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Essay: The impact of management practice on sustainable innovation culture the case of bank of Palestine

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1-Overview:

In his famous book entitled The Wealth of Nations (1776) British economist Adam Smith touched upon such broad topics including specialization, the division of labor, and productivity. The division of labor is the specialization of cooperating individuals who perform specific tasks and roles. Because of the large amount of labor saved by attributing specialized tasks to workers in Industrial Revolution-era factories, the classical economist foresaw the essence of industrialism by determining that division of labor represents a qualitative increase in productivity. He asserted that the specialization and concentration of the workers on their single subtasks often leads to greater skill and greater productivity on their particular subtasks than would be achieved by the same number of workers each carrying out the original broad task. That is, Smith contended that a production line administered by specialized laborers could endow a factory with a competitive advantage whereby the factory would be able to outstrip its competitors.

While it could be argued that Smith’s observation was well ascribed to eighteenth and nineteenth century industrialization, his case for specialization would not suffice for the twenty-first century business environment. In today’s world, an effective division of labor alone would not guarantee a competitive advantage to a business. In a highly globalized and interdependent world, a competitive advantage occurs when an organization acquires or develops a combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high-grade ores or inexpensive power, or access to well-trained and skilled personnel human resources. New technologies such as robotics and information technology can provide a competitive advantage, whether as a part of the product itself, as an advantage to the making of the product, or as a competitive aid in the business process. As such, an entire innovation culture is required nowadays to provide and safeguard a business’s competitive advantage.

Many renowned scholars have attempted to define the key components of the innovation culture required for a business to achieve a competitive advantage. Dobni (2008), for example, characterizes innovation culture as ‘a multi-dimensional context, which includes the intention to be innovative, the infrastructure to support innovation, operational level behaviors necessary to influence a market and value orientation, and the environment to implement innovation.’ Similar to Dobni, Hepburn (2013) describes innovation culture as an environment that encourages creative thinking and enhances efforts to gain economic and social value from the available knowledge and therefore generate new or improved products, services, or processes. As for Rao and Weintraub (2013), they both emphasize six building blocks of innovation culture that include: natural and human capital, processes, the model utilized to measure and reward successes, values, behaviors, and the workplace climate. If a business succeeds to establish these building blocks to create an environment that encourages critical thinking, then it would potentially be able to achieve the sought competitive advantage.

Central to Rao and Weintraub’s six building blocks of innovation culture are the human resources. Through a simple investigation of the building blocks, one is able 4 to notice that all attribute measurements of qualities and aptitudes required by the employees of any business if that business were to acquire a competitive advantage. Accordingly, as Decenzo and Robbins (2009) assert, the human capital is the main innovative engine in any business; it is an essential asset for a business to spur the required innovation in order to achieve and maintain a competitive advantage. After all, as multiple cases prove, a competitor will always have the potential to copy technology, purchase capital and obtain the necessary raw materials to ensure a successful production process. However, a competitor will find it difficult to imitate the human resources of other businesses.

In order for a business to ensure a powerful cadre, an effective human resources department is vital. An ideal HR department is one that adds value to the company by serving the needs of its managers and employees in an encompassing manner that would have tasks successfully and efficiently achieved. Therefore, the HR department should assume a leadership role in any organization and focus on executing predetermined point-specific practices that enhance efficiency and innovation at the workplace. While each business should take on the task of identifying and prioritizing its own Human Resources Management (HRM) practices to realize that goal, there are core practices that any HR department should adhere to. An HR department in any institution or business enterprise should establish a merit-based recruitment and selection process, maintain solid employer-employee relations, conduct effective training and development workshops, ensure a fluid knowledge-transfer process, lay an efficient performance-management framework and setup a transparent recognition-and-rewards system.

To best investigate the link between HRM practices and innovation culture, this study focuses on Palestine’s banking sector. Specifically, the case of Bank of Palestine (BOP) is thoroughly examined. Not only is BOP the largest local bank in Palestine in terms of total assets, total deposits and total credit facilities, but it is also the second largest private-sector employer in the country with a well diversified branch network. The HR department at Bank of Palestine oversees more than 1,230 employees who serve over 650,000 customers of 50 banking branches in rural and urban Palestine (as of April, 2014). Accordingly, the overarching jurisdiction that includes a multitude of tasks and responsibilities of this HR department offers BOP as an excellent case study for this thesis.

2-Research Problem:

As manifested in the above Overview, the adoption of certain HRM practices is crucial for the maintenance of an efficient workplace. When adhered effectively, those practices are known to spur the innovation culture that is required to safeguard the competitive advantage of a business enterprise, thus contributing to its survival and potential expansion. The researcher, as an employee in the quality assurance department at BOP for 3 years, observed the lack of innovation in the banking sector and that HR practices in the Palestinian banking sector are not playing a major role in contributing to innovation. In a number of Palestinian banks, the HR department is playing an operational role not strategic, which could be described as a personnel  department or fall under the administration tasks of the bank, so it is expected to have limited contribution to innovation. It seems that there is lack of awareness to the link between HRM and innovation culture, HRM should play an active role in building the bank’s culture. Although BOP is a leading bank and very competitive but still needs innovation, as innovation helps banks survive, increase customer satisfaction, gain competitive advantage, sustain market share, raise market profile, lead the market, and open new opportunities. Accordingly, in order to preserve their efficiency and stability, the Palestinian banking sector should be encouraged to uphold certain HRM practices that will be identified through this research.

