “customer is king”. The development of digital media influenced the increase in the significance of digital content; so it is emphasized in digital marketing that “content is king” as well. The same content can have different meanings in different contexts, so “context is king” as well. The purpose of this paper is to investigate who the king is in digital environment: customer or digital content. The findings suggest that there is a need to create customer and community-driven digital content in real-time. In a digital landscape, digital content can be a competitive advantage. In a digital environment, both the customers and the content are essential, i.e. for customers, the continual creating and updating of digital content in compliance with the context is needed. The paper points out the problem and causes of digital marketing myopia. Digital customer orientation and the integration of online and offline content are required to avoid digital marketing myopia, the digitalisation of marketing activities. The paper promotes the significance of creating, updating and the promotion of valuable digital content for digital customers/communities. Quality content presents a great opportunity for two-way communication with customers and community, electronic-word-of-mouth (eWOM), user generated content (UGC) and inbound links in real-time. Keywords Digital environment, digital marketing, digital customer, digital content, context.

Introduction Changes in technological environment – the development of information-communication technologies (ICT) and changes in customer behaviour influence the changes in the field of marketing as well. Digital environment, economy, technologies and the process of digitalisation in general require changes in marketing practice, i.e. the digitalisation of marketing activities and marketing literature, through surveys in the field of digital marketing. The aforementioned does not mean the complete replacement of classic digital activities. It means that digital activities are added to current classic activities, i.e. that the choice of mix of classic and digital marketing activities is needed. The choice of combination of classic and digital activities depends on customers (capabili-

ties and readiness to use certain digital technologies) and possibilities of organisations. In a digital environment, for a digital customer, quality content in real-time is necessary. It is pointed out in marketing literature that “customer is king”. The process of digitalisation influenced the “appearance of new king”, i.e. literature in the field of digital marketing points out that “content is king”. Quality content presents a great opportunity for two-way communication with customers and community, electronic-wordof-mouth (eWOM), user generated content (UGC) and inbound links in real-time. The same content in different context can have different influence on customers and search engines, so that “context is king”. Taking it into account, the aim of this paper is to answer the following main survey question (RQ):

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Who Has the Power in Digital Marketing: Customer or Content?

 RQ1: Who is the king in digital environment: customer or content (in the context)? Other RQs are stated at theoretical foundations. The starting point in the survey was the attitude that content is created for specified context, so that the content and context are observed together.

1. Theoretical foundations and research questions 1.1. The power of customers - “Customer is King”

“Marketing is the whole business seen from the point of view of its final result, that is from the customer’s point of view.” Peter Drucker (Darroch 2009, p. 10). Customer orientation and phrase “customer is king” has become a key construct in the marketing literature – textbooks (e.g. Kotler & Keller, 2006; Perreault & McCarthy, 2002), papers (e.g. Ajay & Jaworski 1990; Blocker, Flint, Myers, & Slater, 2011; Homburg, Muller & Klarmann 2011; Fiala, 2012; Horobet & Belascu 2012; Levit, 1960; Narver & Stanley 1990; Wong, Wilkinson, & Young, 2010) and for practitioners (e.g. Bartholomew, 2002; Bowen, 2011; Grewal, Johnson, & Sarker, 2007; Karofsky, 2012; King 2012). Although a lot is written about customer orientation and significance of customers,as Levitt emphasized back in 1960 in his article: “Marketing myopia”, product orientation has been applied a lot in practice, rather than customer orientation. Non-comprehension of digital media power influences digital marketing myopia. The reasons of digital marketing myopia are:  non-digitalisation ofmarketing activities – non-comprehension of significance of changes in digital environment,  non-implementation of digital customer orientation – the focus being solely on traditional customers, and focus on digital content without perception of requirements and interests of digital customer,  non-integration of online and offline content – an organisation should not send different messages across different channels and confuse customers, who have no time for “interpretation of messages”,  a gap between digital marketing theory and practice.


