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A Dynamic Performance Management Approach to Evaluate and Support SMEs

Competitiveness: Evidences from a Case Study

Carmine Bianchi
Professor of Business & Public Management,
University of Palermo, Italy
Milica Marinković
PhD Candidate in Business & Public Management,
University of Palermo, Italy
Federico Cosenz
Assistant Professor of Business & Public Management,
University of Palermo, Italy

Abstract
The role of Performance Management (PM) systems has become crucial for steering Small-Medium
Enterprises (SMEs) to successfully compete during the ongoing critical economic transition. To
improve decision-maker strategic learning processes, traditional PM frameworks need to be
combined with System Dynamics (SD) modeling. This paper shows how to design and use a
Dynamic Performance Management (DPM) approach to assess and support SMEs competitiveness.
The emerging framework is applied to a real case of a small business to analyze the empirical
effectiveness of the approach hereby suggested.

Key-words:
Performance Management, System Dynamics, SMEs, Competitiveness, Strategy, Case Study.

1. Introduction

In the last years, the financial crisis – which is overwhelming global economies – has deeply
weakened Small-Medium Enterprises (SMEs) competitiveness. The battle for surviving in an
economic context characterized by (i) a reduction in customer consumption, (ii) an unscrupulous
competition from emerging economies, (iii) an extreme impulse toward both efficiency and cost-
saving by large-sized companies, (iv) a limited propensity to funding from lending institutions and
(v) a decreasing support from public sector bodies, is becoming “bloody”.

In the long run, SMEs survival on the market basically depends on the results that they are able to
achieve in terms of competitiveness, profitability and capability to satisfy social requests.

As a result, the need to improve SMEs performance based on sustainable competitive strategies has
strongly emerged. To address this need, a number of frameworks and approaches for the design of
strategic Performance Management (PM) systems have been developed and discussed by scholars
since mid-1990s (e.g., the Balanced Scorecards by Kaplan & Norton). These approaches have been
primarily designed for being adopted in large-sized companies, while SMEs display distinct
characteristics that differentiate them from the majority of their larger counterparts (Storey, 1994).
However, SMEs may need a tailored approach enabling their key-actors (namely, those who cover
an entrepreneurial role and their own direct collaborators) to frame their own specific dynamic
complexity, so to understand how to pursue sustainable development, design strategies, manage
trade-offs in time and space, and assess the results emerging from strategy implementation
(Bianchi, 2002).

Particularly during critical economic transitions, organizations must strive towards a continuous
search for more efficient and effective management processes, implying a balanced use of the
strategic resources that are deployed in value creation processes. The identification of a proper
endowment and mix of strategic resources, is important since it allows one to understand how to
affect performance targets. Therefore, strategic resources should be recognized as a consequence of
a prior and selective identification of specific, measurable, achievable, relevant, time related
performance drivers and end-results. Such performance measures should portray a balanced set of
targets organizations must pursue, in the short and long run, according to a sustainable development
perspective (Bianchi et al., 2012).

PM systems represent useful frameworks to drive SME decision-makers in both designing

competitive strategies and measuring resulting outcomes. Such systems are focused on the
identification of „results‟ (i.e., outputs and outcomes) to pursue and of their own „drivers‟
(Fitzgerald et al., 1991; Fitzgerald & Moon, 1996; Otley, 1999; Ferreira & Otley, 2005).

However, traditional PM systems often lack to capture the dynamic complexity of managerial
decision making. In fact, they may omit to consider a number of relevant factors influencing
organizational performance. Such factors can be associated to delays, non-linearities, intangibles,
and to the unintended consequences on human perceptions and behavior caused by a superficial or
mechanistic approach in setting performance targets, especially if such targets are used as a basis
for organizational incentive and career systems.

Therefore, traditional PM systems may limit decision-makers‟ strategic learning processes (Sloper
et al., 1999; Linard & Dvorsky, 2001).

A “dynamic” perspective in designing and implementing PM systems implies the identification and
analysis of end-results, value drivers and related strategic resources accumulation/depletion
processes, according to a “cause-and-effect” perspective. A feedback analysis may allow decision-
makers to better frame the relevant structure underlying performance and, consequently, to design
and assess a set of alternative strategies to adopt, so to affect the system structure according to the
desired performance behavior.

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The aim of this paper is to analyze how the System Dynamics (SD) methodology may add value to
PM in those SMEs operating in dynamic and complex contexts. To this end, a case-study of a
Dynamic Performance Management (DPM) system recently designed for a small firm named
Mosaicoon will be illustrated. The company is sited in Palermo (Italy) and provides innovative web
marketing services worldwide.