3- Research Purpose:

The overall purpose of this research is to determine the degree of correlation that exists between HRM practices and innovation culture. That is, the study aims to identify the degree to which HRM practices have an impact on innovation culture. To achieve this endeavor, the case of BOP is illustrated and examined. The researcher evaluates the effectiveness of the HRM practices currently applied at BOP in inducing the innovation culture required to sustain an efficient workplace. Specifically, the study investigates the perceptions of BOP’s employees and management towards the current HRM practices adopted at BOP and measures their role in contributing to BOP’s innovation culture. This research also identifies the degree of innovation culture that exists at BOP. It then pinpoints the role of innovation in maintaining BOP’s competitive advantage, which has allowed BOP to outperform its competitors in the Palestinian banking sector. Finally, the study explores the means through which certain HRM practices could further enhance innovation culture at BOP. These practices would eventually focus on elevating the productivity and motivation of BOP employees, encourage staff to partake in product development, and improve the efficiency of general workplace processes. If BOP’s current HRM practices do not spur the necessary level of innovation culture, the researcher then offers recommendations that could enhance the effectiveness of the HRM practices under investigation so as to boost BOP’s innovation culture.

4 -Research questions:

The specific study objectives are answered through the following research questions:

1. What is the current level of innovation culture at BOP?

2. How effective are the current HRM practices that are adopted at BOP?

3. Do the adherence to HRM practices contribute to and influence the existing level of innovation culture at BOP? If yes, to what degree does each HRM practice affects innovation?

4. Do demographic variables, such as age of employees and years of experience, influence the relationship between innovation culture and HRM practices?

5- Hypotheses:  This study tests the following hypothesis:

Null hypothesis (H0):

‘ Innovation culture is not affected by the type of management practices implemented and the degree of adherence to these practices at the workplace.

Alternative hypothesis (H1):

‘ Innovation culture is directly affected by the type of management practices implemented and the degree of adherence to these practices at the workplace.

If a relationship between management practices and innovation culture exists then the study intends to investigate the impact of each management practice on innovation culture, in order to know which practices have the highest influence.

6-Structure of the study:

The above hypothesis presents the study’s dependent and independent variables. While the dependent variable is innovation culture, the independent variables are the adopted management practices at the workplace. In order to best test the hypothesis and present the study’s findings, the following structure is followed: A thorough literature review is presented and focuses on theories pertaining to management practices, innovation culture and the link between the two. From This thorough review, a theoretical framework is outlined to pinpoint the main Variables to be tested throughout the rest of the study. A methodology expressing the process required to test the variables follows, which is then utilized to generate necessary data. Finally, the data is discussed and analyzed to answer the research questions before final recommendations are offered.

Chapter Two

Literature Review and Theoretical Framework

Introduction

This chapter opens with a discussion on the importance, roles and practices of HRM. The chapter continues by outlining methods to measuring the effectiveness of HRM. A thorough explanation of innovation, its types and ways to induce it at the work place follows. Afterwards, the links between HRM practices and innovation culture are highlighted before the chapter concludes with a theoretical framework that is inspired by the previous discussion.

2.1 HRM

2.1.1 Importance and Roles of HRM Practices

The roles and functions of the HR department of any organization have changed over time. Traditionally, the role of the HR department was more associated with personnel management and administration, which was more associated with the processing of paper work that mostly served as the organizing and policing arm of the executive management (Heathfield, 2004). However, as the business environment transformed due to vast technological progress and rapid globalization, many scholars pushed for functional changes in the typical HR department. Durai (2010), for example, contends that HR managers should think beyond the traditional activities like personnel planning, welfare measures, and industrial relations. Instead, they should be more familiar with the operational aspects of the organization, like strategic planning, competitive pressures, return on investment and cost reduction in addition to their original tasks. Like Durai, Heathfield (2004) contends that today’s HR role should transform to better contribute in leading modern thinking, by following forward thinking practices, where the HR managers consider themselves as strategic partners, by contributing to the accomplishments and development of the business plan and objectives. The HR objectives should be based on the overall strategic business plan and objectives. This strategic partnership affects the HR roles in designing work positions, hiring, rewarding, recognition, performance development and appraisal systems, career and succession planning, and employee development. The personnel should also be considered as strategic contributors to business success (Durai, 2010; Heathfield, 2004). The HRM should be prepared to work from higher levels in coordination with the top management in designing and implementing the HR plans and strategies (Durai, 2010). Therefore, in order to improve performance, organizations should link human resource functions with the organization’s strategic objective through what is called Strategic Human Resource management (SHRM). SHRM enhances the business’ productivity and effectiveness, as well as helps in achieving their mission (Jayasuriya, 2012).

Several point-specific reasons have induced the aforementioned transformation in the roles and function of HRM, including the change in the nature of work. For instance, the technological developments currently taking place require more skilled and educated employees to provide the needed knowledge in performing the work. This requires higher efforts from the HR managers to meet the new generation’s needs and expectations as they now expect world-class HRM practices and systems. Therefore, HR managers should have plans and strategies to meet those expectations. Also the rapid social transformation improved access to education and increased labor mobility, which changes the profile of workforce in the country, and provides heterogeneous groups in organizations. This is another aspect that requires the HR managers to change their role, as they now have to deal with workforce from different cultures and backgrounds; this requires new HRM practices that match the interests of different types of employees (Durai, 2010). Globalization is yet another contributing factor for the change in HRM roles. The globalization of world markets has required organizations to change their traditional HRM practices to expand and include more functions that suite their companies and employees in different countries, enable them to coordinate and control their employees, and have integration between their global HR operations. In order to face global competition, HR managers should adapt HRM practices that enhance and increase employees’ productivity through bundling different HRM practices that produce excellent employee performance through enhancing employees’ commitment, competency, and skill set (Durai, 2010); and should apply what is called High Performance Work Systems (HPWS) emphasizing on high quality work, job security, careful selection process, comprehensive training, decentralized decision making, information sharing, pay for performance, dynamic leadership, inspirational motivation, and measurement of management practices (Alsaghir, 2010; Durai, 2010). Due to the current changes and the increased size of organizations, the HR department should use an integrated human resource information system (HRIS) that enables it to computerize operations (like recruitment, training, appraising, and pay roll preparations) and better coordinate their execution. This system actually resembles interconnected components working together to collect, process, store, and distribute information to support decision-making, coordination, control, analysis, and visualization of the organization’s HRM practices. This system eliminates the routine tasks for the HR department, and facilitates the update of employees’ data, and reduces the time needed to produce reports (Durai, 2010).