One of potential causes of digital marketing myopia is being surveyed in this paper – the focus on digital content without the perception of requirements and interests of digital customer. Kotler and Keller (2006) differentiate between five concepts under which organisations have conducted marketing activities - production, the product, selling, marketing and holistic marketing concept. Holistic marketing recognizes that “everything matters” with marketing. The four components of holistic marketing are relationship, integrated, internal and social responsibility marketing. The customer is king means customer relationship management – CRM (Bartholomew, 2002), customer care (King, 2012), customer service (Mehok, 2010), ‘24/7 service on demand,’ (Bowen, 2011) etc. “The customer is always right”, even when he is not, because “a happy customer will tell one or two friends about their experience; an unhappy customer will tell everyone they know” (Mehok, 2010, p. 37). CRM is required for long-term relations with customers. “The customer is king. It’s not about a sprint, it’s a marathon. Our theory is that 90% of the customers want to do the right thing and you have a great working relationship with them”,emphasizes Ernie Boch Jr., vice-president of Boch Enterprises (Karofsky, 2003). For Nikki King Obe – the customer is king, which means making an organisation customer facing and improving customer care. The keyword is care. However, not only care for customers, but also for employees. If employees are not happy and fulfilled, they will never delight customers. “Also, a customer must be delighted very quickly and his problem solved speedily”. The creation of culture in which all employees comprehend and accept that “customer is king” is necessary. “The process is easy but the culture is really difficult” (King, 2012). For Chips Co. (a small, high-tech engineering firm), “the idea that ‘customer is king’ became firmly instilled in the employees’ mindsets. Chips Co. managers’ analysis revealed that among the primary needs was a tangible demonstration to customers that Chips Co. was ‘empathetic to their needs, and their need is to cost down’, and Chips Co. was ‘going to do what we can’” (Grewal et al. 2007, p. 409). For President of Blacklands Railroad – Wayne Defebaugh, the corollary is: Think “customer.” “Services is our biggest asset, and our slogan is

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‘24/7 service on demand,’“ Defebaugh says. “That means if a customer has a need that we can help with, we will do it. ‘Service on demand’ means we stay in constant contact with all of our customers via our office, cell phones, or Internet, etc.” he says (Bowen, 2011). In five-star hotels in India, the mantra is “the customer is not king, the customer is god” (Wahhab, 2012). On the other hand, it is pointed out in literature that all customers do not have equal importance for operating of an organisation and that organisation should focus on profitable customers. Smith (2000) points out that only some customers are kings. According to 80:20 principle, 20 percent of customers are profitable, i.e. generate revenue and profit. “Some customers are simply too difficult or too costly to keep, and on reflection, should be fired” (Smith, 2000, p. 2). Two paradoxes describe the economy at the beginning of the 21st century. Consumers have more choices that contribute to lower satisfaction. Top management has more strategic options that contribute to a lower value. What is stated encourages reconsideration of the traditional value system. Leaders need new frames of reference for value creation. The solution is a concept of cocreating a unique value with customers. Thanks to the Internet, consumers can connect and engage in active dialogue with manufacturers of products/services. Instead of producers, consumers initiate and control the dialogue with producers. The market becomes a forum where consumers play an active role in creating the value. An important feature of the new market is that consumers are becoming a new source of competence for the organisation. Competence of consumers depends on their knowledge and skills, willingness to learn and experiment, and the ability to participate in an active dialogue. Given the new role of consumers, competence is a function of the collective knowledge available in the entire system, i.e. expanded network made up of consumers, the traditional suppliers, manufacturers, investors and other business partners. The role of consumers is changing. Organisations can no longer act autonomously, design products, develop manufacturing processes, determine pricing, create marketing messages and control the distribution channels without the affect of the consumers. Consumers tend to affect every part of the business system. Trained with new tools and dissatisfied with the existing choices, consumers want to influence and participate in the co-creation of


value with the organisation. Interaction is the basis of a new system of co-creation of the unique value (Prahalad & Krishnan, 2008; Prahalad & Ramaswamy, 2000; Prahalad & Ramaswamy, 2004). Nowadays, digital technologies and media give power to customers. The development of digital technologies influences the changes in customer behaviour. From the aspect of organisations, key challenges in the field of customer behaviour in digital environment are: abundance, possibilities to connect with other customers, greater awareness, mobility and influence on organisations’ operating. Figure 1 shows five key sources of customers’ power. The result is a great potential of informed and connected digital consumers. Firstly, there is a large number of digitalised consumers. Secondly, digital technologies allow consumers to connect themselves mutually through social media (social networks, blogs etc.) in the first place, but in other ways as well, to exchange information and experiences and make an impact on organisations, events, persons etc. regardless of geographic or physical location. Thirdly, consumers find information fast and easily, they can follow up actual events (“live stream”), compare information and make better decisions. In the fourth place, wireless and mobile devices create mobile consumers, i.e. enable a consumer to be available constantly and everywhere, which is the most important for a consumer if he wishes to be available. In the fifth place, the result of power in the field of information, mobility and connectivity of consumers is an overall market power. Numerous, connected, informed, educated and interested in influence, consumers can have greater power compared to organisations. However, on the one hand, consumers often are not conscious of their power – potential, and on the other, initiators are needed – leaders who will initiate and encourage consumers to certain activities.