The paper does not address a specific problem related to SMEs performance behavior over time,
rather it aims at discussing through empirical evidences the effectiveness of DPM applied to SMEs,
with a view to pursue their own sustainable development.

2. Research methodology

The research presented in this paper is specifically oriented to address the following questions:

o Which are the main limits of traditional PM approaches to SMEs?

o How can the SD methodology support PM systems to improve strategic learning processes of
SME decision-makers?
o How to design DPM systems to be used by decision-makers on a regular basis to manage SME
performance and competitiveness?
o What outcomes are related to the design and adoption of a DPM system into a specific small
firm, such as Mosaicoon?

Previous research on PM systems in SMEs seems not to properly consider how critical is the
identification and analysis of how to effectively design and implement such systems in smaller
firms. In fact, it fails to explicitly address the features of PM development processes that enhance
the likelihood of a successful implementation (Hudson et al., 2001) in SME contexts. Namely, a
passive application of theoretical approaches to different types of firms can be noticed. Such
practice has involved a lack of analysis of those critical success factors that differ from firm to firm.
On the contrary, PM frameworks should be designed according to firm‟s specificity (e.g. size,
governance, decision-making processes, industry).

Furthermore, current PM approaches tend to frame SMEs performance from a too static point of
view that does not allow one to properly assess policy impacts with reference to the trade-offs
existing between both short- vs. long-term effects (time), and results related to different strategic
business and functional areas in an organization (space).

As a result, in this paper a theoretical analysis is undertaken to describe a three-dimensional

systemic perspective of SMEs performance evaluation. Such dimensions refer to: (i) an
3
“instrumental” view that investigates how performance is achieved, (ii) an “objective” view, that
explores what performance consists of, (iii) a “subjective” view, that frames who is responsible for
the pursued goals and objectives, and for the implementation of planned activities aimed to achieve
them. The subjective view provides a synthesis of the two previous performance views (Bianchi,
2010).

Particularly, this work focuses on the “instrumental” view as a basis for designing and
implementing a DPM system in SMEs. SD provides a suitable methodology for modeling and
simulating small business performance, since it is able to support decision makers – through
modeling – in framing and understanding dynamic complex social systems, and to foster the design
and implementation of sustainable development policies (Forrester, 1958; Sterman, 2000). Model
building is accomplished through the identification of causal relationships between key
performance variables (i.e., end-results and performance drivers) and strategic resources within the
system. The underlying principle is that, if the model structure determines the system behavior and
the system behavior determines the organization performance, then the key to developing
sustainable strategies to improve performance is understanding the relationship between structure
and behavior and managing the leverage points (Sterman, 2000).

From a strategic point of view, the formulation and adoption of a DPM system may enable SMEs to
overcome the above shortcomings of traditional PM frameworks and support them in improving
decision-making processes. To understand how to implement the emerging DPM framework to
SMEs, the second section of the paper focuses on an empirical study conducted in a SME.
Particularly, the case study is framed through three stages, i.e.: (1) key actor knowledge elicitation,
(2) model building and data collection, (3) policy scenario analysis.

Each stage has implied the involvement of company‟s key actors (i.e., Mosaicoon‟s CEO and
strategic business units managers). Both semi-structured interviews and “Group Model Building”
techniques (Vennix, 1996) have been used to make key actors‟ experience explicit and,
subsequently, design the model structure. The resulting model highlights the main cause-and-effect
relations underlying the competitive system of Mosaicoon. Particularly, it shows a set of
performance drivers where to concentrate both management control and policy design processes. In
the last stage, this has allowed us to simulate different scenarios that may come up from the
adoption of alternative policies oriented to improve company‟s competitiveness.

3. Designing tailored approach to SME PM systems: a literature review

4
To be effective, the design of PM systems in small business requires consistency with the key
characteristics that differentiate them from larger firms. Current literature (Addy et al., 1994; Burns
& Dewhurst, 1996; Ghobadian & Gallear, 1997; Appiah-Adu & Singh, 1998; Berry, 1998; Marri et
al., 1998; O‟Regan et al., 1998; Haywood, 1999; Hudson et al., 2001) points out a number of
recurring SME characteristics, as listed below:

– personalized management, with little devolution of authority;

– severe resource limitations in terms of management and manpower, as well as finance;
– reliance on a small number of customers, and operating in niche markets;
– flat, flexible organizational structures;
– high innovatory potential;
– reactive to environment changes and legislative reforms;
– informal and unstructured strategy design.