The skills, knowledge, and abilities of people within the organization are the key success factors that differentiate the organization from its competitors (Decenzo & Robbins, 2007). This brings the importance of HRM in matching employees’ goals with business’ goals and reducing the gap between both, and forming good harmony that utilizes organizational resources effectively and efficiently (Decenzo & Robbins, 2007; Pomoni, 2009; Poudel, 2013). As well to matching the unique competencies of employees with the business’ mission through efficient recruitment, performance evaluation, compensation, and discipline, handling the laws of protecting the human resources within the organization, as equal employment, compensation, safety, and labor relations, maintaining consistency and equity within the organization especially when it comes to promotions and rewards (Decenzo & Robbins, 2007), and providing a favorable culture for employees to work creatively and enhance their creativity skills, ability and knowledge (Poudel, 2013).

The main role of HRM is to attract good people to the organization, help them perform their work through matching their skills and competencies to the related area in the business, provide the needed training courses and select effective training methods and tools (Decenzo & Robbins, 2007; Pomoni, 2009; Poudel, 2013), then provide the needed motivation tools to direct their efforts to the desirable objectives, besides compensating them, and solving any problems that might arise. People are usually interested in joining a workplace that provides them with the opportunity to develop, train, and excel on a personal level in the future, in addition to receiving attractive benefits. Lastly HRM practices help in utilizing the organization’s resources in the best efficient way that reduces and avoids common personnel mistakes, like hiring the wrong person, experiencing high turnover, unfair labor practices and many others, in order to achieve the organizational objectives and goals (Decenzo & Robbins, 2007; Poudel, 2013). This is done by reducing employees’ turnover rate by increasing employees’ loyalty and commitment through letting them perceive their jobs as part of their personal life and not as a routine obligation (Pomoni, 2009). It could be argued from the above that the definition of HRM is continuously revitalized. Many scholars have attempted to define HRM that is ascribed to today’s business environment. According to Leede and Looise (2005), HRM is ‘all management decisions and activities that affect the nature of the relationship between the organization and its employees ‘ the human resources’ (P. 109). Decenzo and Robbins’ (2009) definition is more specific as it states that HRM is ‘the staffing functions of the management process, or the policies and practices needed to carry out the “people” or human resource aspects of a management position, including recruiting, screening, training, rewarding, and appraising'(p. 6). Jorgensen, Becker, and Matthews (2009) combine between the two previously mentioned definitions and state that HRM is ‘all management activities impacting relationships between organization and employee or more specifically as a system of operational functions such as staffing, selection, job design, training and career development, performance appraisal, and compensation’ (p. 452). Consistent with Decenzo and Robbins (2009), Durai (2010) states that HRM is concerned with policies and practices that ensure the best use of employees in achieving the organizational and individual goals. However Tan and Nasurdin (2011) conclude that ‘HRM practices relate to specific practices, formal policies, and philosophies that are designed to attract, develop, motivate, and retain employees who ensure the effective functioning and survival of the organization’ (p. 157). Jayasuriya (2012) summarizes the definition of HRM as managing resources that are human as it focuses on recruiting, managing, and providing direction for employees, HRM deals with compensation, hiring, performance management, organization development, safety, wellness, benefits, employee motivation, communication, administration, and training.

While scholars have defined HRM differently, all agree that certain core practices are required from the typical HR department. Every HRM department regardless of the size of the organization has specific roles and functions to perform, but these functions may vary form organization to another depending on its nature, size, and objectives (Durai, 2010). The core HR roles include staffing (HR planning, recruitment and selection), HR development, compensation and benefits, safety and health, employee and labor relation, and HR research (Decenzo & Robbins, 2007; Mondy, 2010).

2.1.2 Measuring the Effectiveness of HRM Practices

HR department should be able to measure the effectiveness of the execution of its roles. Top management expects from their HR managers to present measurable results about their practices and how they affect organization’s strategic objectives (Rao, 2009). Effectiveness measures how well the established strategic goals are met (Gibson, 2006).

While Durai (2010) finds difficulties in measuring the effectiveness of HRM practices and their impact on the overall performance of the business, and suggests that the HR’ department’s concentration in the future should be on finding and developing reliable and accurate HR tools to measure the efficiency of HR practices (Durai, 2010). Many previous scholars discussed several ways to measure the HRM practices’ effectiveness, summarized below in table 2.1, and discussed further afterwards.

Table 2.1: Measurements of HRM practices

Scholar (Year) Measurement tool

Belcourt (2001) ‘5 Cs of HR effectiveness model, which includes the compliance, client satisfaction, culture management, cost control and contribution

‘ The company’s survival

‘ Rate of Return (ROI), Return on Equity (ROE), expenses relative to sales, and other financial ratios

‘ HRM practices should be measured based on each unit’s goals not general measures like growth or profit

Gibson (2006) HR audits, ROI, Cost ‘ Benefit Analysis, and Break- even analysis

Bhatia (2008) Designed an electronic tool that helps CEOs and HR managers to test the HRM functions effectiveness. Divided into three main groups: strategically aligned HR, decision enablers and processes, and employee development empowerment

Cascio and Boudreau (2008) Input output ratios, such as the time to fill vacancies, turnover rates, turnover costs, and compensation budgets compared to total expenses

Jayasuriya (2012) ‘ Employee survey

‘ HR scorecard

Data Source: previous studies

Belcourt (2001) has developed a model called the 5 Cs of HR effectiveness (including compliance, client satisfaction, culture management, cost control and contribution), which measures HR’s contribution to the organization’s strategic objectives. The model combines the judgment of senior managers, investors, customers, and HR executives about HR practices effectiveness, in five different groups.