Figure 1 Sources of customers’ power Source: Authors

Zureik and Mowshowitz (2005) pointed out the power of consumer in the digital society, based on the survey of Internet’s role in the politiSTRATEGIC MANAGEMENT, Vol. 19(2014), No. 2, pp. 047-055

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cisation of consumers and consumption. “The potential power of consumers is very great, and computer-communications technology offers the means to help realize that potential. Many political actions have been launched by consumer groups in recent years, among them attacks on the practice of multionalcorporatins” (Zureik & Mowshowitz, 2005, p. 48). In the attention economy, organisations have to struggle not only for loyalty, but also for customer attention. A great number of traditional and digital media, the struggle of an individual for survival in the period of economic crisis and/or a decision to invest time in other activities means that organisations are struggling among themselves both for time and the attention of customers. “Attention should no longer be viewed as a commodity, but as a scarce economic resource. This is because we are witnessing a fundamental shift in the way people value and allocate their time” (Berman & McClellan, 2012, p. 28) and that all endeavour to “attract theking to themselves”. Respondents who answered to RQ1 that “customer is king” were asked the following RQs:  RQ2: Why is customer king?  RQ3: Why is content not king?  RQ4: If customer is king, what does that mean for you? 1.2. The power of content - “Content is King”

In 1996, Microsoft’s Chairman, Bill Gates, wrote an article entitled “Content is King” and the phrase has now become a mantra in the Internet world (Cousins, 2012). Since then, it has been pointed out in numerous papers that “content is king” (Cousins, 2012; Handley, 2012; SpringCM, 2012, etc.). Beside this statement, it is pointed out that content is marketing currency (Albee, 2010); free magnet to capture more leads online (Infusionsoft, 2011a); that content requires the new marketing equation, because “due to shifts in consumer attention, companies are challenged to move beyond episodic, short duration ‘push’ campaign initiatives into longer-term, often continual ‘pull’ content marketing initiatives that require new strategic approaches” (Lieb, Kichner, & Szymanski, 2012, p. 6) and that “magnetic content represents a departure from the classic interruption model of advertising” (Verna, 2012, p. 2). Oliver Newton (according to Verna, 2012, p. 8) emphasizes that: “The ad is yesterday. Content is the future.” “Magnetic content is designed to sup-


plement rather than replace offline and online advertising. Ideally, the content should engage customers in ways that conventional ads cannot, thereby fostering loyalty and enhancing brand value” (Verna 2012, p.8) etc. “Content marketing is the creation and sharing of content for the purpose of promoting a product or service” (Marketo, 2010, p. 1). Altimeter (according to Lieb et al., 2012, p. 6) defines content marketing as the following: “Content marketing is a term that refers to the creation and sharing of content for marketing purposes. In digital channels, it refers to content that resides on properties the brand or marketer owns (e.g., a website) or largely controls from a content perspective (social media channels, syndication). Content marketing differs from advertising in that, unlike advertising, a media buy is never part of the equation”. Types of content are: articles, blog posts, books/ebooks, brochures/manuals, case studies, e-mail, images, information guides, microsites/web pages, online courses, podcasts/videocasts, presentations, press releases, product data sheets, reference guides, resource libraries, RSS/XML Feeds, videos, webinars/webcasts, white papers, widgets, workbooks (Marketo, 2010), reports, Tweets and Facebook posts, etc. The benefits of content marketing are additionally confirmed by the following data. According to a Roper Public Affairs study, 80% of business decision makers prefer to get information from the companies they buy products or services from in a series of articles rather than an advertisement (80% prefer articles, 20% prefer ads) (Infusionsoft, 2011b: 2). Apart from the aforementioned, content marketing allows prospects to visit website of an organisation, contrary to classic ads by which activity prospects are interrupted (Infusionsoft, 2011b). “We’re entering an era of reciprocity. We now have to engage people in a way that’s useful or helpful to their lives… To put it another way: How can we exchange value instead of just sending a message?” (Jim Lecinski, according to SpringCM, 2012). The significance of content is perfectly presented by attitudes of a practitioner. Sheridan is one of the three owners of River Pools and Spas, which installs swimming pools and hot tubs throughout Maryland and Virginia. “I used to see my company as a ‘pool company’. Today, I see my business as a content marketing company. My entire goal is to give more valuable, helpful and remarkable content to consumers than anyone else in my field, which will in turn lead to more sales”.

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Sheridan views content as a competitive advantage that expands and deepens his relationships with would-be customers (Handley, 2012, p. 52). Why is content still king? According to Handley (2012) reasons are: the right mix attracts search engines, generates page views – and turns browsers into buyers. Chairman and CEO of Viacom Sumner Redstone once announced the motto of its transnational empire as “content is king” (Fung, 2006). Authors emphasize the quality of content (Cola & Prario, 2012; Croft, 2008). Croft (2008) poses the question: Why is quality content king? Today, with the explosion in internet use worldwide and the huge volume of information that is being added to the Web on a daily basis, quality is even more important. Users equate quality with relevance. They get annoyed when they get results that are, as far as they are concerned, irrelevant and time-wasting (Croft, 2008). “Ultimately, quality, and quality content, is king” (Cola & Prario, 2012, p. 192). Latendre (2012) points out that the content still rules, but context is now king. “Content is stored in one system and communication occurs in another” (Latendre, 2012, p. 7), so that the same content in different context can be differently perceived. Content, taken out of context, is diminished. Information, in order to really add value, requires context – so say John Seely Brown and Paul Duguid, authors of The Social Life of Information (Belle, 2011). Boyle and Whannel (2010) pointed out to the significance of medium for the transfer of content. Fung (2006) highlighted the problem of local adaptation of content. Context is presenting, at a right time, the most relevant content to each unique visitor based on the information an organisation knows about them to ensure they take the desired next step. When combining content and context, an organisation can start delivering experiences to visitors across all of the channels they use to connect with an organisation (Ektron, 2012a). Taking into account that customers differ, the same content is not suitable to everybody, so that personalisation and content targeting are required (Ektron, 2012b). As a consequence, integrated perception of content and context is essential. Content is still king. It is core building block of websites, email campaigns, mobile devices, and earned media. It comes in many forms and being able to manage content is an important mission for any organisation. Web content management empowers content authors to be more effective at


publishing content to each digital channel (Ektron, 2012a). The challenges in content creation are: the creation of content that engages audiences, creation engaging content that keeps social audience active, producing enough content, content that will generate leads and sales, content that establishes thought leadership creating a variety of content (Brafton, 2012). Respondents who answered to RQ1 that “content is king”, were asked the following RQs:  RQ2: Why iscontent king?  RQ3: Why is customer not king?  RQ4: If content is king, what does that mean for you? For creating and updating quality digital content, changes in organisation are required. Digital mindset, culture and staff are required as well. According to Lieb et al. (2012, p. 3) content marketing requires a shift in company culture, resources, budgets, partners, and strategy. Rebalancing is critical to achieve these goals. The choice is whether to rebalance now or wait until later, when the battle for attention may become even more difficult than it is today.

2. Method Using telephone interviewing, this survey endeavouredto answer the question - who is the king in digital environment: customer or content? The first question (RQ1) was the same for all respondents, and RQ2-RQ4 depended upon the answers of respondents to RQ1. The sample for this research consisted of 20 marketing managers in Serbia. The majority of respondents (60%) have more than 10 years of experience, followed by a group (25%) with 6-10 years of experience and 15% have less than 5 years of experience. The average age of participants was 37.45 years.

3. Results RQ1 - For greater number of respondents (63%) “content is king”. “Customer is king” is considered by 37% respondents. It is interesting that almost all respondents said that the question was difficult, they were changing the answer; i.e. they were not sure and could not determine themselves promptly for one of the two offered answers. The majority (87%) posted questions – whether they could give two answers, because they considered that both customer and content were essential. When they were told that they should decide for STRATEGIC MANAGEMENT, Vol. 19(2014), No. 2, pp. 047-055

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one answer, those who chose content, emphasized that the content is created for customer (87%). That is, although the answer was – content – they would add – the content is important for a customer. The analysis of answers to RQ2- RQ4of respondents, who answered to RQ1 that “content is king” is as follows. RQ2 - The greatest number of respondents (87%) considers that content is king because it enables brand awareness. Other reasons are: attracting customers (74%), interactions with customers and community in real-time (74%), engagement of customers, advocacy, eWOM, UGC (73%), retaining customers (69%), loyalty (67%), thought leadership (63%), reputation (62%), lead management (43%), conversion (42%), sale (37%), SEO (33%), and inbound links (28%). RQ3 - Customer is not king, because he has no power – he cannot influence organisations’ operating as an individual (considered by 85% of respondents), community has no power – consumers are not connected, although digital media allow them to be (82%). A greater number of respondents (76%) stated marketing myopia of organisations as a reason – organisations are not sufficiently customer oriented, the customer is not in the focus of operating, therefore he cannot be king. RQ4 - For organisations in which content is king, it means: serving customers in real time (86%), investing time into creation and promotion of enough content in real-time (85%); attracting and retaining customers (85%), educating customers (78%), entertaining customers (76%), entertaining with customers (63%), following up the UGC (user generated content) – listening of customers and communications (62%). Respondents stated that content should be: constant, useful, relevant, original, unique, fresh, educative, customer and community-driven, interesting, amusing, tochange, to be simple to read and share it through social networks and other media, to have viral power and provide positive eWOM and “buzz”, as well as that more frequent adding of content for mobile customers is necessary. The analysis of answers to RQ2- RQ4 of respondents, who answered to RQ1, that “customer is king” is as follows. RQ2 - Customer is king, because he brings profit (considered by 93% of respondents), ensures survival (89%), as an ambassador and medium, transfers messages – eWOM (85%), WOM (85%).