Compliance; the role of the HR department in this function is to make sure the organizational practices follow the laws and legislations, by ensuring that employees and managers understand and obey the law, therefore saving legal costs, fines, and bad publicity (Belcourt, 2001).

Client satisfaction; here the company measures the satisfaction of the stakeholders to determine the effectiveness of HR practices; satisfied employees increase customers’ satisfaction. Total Quality Management (TQM) tries to resolve the gap between clients’ expectations and levels of satisfaction, the bigger the gap the less effective the HR department. Surveying stakeholders before, during, and after a certain change in HRM practices makes it easier for the HR department to know clients’ perceptions, and prove that the change program meets its goals (Belcourt, 2001).

Culture management; organizations seek to provide the culture that enhances employees’ performance. Managers monitor the organizational culture through employees’ attitude surveys, believing that employees’ attitude has an impact on their behavior, for example absenteeism, tardiness, work performance, and strikes. The results of these surveys can be linked to the department’s objectives (Belcourt, 2001).

Cost control; as mentioned earlier the labor cost is considered the largest expense in the organization, HR practices can reduce this cost by reducing the number of staff and keeping the same productivity with less employees therefore increasing efficiency, or by reducing the costs associated to employees’ behavior such as absenteeism (Belcourt, 2001). Contribution; researches proved that integrated HRM practices have positive effect on employees’ performance through increasing knowledge, skills and abilities, enhancing motivation, and increasing the retention of competent employees. These practices have direct positive influence on the organization’s financial performance (Belcourt, 2001).

Also Belcourt (2001) sees that the first measure for HRM practices effectiveness is the company’s survival, as long as the company is not bankrupt then the organization is a success, but this measure alone is not satisfactory for most organizations because it doesn’t give relative measure of success, thus other measures should be used, like Rate of Return (ROI), Return on Equity (ROE), expenses relative to sales, and other financial ratios. Then the HRM practices can be related to these measures, like measuring the impact of investment in training or performance appraisal.

However, at the end, many measuring challenges stand; there are no best HRM practices for all the situations, each company has its unique characteristics. Within the single organization each section has its strategic goals, which means the impact of HRM practices should be measured based on each unit’s goals not general measures like growth or profit (Belcourt, 2001).

Gibson (2006) demonstrates many HR measurement tools that HR managers should apply, which include: HR audits, ROI, Cost ‘ Benefit Analysis, and Break- even analysis. More emphasis was put on the HR audits measurement; which is a tool that measures the efficiency and effectiveness of the HR department through testing how the HR functions are used to accomplish the organization’s strategic objectives. Precisely the HR audit examines the degree to which the organization fulfills the legal requirements, extent to which HR services are user friendly, employees’ complaints and objections and their causes and their impact, degree to which core competencies are identified and defined, the extent to which recruiting, selection, and retention practices reflect the organization’s core competencies, the degree to which the organization positions itself in the marketplace in terms of compensation and benefits, the extent to which the training program meets the current and potential employees’ needs, the level to which the organization’s safety program complies with public rules and regulations, and the degree to which it supports the company’s objectives.

Bhatia (2008) designed an electronic tool that helps CEOs and HR managers to test the HRM functions effectiveness, it consists of a checklist that includes twenty important criteria that form the framework of modern HR. These criteria are divided into three main groups: strategically aligned HR, decision enablers and processes, and employee development empowerment. Each criterion has a specific weight determined by size of the organization. For more information see (http://empxtrack.com/hr-effectiveness-survey).

Cascio and Boudreau (2008) show how to measure the efficiency of HR as well to the effectiveness of their practices. To measure HR efficiency, companies could use input output ratios, such as the time to fill vacancies, turnover rates, turnover costs, and compensation budgets compared to total expenses. These measures combine between HR processes and accounting outcomes, therefore it could determine if the HR practices are lowering the costs or not. The drawback of these ratios is that they concentrate only on cost reduction ignoring the value of employees’ talents.

While the effectiveness of HR practices can be measured through linking the HRM practices to the financial outcomes through using human capital index or human capital benchmarks. Some practices directly affect the financial performance, but many scholars couldn’t prove that more investment in HR activities enhances the financial outcomes, another problem of this measure is using one description of the implemented HR practice for the whole organization, where actually HR practices vary significantly across divisions, geographical locations and so forth. Another limitation is that this system only measures the existence of HR practices but not their effects (Cascio and Boudreau, 2008).

Jayasuriya (2012) demonstrates that the best way to measure the effectiveness of HRM practices is through the use of metrics in addition to linking them with balanced scorecards that measure the impact of HR practices through major stakeholders. Employee survey is one of the useful tools that measure the impact of employees’ management if appropriately focused on strategic issues. Another way is the HR scorecard, which includes the following elements: workforce success (did the employees accomplish the key strategic objectives for the business?), right HR costs (is the investment in the workforce appropriate?), right types of HR alignment (are the HR practices aligned with the business strategy, and differentiated across positions?), right HR practices (is the business following world class HRM policies and practices?), and finally right HR professionals (do the available HR professionals have the needed skills and qualifications to implement the world class HRM system.