RQ3 - Content is not king, because good content does not guarantee sales and profit (considered by 86% of respondents), i.e. content can attract digital visitors, but they do not have to be necessarily customers. Other reasons are: the amount of content (85%), problem in content targeting – content without context does not mean anything (74%), there is no staff for creating content (35%), required time – for content creation and maintenance (26%). RQ4 - For organisations in which customer is king, it means: thinking as a customer, connection with customers, two-way communication with customers, CRM, listening to customers, response to requirements of customers, service, behaviour towards customers as persons with names and surnames, and not as “numbers”.

4. Discussion and conclusions This study aims to investigate who the king is in digital environment. The key finding is that content is king. The findings should not be simply interpreted as the majority of respondents were indecisive; they gave answers upon longer contemplating, and at last, the majority of respondents who stated that content is king, mostly added that content for customer is king (87%). It could be the final conclusion of the survey. The content is created for the customer and because of the customer. Thus the answer to the question: Who is the king in digital landscape: customer or content (in context)? is: customer and content. That is, a digital content is important for a digital customer (see Figure 2). In digital environment, both customers and content are essential, i.e. for customers, the continual creating and updating of digital content in compliance with context is needed. The findings suggest that there is a need to create customer and community-driven digital content in real-time. In digital landscape, digital content can be a competitive advantage.

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Thus, the conclusion reads: in accordance with customer orientation, starting from interests and requirements of digital customer, the creation of digital content is required.

5. Limitations and future research Digital content (in context) is king

Digital customer is king

Digital content (in context) for digitalcustomer/community is king  Brand awareness  Attracting of customers  Interactions with customers and community in real-time  Engagement of customers, advocacy, eWOM and UGC (“Buzz”, “likes”, fans, followers)  Retaining of customers, loyalty  Thought leadership, reputation  Lead management  SEO  Conversion, sale  Profit  Survival

Although the findings yield valuable insights into digital marketing, there are some limitations. Firstly, in this paper, it is implied that content is created for the corresponding context. Future research could be oriented to separation of content and context and to the perception of significance of customer, content and context. Secondly, possibilities in the field of creating of digital content are numerous – there is a great number of different content types. However, the use of numerous possibilities, fast creating – adding new content – quantity that does not follow up quality due to speed, insufficient number and insufficiently qualified staff, and what is most important, nonfocus on customer, can lead to digital marketing myopia. The digital marketing myopia itself could be the subject of a research – whether it exists, what are the causes, consequences etc. Thirdly, an organisation has to transfer the same message across all channels – both online and offline. The integration of online and offline contents is required. The compliance of messages through traditional and digital media, also, can be the subject of a research. In the fourth place, the research can be oriented towards the influence of digital content, which is created by organisations on UGC. In the fifth place, digital content on different media can lead to inbound links, so it would be interesting to research the influence of digital content in different media on inbound links. In the sixth place, the number of mobile consumers is increasing, so it would be interesting to research the content adaptation for mobile consumers. SM

Figure 2 Customer or content? – Digital content (in context) for digital customer/community is king Source: Authors

If “digital content is king”, does it mean that there is a digital marketing myopia, i.e. that the content is in focus rather than the customer’s orientation? The answer is – if the content is created in accordance to the requirements of customers and community, then the customer orientation is in focus. The focus on digital customer in specified context while creating digital content is required in order to avoid digital marketing myopia.


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Correspondence

Beba Rakic Graduate School of Business Studies, 8 Goce Delceva St, 11070, New Belgrade, Serbia E-mail: [email protected]


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Preliminaries of Modern Systems Management Concepts


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Leave an empty line between paragraphs. Headings: Headings must be short, clearly defined and numbered, except for Introduction and Conclusions. Apply at most three levels of headings. Please, leave two empty lines before headings and one empty line after. Font: Times New Roman, bold, 16 pt, centered. Section headings should be in bold with Leading Capitals on Main Words, Times New Roman, 14pt, bold, centered. Sub-section headings should be in italics, with Leading Capitals on Main Words, Times New Roman, 12 pt, bold. All tables, graphs and diagrams are expected to back your research findings. They should be clearly referred to and numbered consecutively in Arabic numerals. They should be placed in the text at the appropriate paragraph (just after its reference). Tables should be centered. All tables must have captions. The title of your table should follow the table number. Tables should not be wider than the margins of the paper. Skip two lines before and after each table. Figures should be centered. All figures must have captions. The title of figures should appear immediately below the figure. The title of the figure should follow the figure number. Figures should not be wider than the margins of the paper. Skip two lines before and after each figure. Figures will not be redrawn by the publisher. Figures should be high-quality grayscale graphics (please, do not use colors): vector drawings (with text converted to curves) or 300 dpi bitmaps. Please do not supply any graphics copied from a website, as the resolution will be too low. In all figures taken or adapted from other sources, a brief note to that effect is obligatory, below the figure. One sentence at least referring to the illustration is obligatory. Mathematical expressions should be numbered on the right side, while all variables and parameters must be defined.

Copyright

Articles submitted to the Journal should be authentic and original contributions and should have never been published before in full text, nor be under consideration for any other publication at the same time. Authors submitting articles for publication warrant that the work is not an infringement of any existing copyright and will indemnify the publisher against any breach of such warranty. For use of dissemination and to ensure proper policing of use, papers and contributions become the legal copyright of the publisher unless otherwise agreed.

Proof

Authors are responsible for ensuring that all manuscripts (whether original or revised) are accurately typed before final submission. One set of proof will be sent to authors, if requested, before the final publication, which must be returned promptly.

Referencing Guide The references should specify the source (such as book, journal article or a web page) in sufficient detail to enable the readers to identify and consult it. The references are placed at the end of the work, with sources listed alphabetically (a) by authors’ surnames or (b) by the titles of the sources (if the author is unknown). Multiple entries by the same author(s) must be sequenced chronologically, starting from the earliest, e.g.: Ljubojević, T.K. (1998). Ljubojević, T.K. (2000a). Ljubojević, T.K. (2000b). Ljubojević, T.K., & Dimitrijević, N.N. (1994). Here is a list of the most common reference types:

A. PERIODICALS Authors must be listed by their last names, followed by initials. Publication year must be written in parentheses, followed by a full stop. Title of the article must be in sentences case: only the first word and proper nouns in the title are capitalized. The periodical title must be in title case, followed by the volume number, which is also italicized: Author, A. A., Author, B. B., & Author, C. C. (Year). Title of article. Title of Periodical, volume number(issue number), pages.  Journal article, one author, paginated by issue Journals paginated by issue begin with page 1 in every issue, so that the issue number is indicated in parentheses after the volume. The parentheses and issue numbers are not italicized, e.g. Tanasijević, V. (2007). A PHP project test-driven end to end. Management Information Systems, 5 (1), 26-35.  Journal article, one author, paginated by volume Journals paginated by volume begin with page 1 in issue 1, and continue page numbering in issue 2 where issue 1 ended, e.g. Perić, O. (2006). Bridging the gap: Complex adaptive knowledge management. Strategic Management, 14, 654-668.

 Journal article, two authors, paginated by issue Strakić, F., & Mirković, D. (2006). The role of the user in the software development life cycle. Management Information Systems, 4 (2), 60-72.  Journal article, two authors, paginated by volume Ljubojević, K., & Dimitrijević, M. (2007). Choosing your CRM strategy. Strategic Management, 15, 333-349.  Journal article, three to six authors, paginated by issue Jovanov, N., Boškov, T., & Strakić, F. (2007). Data warehouse architecture. Management Information Systems, 5 (2), 41-49.  Journal article, three to six authors, paginated by volume Boškov, T., Ljubojević, K., & Tanasijević, V. (2005). A new approach to CRM. Strategic Management, 13, 300-310.  Journal article, more than six authors, paginated by issue Ljubojević, K., Dimitrijević, M., Mirković, D., Tanasijević, V., Perić, O., Jovanov, N., et al. (2005). Putting the user at the center of software testing activity. Management Information Systems, 3 (1), 99-106.  Journal article, more than six authors, paginated by volume Strakić, F., Mirković, D., Boškov, T., Ljubojević, K., Tanasijević, V., Dimitrijević, M., et al. (2003). Metadata in data warehouse. Strategic Management, 11, 122-132.  Magazine article Strakić, F. (2005, October 15). Remembering users with cookies. IT Review, 130, 20-21.  Newsletter article with author Dimitrijević, M. (2009, September). MySql server, writing library files. Computing News, 57, 10-12.  Newsletter article without author VBScript with active server pages. (2009, September). Computing News,57, 21-22.

B. BOOKS, BROCHURES, BOOK CHAPTERS, ENCYCLOPEDIA ENTRIES, AND BOOK REVIEWS Basic format for books Author, A. A. (Year of publication). Title of work: Capital letter also for subtitle. Location: Publisher. Note: “Location" always refers to the town/city, but you should also include the state/country if the town/city could be mistaken for one in another country.  Book, one author Ljubojević, K. (2005). Prototyping the interface design. Subotica: Faculty of Economics.