2.2 Innovation

2.2.1 The importance of innovation in the workplace

There’s no unique definition for innovation, the literature review revealed that different researchers have different definitions; Leede and Looise (2005) define innovation as ‘a deliberate and radical change in existing products, processes, or the organization in order to achieve a competitive advantage over competitors’ (P. 108). Whereas Becker and Matthews (2008) define innovation in their study as ‘the creation of novelty which when effectively exploited and implemented generates sustainable value’ (p. 4,5); in this definition novelty refers to something new to the organization (incremental innovation), not necessarily new to the industry (radical innovation). The sustainable value they are talking about does not only include economic return, but also financial, social, environmental, and other outcomes beneficial to the organization. Dobni (2008) states ‘innovation is often expressed through behaviors or activities that are ultimately linked to a tangible action or outcome. Examples of this include the implementation of ideas surrounding new product/services or modifications to existing ones (product or market focus), restructuring or cost savings initiatives, enhanced communications, personnel plans (process related), new technologies (technology/ research and development based), unique employee behaviors (behavioral based), or organizational responses to opportunities (strategic) and unscripted situations’ (p. 540). While Sastry (2012) considers innovation as anything that provides additional value to customers or to the company. And lastly Kerpen (2013) believes that innovation is the implementation of new solutions that meet new requirements, inarticulate needs, or market needs.

In this dynamic and competitive world, the importance of creativity and innovation is increasing every day and organizational innovation is considered an essential weapon to compete (Griffin, 2011; Sastry, 2012; Sharifirad & Ataei, 2012; Tan & Nasurdin, 2011), accordingly organizations are moving toward more innovation oriented strategies and are frequently making changes in their processes, products and services or even organizational structure in order to meet customers’ fast changing needs and wants, increase the firm’s productivity and use human capital as a competitive advantage that cannot be copied (Alsaghir, 2010).

Innovation creates value and sustains competitive advantage in this rapidly changing environment, and allows firms to react to the changing environment and achieve better performance (Chen & Huang, 2009). Moreover, Becker and Matthews (2008) confirm that in the current fast competitive globalized marketplace, innovation has become a prerequisite for any business.

Many firms have restructured their employment relations in response to changing their HRM practices to adapt to the dynamic, information-rich environments. The new practices are adopted in a system-like manner rather than individual components, which lead to high innovative performance (Laursen & Foss, 2003).

Mobbs (2010) studies the importance of innovation for the nation as a whole and for firms. For firms, there are many reasons why innovation is important; some of them are reflected on the market (survive, increase customer satisfaction by making their lives easier, gain competitive advantage, sustain market share, raise market profile, lead the market, and open new opportunities) others affect external forces (comply with legislation, and reduce the impact of competition). Factors affecting staff and organization include employees’ motivation with interesting and challenging environment, ability to retain more talented employees and encourage those with great ideas to approach the company, provide stability for their employees, and attract alliance partners. The author finally identifies innovation’s impact on the financial side, which include: attracting extra funding, raising profits, and driving total shareholders return. Recently, almost every study of business leaders proved that the key to corporate growth, competing others in the industry, and keeping countries out-front in this increasingly flat, complex and highly competitive word, is innovation (Cahn, 2013).

The importance of innovation is rising in this age of technological advancement. This is obvious by multinational companies like Google; which sets a new policy called ‘the 20 percent program’ where employees can spend 20% of their working time (which is equal to one day per week) to work on external projects, accordingly this would provide them with the time and space to think innovatively, the policy worked well and generated new products like Google news (Gammerlgard, 2012; Kaplan, 2013).

Griffin (2011) and Sastry (2012) state that the availability of innovative workplace is critical in this competitive market that requires flexibility in work. Adding to this its effect on the overall economic growth. In order to guarantee sustainable business success, the organization should pay more attention to employees’ creativity and nurture this creativity, as well to involve employees in strategic initiatives (Sastry, 2012).

Innovation culture improves staff motivation and working conditions, which eventually enhance employees’ productivity, organizational performance, and innovation capabilities that enable the company to respond faster to market changes and have a competitive advantage (European Commission, 2013). In addition to being the preferred employer everyone wishes to join (Griffin, 2011). In fact, many businesses care about the final results and returns, which makes it difficult to create a culture that focuses on new ideas and long term gains. To innovate, companies must create a culture that encourages innovation among employees and facilitates the generation and development of new ideas (Newenham, 2013).

Oeij, Dhondt, Kraan, Vergeer, and Pot (2012) conducted a survey among companies in Netherlands that proved a strong positive relationship between innovative workplace and employees’ commitment and qualitative and quantitative organizational performance. Their study emphasizes Alsaghir (2010) conclusion of the importance of High Performance Workplace (HPWP) as a non-technical factor that fosters economic growth through providing organizational innovation (or what is also called workplace innovation or social innovation in the workplace), as well to efficient outcomes such as employee productivity, manufacturing quality, customer service, financial performance and profitability, and performance outcomes. The study also illustrates the importance of innovative workplace at three levels, which include the society level, the company level, and the employee level.

At the society level, it was proved that increased investment in organizational change increases economic growth. While the needed investment in organizational change is still undetermined, it depends on the country, but what has been proved is that no investment leads to lower economic growth.

At the company’s level, it was proved that workplace innovation increases quality of work and it is the only type of innovation that generates higher Total Factor Productivity (TFP) levels through implementing innovative practices such as performance based pay, flexible job design and employee involvement, and developing employee skills and labor management cooperation. Higher productivity is directly related to better communication, which leads to lower absenteeism and higher social and vocational competences. As for the worker level, innovative workplace increases employees’ autonomy to control their work responsibilities in addition to unrestricted capacity for learning and problem solving.

Therefore, attaining a world-class performance level requires capital investment, investment in and introduction of new technologies, as well the implementation of high performance workplace practices.

Almquist, Leiman, Rigby, and Roth (2013) surveyed 450 executives around the world for companies with around $100 million in revenue. The study revealed that innovation increases the annual growth rate of companies by 13% compared to 5% of other companies that lack innovation culture. Increases employees’ loyalty, this was measured through using employee Net Promoter scores (eNPS) a wellknown indicator of employees’ loyalty and enthusiasm. In addition to their better ability in making and executing decisions, this was measured by assessing the corporate decision effectiveness, which included the quality, speed and yield of decisions, and the effort involved.