 Book, one author, new edition Dimitrijević, M. (2007). Customer relationship management (6th ed.). Subotica: Faculty of Economics.  Book, two authors Ljubojević, K., Dimitrijević, M. (2007). The enterprise knowledge portal and its architecture. Subotica: Faculty of Economics.  Book, three to six authors Ljubojević, K., Dimitrijević, M., Mirković, D., Tanasijević, V., & Perić, O. (2006). Importance of software testing. Subotica: Faculty of Economics.  Book, more than six authors Mirković, D., Tanasijević, V., Perić, O., Jovanov, N., Boškov, T., Strakić, F., et al. (2007). Supply chain management. Subotica: Faculty of Economics.  Book, no author or editor Web user interface (10th ed.). (2003). Subotica: Faculty of Economics.  Group, corporate, or government author Statistical office of the Republic of Serbia. (1978). Statistical abstract of the Republic of Serbia. Belgrade: Ministry of community and social services.  Edited book Dimitrijević, M., & Tanasijević, V. (Eds.). (2004). Data warehouse architecture. Subotica: Faculty of Economics.  Chapter in an edited book Boškov, T., & Strakić. F. (2008). Bridging the gap: Complex adaptive knowledge management. In T. Boškov & V. Tanasijević (Eds.), The enterprise knowledge portal and its architecture (pp. 55-89). Subotica: Faculty of Economics.  Encyclopedia entry Mirković, D. (2006). History and the world of mathematicians. In The new mathematics encyclopedia (Vol. 56, pp. 23-45). Subotica: Faculty of Economics.

C. UNPUBLISHED WORKS  Paper presented at a meeting or a conference Ljubojević, K., Tanasijević, V., Dimitrijević, M. (2003). Designing a web form without tables. Paper presented at the annual meeting of the Serbian computer alliance, Beograd.  Paper or manuscript Boškov, T., Strakić, F., Ljubojević, K., Dimitrijević, M., & Perić, O. (2007. May). First steps in visual basic for applications. Unpublished paper, Faculty of Economics Subotica, Subotica.

 Doctoral dissertation Strakić, F. (2000). Managing network services: Managing DNS servers. Unpublished doctoral dissertation, Faculty of Economics Subotica, Subotica.  Master’s thesis Dimitrijević, M. (2003). Structural modeling: Class and object diagrams. Unpublished master’s thesis, Faculty of Economics Subotica, Subotica.

D. ELECTRONIC MEDIA The same guidelines apply for online articles as for printed articles. All the information that the online host makes available must be listed, including an issue number in parentheses: Author, A. A., & Author, B. B. (Publication date). Title of article. Title of Online Periodical, volume number(issue number if available). Retrieved from http://www.anyaddress.com/full/url/  Article in an internet-only journal Tanasijević, V. (2003, March). Putting the user at the center of software testing activity. Strategic Management, 8 (4). Retrieved October 7, 2004, from www.ef.uns.ac.rs/sm2003  Document from an organization Faculty of Economics. (2008, March 5). A new approach to CRM. Retrieved July 25, 2008, from http://www.ef.uns.ac.rs/papers/acrm.html  Article from an online periodical with DOI assigned Jovanov, N., & Boškov, T. A PHP project test-driven end to end. Management Information Systems, 2 (2), 45-54. doi: 10.1108/06070565717821898.  Article from an online periodical without DOI assigned Online journal articles without a DOI require a URL. Author, A. A., & Author, B. B. (Publication date). Title of article. Title of Journal, volume number. Retrieved from http://www.anyaddress.com/full/url/ Jovanov, N., & Boškov, T. A PHP project test-driven end to end. Management Information Systems, 2 (2), 45-54. Retrieved from http://www.ef.uns.ac.rs/mis/TestDriven.html.

REFERENCE QUOTATIONS IN THE TEXT  Quotations If a work is directly quoted from, then the author, year of publication and the page reference (preceded by “p.”) must be included. The quotation is introduced with an introductory phrase including the author’s last name followed by publication date in parentheses. According to Mirković (2001), “The use of data warehouses may be limited, especially if they contain confidential data” (p. 201).

Mirković (2001), found that “the use of data warehouses may be limited” (p. 201). What unexpected impact does this have on the range of availability? If the author is not named in the introductory phrase, the author's last name, publication year, and the page number in parentheses must be placed at the end of the quotation, e.g. He stated, “The use of data warehouses may be limited,” but he did not fully explain the possible impact (Mirković, 2001, p. 201).  Summary or paraphrase According to Mirković (1991), limitations on the use of databases can be external and softwarebased, or temporary and even discretion-based. (p.201) Limitations on the use of databases can be external and software-based, or temporary and even discretion-based (Mirković, 1991, p. 201).  One author Boškov (2005) compared the access range… In an early study of access range (Boškov, 2005), it was found...  When there are two authors, both names are always cited: Another study (Mirković & Boškov, 2006) concluded that…  If there are three to five authors, all authors must be cited the first time. For subsequent references, the first author’s name will cited, followed by “et al.”. (Jovanov, Boškov, Perić, Boškov, & Strakić, 2004). In subsequent citations, only the first author’s name is used, followed by “et al.” in the introductory phrase or in parentheses: According to Jovanov et al. (2004), further occurences of the phenomenon tend to receive a much wider media coverage. Further occurences of the phenomenon tend to receive a much wider media coverage (Jovanov et al., 2004). In “et al.", “et” is not followed by a full stop.  Six or more authors The first author’s last name followed by "et al." is used in the introductory phrase or in parentheses: Yossarian et al. (2004) argued that… … not relevant (Yossarian et al., 2001).