2.2.2 Types of Innovation

The main two types of innovation are process and product innovation. The following table (table 2.2) summarizes the different types of innovation, followed by more details and a definition of each type.

Types of Innovation

Scholar (Year) Product Innovation Process Innovation Other Types

Sastry (2012) ‘ ‘ ‘ Incremental

‘ Radical

‘ Systemic

Tan and Nasurdin (2011) ‘ ‘ Administrative innovation

Dobni (2008) ‘ ‘ Technology/ research and development

Laursen and Foss (2003, 2013) ‘ ‘

Oeij et al.(2012) ‘ ‘

Ramalingam, Scriven and Foley (2009) ‘ ‘ ‘ Position innovation

‘ Paradigm innovation

Keeley, Pikkel, Quinn, and Walters (2013) ‘ ‘ ‘ Profit model

‘ Network

‘ Structure

‘ Channel

‘ Brand

‘ Customer engagement

Data Source: Previous Studies

Tan and Nasurdin (2011) define product innovation as the development of new products based on previous knowledge, research and practical experience to meet customers and market need. Dobni (2008) added to this definition the improvements to existing products or services. Laursen and Foss (2003, 2013) define product innovation as innovations of physical products and services. Oeij et al.(2012) perceive product innovation as an outcome where the company concentrates on the final product, new product features, and production methods. According to Ramalingam, Scriven and Foley (2009) product innovation is the change in the products/ services the organization offers to the end user. Tan and Nasurdin (2011) define process innovation as the creation of new process or improvement to existing process, which involves the implementation of improved production or delivery method that includes changes in techniques, equipment, and/ or software. Laursen and Foss (2003, 2013) define process innovation as innovation in the basic production process itself and also in the administrative structure of the firm. While Oeij et al. (2012) claim that process innovation indicates that the organization has the capabilities to innovate where they adapt the changing conditions. And according to Ramalingam et al. (2009) process innovation is the change in the way of creating and delivering products/ services. Process innovation leads to cost saving initiative and enhanced communications (Dobni, 2008).

Tan and Nasurdin (2011) define administrative innovation as performance derived from changing organizational structure and administrative process, reward and information system and it includes basic work activities within the organization, which are directly related to management. Sastry (2012) classifies innovation into five types based on their impact whether incrementally (new to the firm), radically (new to the industry) or systemically, which include: product innovation, service innovation, organizational (procedural or process) innovation, market-led/ market-push innovation, and technology-led innovation.

Adding to this technology/ research and development (R&D) based innovation where new technologies are introduced, strategic innovation, which occurs when organizations respond to opportunities (Dobni, 2008).

Ramalingam et al. (2009) added another two types of innovation, including: position innovation that demonstrates change in the context in which the product/ service are framed and communicated, therefore repositioning the perception of an existing product and how it is used, and paradigm innovation, which includes changes in the underlying mental models which shape what the organization does. In their book ‘ten types of innovation’ Keeley, Pikkel, Quinn, and Walters (2013) demonstrate different types of innovation that include the following: profit model (how companies make money, includes innovative ways to convert the company’s sources of value into cash), network (how companies connect with others to create value, how to take advantage of other companies’ processes, technology, offerings, channels and brands), structure (how the company organizes its talents and assets in unique ways to create value), process (how they use superior methods to deliver their products/ services), product performance (how companies develop differentiated features and functionality), product system (how they create complementary products and services), service (how they support and enhance the utility, performance and value of their offerings), channel (how products/ services are delivered to customers), brand (how products/ services are presented), and customer engagement (how companies foster distinctive interactions with their customers through understanding their deep aspirations).

2.2.3 Creating an Innovative Culture

Dobbin (2008) define innovation culture as ‘a multi-dimensional context, which includes the intention to be innovative, the infrastructure to support innovation, operational level behaviors necessary to influence a market and value orientation, and the environment to implement innovation’ (p. 540). Hepburn (2013) define innovation culture as an environment that encourages creative thinking and enhances efforts to gain economic and social value from the available knowledge and therefore generate new or improved products, services, or processes. In this context Rao and Weintraub (2013) emphasize six building blocks of innovation culture, including resources, processes, how success is measured and rewarded, values, behaviors, and workplace climate. Each one of these building blocks is divided to other factors and elements that can be measured to find the degree of the company’s innovation culture; more details will be discussed in subsequent sections.

To transform an organization into an innovative workplace, the definition of what is considered innovative should be stated. Then the business will require various types of teamwork, continuous skill developments and learning plans, employee empowerment, transparent communication practices, flexible organization arrangements, and innovation councils which consist of group of people whose main goal is to enhance and encourage innovation in the workplace and help in implementing the new ideas. Keeping in mind that changing an organization’s philosophy takes time, and requires the involvement of all the stakeholders from the beginning of the process. Information sharing and communication is mandatory at this stage, as well as to the agreement on the new strategic direction, all the stakeholders should be aware that the change is for their interest. Finally the process and its results should be monitored, although it might be hard to measure the advantages of the new work system in financial terms, other parameters could be used to evaluate the progress (Sastry, 2012).

May (2013) clarifies that enhancing employees’ creativity to be more innovative requires a framework to operate effectively as well as to enable the management evaluate the profitability of the results. Those approaches include: creating a stimulating environment that increases communication between employees by removing the physical barriers in the work area, and by adding inspirational objects that might not be directly related to their job. Rewarding employees for their creative efforts, encouraging them to take risks, and avoiding punishments when things go wrong, this way employees will be motivated to give suggestions and take more responsibilities. The last approach is providing different perspectives from outside the organization for example customers view on the way of using their products, this might open new paths for improving the product, as well knowing the key success factors that can be used against competitors.

Workplace innovation requires changes in work organizations, HRM and supportive technologies, and a strategy that enhances the organization’s performance and quality, in addition to further investment in IT and IT applications which are important components for organizational innovation, and enhances employees’ skills and company’s productivity and performance (Oeij et al., 2012).

To change the organizational culture into a more innovative one, executives should understand the current culture in their company; this could be done through using the six building blocks survey (discussed in the following section), and from the results of this survey managers should identify the strengths and weakness of the culture, and take them as a starting point for their intervention in the new innovative culture (Rao and Weintraub, 2013).

Organizations become innovative when employees have the freedom to be creative and come up with new ideas, products, services, and ways of doing work. And also when employees are aware of the company’s vision and have the autonomy to take the needed decisions that help in achieving this vision. Therefore, in order to provide an innovation culture, leaders should reduce the available policies and rules, as they constrain employees’ creativity and offer little room for innovation, this could be done through revising the rules and making sure that they are consistent with the new innovation culture, as many policies and rules expire by time and become helpless and leaders don’t change them frequently; the less the available policies and rules the more flexible the organization. Innovative organizations focus more on their vision than their rules. The leaders’ decisions for flexible working conditions should be reflected on their policies; when the CEO decides to offer the right work/life balance through flexible workplace, this should be accompanied with changing the HR policy of working hours. Same thing when managers decide to enhance employees’ creativity they become aware of the importance and chance of making mistakes, this should be accompanied with changing the related policy.

Also, the hierarchal organizational structure should be changed, the more levels in the workplace the more time required to take approvals on new ideas which irritates employees and discourage them from giving new suggestions. For an innovative culture, a flat structure is recommended, where employees are free to talk to each other and exchange ideas (Halls, 2010).

Kaplan (2013) states six steps for creating an innovation culture. The first thing is that companies should have accurate and specific mission and visions, not generic goals, with clear guidance. Then give employees enough time to explore and try new ideas by creating a structure for unstructured time for example, Intuit company uses time as a reward for employees because they know that it is the biggest motivator for entrepreneurs, this is done by giving their innovators three months of unstructured time, they can use this time either at one shot or divided between six months, to explore new opportunities. For this to succeed the company should provide employees with guides and tools to better enhance their innovation skills. In this regard companies can find free available toolkits, one of them is called Boot Camp Bootleg done by Stanford design School; many new products and enhancements in internal processes were done through using these toolkits. The availability of these toolkits in the organization motivates employees by recognizing that the leaders care about improving, empowering them, and developing their skills. The fourth step is measuring; the company should start measuring after figuring out what to measure according to the company’s priorities, what can’t be measured can’t be managed or improved. The fifth step is rewarding success; rewards should not only be in a formal way, sure formal rewards get employees motivated but for short period of time, other ways should be found to increase the engagement of employees. Colgate for example gives its employees who make a remarkable contribution in the projects wooden nickels, then those employees pass these nickels to their colleagues in the same project, and it’s common for employees to come to their desks after lunch and find some nickels from anonymous on their desks. This fun way encourages and motivates employees to stay engaged, adding to this promoting the free flow of ideas. And finally, the company should get symbolic; symbols could be in the form of values, statements, awards, posters in the hallways, success stories and others. As an example, Netflix names its conference rooms after blockbuster movies (one of them King Kong) as a reminder of the continuous breakthroughs its employees are creating and promoting. Kaplan (2013) concludes by clarifying that each organization culture is unique, each company has its values and goals, and therefore the new culture should take into consideration the company’s approach and align it with those values and goals.

Kerpen (2013) declares that the bigger the company gets, the harder it becomes to have or sustain an innovation culture. But still there are seven steps that can be followed to create a culture of innovation. The first step is evaluating the current culture by knowing the current level of the following: desire to be innovative, know-how to be innovative, and support to be innovative. Mainly by knowing how the company is ready and prepared for the innovation culture will help in knowing how easy or difficult it will be. The second step is determining the importance and role of innovation in the company’s future. Then an innovation mission and vision that align innovation with the company’s strategy should be announced. The fourth step is specifying measuring tools to track innovation; like percent of sales, percent of profit, and percent of company’s desire, know how, and empowerment to be innovative. Afterwards, the company should organize to support innovation, they should distinguish between what is urgent and what is essential. The sixth step is creating a roadmap of cultural interventions (which includes creativity, risk taking, collaboration, and customer focus) to shift the culture, and the company should make sure that these interventions are measurable and align them with the innovation mission. And the final step is intervening, measuring, repeating, and wining.

To have an innovative culture, there should be integration between creative people and business executives both inside and outside the organization. Pixar is an example of an organization that encourages innovation, where the development department of this company has incubation teams who are encouraged to give their feedback to help directors develop their ideas. There should be a structure, roles, and decision processes that foster innovation, and a culture that values, supports, and rewards innovation (Almquist et al., 2013).

2.2.4 Measuring Innovation Culture

Measuring innovation enables organizations to understand their current innovation practices and capabilities, points the company’s weaknesses and where it should focus to maximize innovation success, identifies the company’s strengths to capitalize on and identifies opportunities to increase innovation, assists in identifying and controlling the barriers that restrain creativity and innovation and spreading the awareness of the importance of innovation concepts and enhancing the innovation culture in the organization (Gamal, 2011). Table 2.3 summarizes the different ways previous scholars discussed about measuring the innovation culture, and discussed further afterwards.

Table 2.3: Measurements of innovation culture

Scholar (Year) Measurement Tool

Oeij et al. (2012) A survey that contains questions about four categories: autonomy, self-directed teamwork, internal flexibility, and innovation.