 Unknown author If the work does not have an author, the source is cited by its title in the introductory phrase, or the first 1-2 words are placed in the parentheses. Book and report titles must be italicized or underlined, while titles of articles and chapters are placed in quotation marks: A similar survey was conducted on a number of organizations employing database managers ("Limiting database access", 2005). If work (such as a newspaper editorial) has no author, the first few words of the title are cited, followed by the year: (“The Objectives of Access Delegation,” 2007) Note: In the rare cases when the word "Anonymous" is used for the author, it is treated as the author's name (Anonymous, 2008). The name Anonymous must then be used as the author in the reference list.  Organization as an Author If the author is an organization or a government agency, the organization must be mentioned in the introductory phrase or in the parenthetical citation the first time the source is cited: According to the Statistical Office of the Republic of Serbia (1978), … Also, the full name of corporate authors must be listed in the first reference, with an abbreviation in brackets. The abbreviated name will then be used for subsequent references: The overview is limited to towns with 10,000 inhabitants and up (Statistical Office of the Republic of Serbia [SORS], 1978). The list does not include schools that were listed as closed down in the previous statistical overview (SORS, 1978).  When citing more than one reference from the same author: (Bezjak, 1999, 2002)  When several used works by the same author were published in the same year, they must be cited adding a, b, c, and so on, to the publication date: (Griffith, 2002a, 2002b, 2004)  Two or more works in the same parentheses When two or more works are cited parenthetically, they must be cited in the same order as they appear in the reference list, separated by a semicolon. (Bezjak, 1999; Griffith, 2004)  Two or more works by the same author in the same year If two or more sources used in the submission were published by the same author in the same year, the entries in the reference list must be ordered using lower-case letters (a, b, c…) with the year. Lowercase letters will also be used with the year in the in-text citation as well: Survey results published in Theissen (2004a) show that…

 To credit an author for discovering a work, when you have not read the original: Bergson’s research (as cited in Mirković & Boškov, 2006)… Here, Mirković & Boškov (2006) will appear in the reference list, while Bergson will not.  When citing more than one author, the authors must be listed alphabetically: (Britten, 2001; Sturlasson, 2002; Wasserwandt, 1997)  When there is no publication date: (Hessenberg, n.d.)  Page numbers must always be given for quotations: (Mirković & Boškov, 2006, p.12) Mirković & Boškov (2006, p. 12) propose the approach by which “the initial viewpoint…  Referring to a specific part of a work: (Theissen, 2004a, chap. 3) (Keaton, 1997, pp. 85-94)  Personal communications, including interviews, letters, memos, e-mails, and telephone conversations, are cited as below. (These are not included in the reference list.) (K. Ljubojević, personal communication, May 5, 2008). FOOTNOTES AND ENDNOTES A few footnotes may be necessary when elaborating on an issue raised in the text, adding something that is in indirect connection, or providing supplementary technical information. Footnotes and endnotes are numbered with superscript Arabic numerals at the end of the sentence, like this.1 Endnotes begin on a separate page, after the end of the text. However, Strategic Management journal does not recommend the use of footnotes or endnotes.

CIP - Каталогизација у публикацији Библиотека Матице српске, Нови Сад 005.21 STRATEGIC managament : international journal of strategic managament and decision support systems in strategic managament / editor-in-chief Jelica Trninić. - Vol. 14, no. 1 (2009) - . - Subotica: University of Novi Sad, Faculty of Economics, 2009-. - 30 cm Tromesečno. - Nastavak publikacije: Strategijski menadžment = ISSN 0354-8414 ISSN 1821-3448 COBISS.SR-ID 244849927

Rešenjem Ministarstva za informisanje Republike Srbije, časopis "Strategijski menadžment" upisan je u registar javnog informisanja pod brojem 2213, od 7. avgusta 1996. Rešenjem Ministarstva za nauku i tehnologiju Republike Srbije br. 413-00-435/1/96-01 časopis je oslobođen opšteg poreza na promet proizvoda kao publikacija od posebnog interesa za nauku.