Rao and Weintraub (2013) Assessment tool called InnoQuotient survey, which consists of six building blocks of firm culture, including resources, processes, and how success is measured and rewarded, values, behaviors, and workplace climate

Doss (2013) Declares that companies should focus on measuring features of the innovation ecosystem rather than measuring the outputs of this ecosystem

Dobni (2008) Seven factors to measure innovation culture, which include: innovation propensity, organizational constituency, organizational learning, creativity and empowerment, market orientation, value orientation, and implementation context

Gamal, 2011 ‘ Eight categories, which include: knowledge, intangibles, networks, demand, clusters, management techniques, risk/ return, and system dynamics

‘ Diamond mode

Data Source: previous studies

Oeij et al. (2012) measure the innovation workplace in their study through a survey that contains questions about four categories: autonomy, self-directed teamwork, internal flexibility, and innovation.

Autonomy was measured by asking about the degree to which employees can decide on: determining the working method, determining the division of work, determining working times and breaks, and solving operational disturbances in the work process. The items were measured on 5-point Likert response scales. The second dimension about the availability of self directed teamwork measured by a question whether teamwork is an important issue to the work organization, and, if confirmed by the respondent, another question is asked to test whether the supervisor or the team members decide on the division of tasks and how the tasks are performed.

Internal flexibility consists of five items; the first two measure the supervisors’ flexibility with employees in terms of working time and work performance of employees. The remaining three measure the flexibility of work such as multi functional use of personnel, flexible working hours, and self-development. The final dimension, innovation, measured by a subscale of five items, two of them concern innovation policy of an organization, and the remaining three refer to the innovations implemented in the last two years.

Rao and Weintraub (2013) assessment tool called InnoQuotient survey, which consists of six building blocks of firm culture; the first three contain resources, processes, and how success is measured and rewarded. These blocks are considered tools oriented, quantifiable, and generally understood innovation building blocks, that is why they get most of the managers’ attention. While the other three blocks, values, behaviors, and workplace climate, are people oriented, less tangible, and more difficult to measure, therefore managers give them less attention, although the impact of these right brained blocks on innovation is much higher. Each one of the building blocks has three factors and each factor has three elements totaling 54 elements (6 blocks * 3 factors* 3 elements), each element of these 54 is evaluated using a scale from 1 to 5, as how closely each statement responds to reality in the workplace, 1 being the lowest and 5 the highest. Then averages are calculated to each block, factor, and element. And the final average shows the score of the company’s innovation culture.

Doss (2013) declares that companies should focus on measuring features of the innovation ecosystem rather than measuring the outputs of this ecosystem, as what Edward Deming said about working on the process not on the outcome of these processes. Leaders could measure these features through inspiring, relying on leadership judgment, being a vocal advocate for innovation values, and measure what they are trying to create, in a way that everyone in the organization understands and knows their role.

Dobni (2008) states seven factors to measure innovation culture, which include: innovation propensity, organizational constituency, organizational learning, creativity and empowerment, market orientation, value orientation, and implementation context. Those factors could be used descriptively and diagnostically.

After the 2000s innovation has been measured through eight categories, which include: knowledge (indicates knowledge that motivates innovation creation and the way it is developed and shared, it could be measured in terms of knowledge investment indicators and performance indicators), intangibles, networks, demand, clusters, management techniques, risk/ return, and system dynamics (Gamal, 2011).

Gamal (2011) also discusses the diamond model that is used to measure innovation in an organization, which considers five dimensions for assessing innovation; first one is the strategy (in this dimension three areas are measured; whether the company has a well managed strategic planning process, whether innovation is appreciated by the entire company and therefore included in the company’s culture, and whether the company has mechanisms that will help in effectively implementing the corporate strategy), process (measures the company’s flexibility in the process of developing new products, and managing the internal processes of the company), organization (measures whether the organizational structure encourages innovation, through effective top-down, bottom-up, and lateral communication and coordination within the firm, as well to the availability of a system that encourages employees to come up with new ideas), linkages (this measures the relationships between the company and its external parties like suppliers, customers, firms from other industries, specialists, and competitors), and learning (here four dimensions are measured, which include: the company’s commitment to training and development of employees, the organization’s ability to gather information from its linkages, the firm’s ability to learn from its successes and failures, and the firm’s ability to share this learning with the entire organization).

2.3 HRM and Innovation culture

2.3.1 The Relationship Between HRM and Innovation Culture

If innovation is the connection between two flows; the flow of knowledge and the flow of people, then HRM will play a serious role in determining and supporting these two flows (Becker & Matthews, 2008). Effective HRM practices and effective knowledge management enhance the organizational innovation (Tan & Nasurdin, 2011). The organization’s HRM practices matter to the contribution of human capital to innovation performance (Laursen & Foss, 2013). Firms can apply a set of strategic HR practices that discover and utilize knowledge and expertise in the organization, encourage and motivate employees to achieve business objectives like innovation performance (Chen & Huang, 2009).

Encouraging employees to become more curious thinkers could be a first step toward an innovative culture. Human inquisitiveness, when cherished correctly, is what leads people to find new solutions and improve the current situation. Companies don’t need to hire masterminds to achieve innovation, but providing the right culture by giving employees the confidence and incentives to solve the problems around them is all what is needed (Gammerlgard, 2012). Creativity is not an inborn skill; it can be nurtured and enhanced by providing the right environment that encourages creativity and supports innovation (Poh, 2011).

Leede and Looise (2005) developed an integrated model, that is illustrated in figure 2.1, that connects HRM and innovation, mainly technical innovation (product/ service and process innovation). The model combines two levels of innovation; the level of creating an innovative organization, and the level of specific innovation stages, activities or projects, with HRM policies and practices. To have an innovative culture, the organization should have a strategy aiming for innovation not just quality and cost cutting. To achieve this innovation culture, modifications should be made to the existing HRM practices as well as adoption to new ones, in order to attain HRM practices that achieve the organization’s aim of having an innovative culture.

The drawback of this study is that it didn’t mention the HRM practices that should be used to create an innovative culture in the organization, therefore Leede and Looise (2005) indicate the need for further research in this area, particularly in relation to the most appropriate HRM practices in the various innovation stages. And this is the gap that this study will try to fill.

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