As recommended for public and larger-sized organizations, also SMEs need to focus the design of
PM systems on a multidimensional perspective of performance that may capture both financial and
non-financial measures. Actually, organizational performance refers to three main dimensions
(Coda, 2010): (a) a competitive, (b) a financial, and (c) a social dimension.

As figure 1 displays, the competitive dimension is respectively oriented to satisfy market needs, i.e.
providing better products/services to customers in comparison to competitors‟ ones. The financial
dimension aims at increasing company‟s profitability to both support future investments and reward
shareholders. The social dimension is addressed to ensure a stable equilibrium between
stakeholders‟ contributions (e.g., employees, customers, providers, funders, shareholders, State,
environment) and the related expected rewards that the company provides them (e.g., work
motivation and salaries, product/service quality, regular payments, dividends, taxes, etc.).

MARKET

Competitive
dimension

Financial Social
dimension dimension

PROFIT & PEOPLE

LIQUIDITY ENVIRONMENT

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Fig. 1 – A multidimensional perspective of performance dimensions (Source: Coda, 2010).

Each performance dimension includes a set of strategic resources whose acquisition and
deployment in a synergetic way implies the possibility to generate certain results. For instance,
company‟s image refers to the competitive dimension, liquidity to the financial one, and employees‟
satisfaction to the social one. A multidimensional perspective of performance also highlights close
connections among the three mentioned dimensions; Therefore, such dimensions must be conceived
as a system where resource depletion/accumulation processes and related results of one dimension
impact on the performance of the other two1. This means that the success of a firm basically
depends on a consistent balance among these performance dimensions. To this end, PM systems
have to take into account a balanced mix of indicators that allows decision-makers to focus on the
trade-offs between not only individual and static performance measures related to competitive,
financial and social dimensions, but also short- and long-term effects of adopted policies, as well as
different strategic business areas or individual departments of functions (e.g.: Commercial,
production, R&D, Finance, Human Resource) within a company.

Based on the characteristics of SMEs as above listed, Hudson et al. (2001) have outlined a set of
critical performance categories that may be referred to competitive, financial and social dimensions.
In doing so, they discussed a comprehensive literature survey by Neely et al. (1997) that sorts and
links strategic performance measures to performance range targets (table 1). The survey collects a
wide array of researches both from theory and practice on PM design (Kaplan, 1983; Lynch &
Cross, 1991; Schmenner & Vollmann, 1994; Neely et al., 1995; Collier, 1995; White, 1996;
Laitinen, 1996; Slack et al., 1998; Medori & Steeple, 2000; Keegan et al., 1989; Sink & Tuttle,
1989; Jones et al., 1993; Meyer, 1994; Bititci, 1994; Ghalayini et al., 1997; Eccles, 1991; Kaplan &
Norton, 1992; Fitzgerald & Moon, 1996).

1
For instance, an increase in liquidity (financial dimension) allows the firm to hire more employees (social dimension),
who may improve product/service quality and, as a result, increase its customer base (competitive dimension).
6
 CUSTOMER
QUALITY TIME FLEXIBILITY FINANCE HUMAN RESOURCES
SATISFACTION

- Product - Manufacturing - Employee

- Lead time - Cash flow - Market share
performance effectiveness relationships

- Delivery - Delivery - Resource - Employee

- Market share - Service
reliability reliability utilisation involvement

- Process - Volume - Overhead cost

- Waste - Image - Workforce
throughput time flexibility reduction

- New product - Inventory - Integration with

- Dependability - Process time - Employee skills
introduction performance customers

- Computer
- Innovation - Productivity - Cost control - Competitiveness - Learning
systems

- Cycle time - Future growth - Sales - Innovation - Labour efficiency

- Product - Delivery
- Delivery speed - Profitability - Quality of work life
innovation reliability

- Labour efficiency - Efficiency - Resource utilisation

- Resource - Product cost

- Productivity
utilisation reduction

Table 1 – Critical performance categories tailored to SMEs management (Source: Hudson et al.,
2001).

Particularly, to identify performance measures relevant to SMEs management, Neely (1999) also
suggests that measures must be limited to a few critical success factors. As for SMEs – where
unstructured decision-making processes are usually adopted – plenty of indexes and indicators may
actually outline an unfocussed performance management framework and, hence, may divert
management attention from those value drivers having a major impact on company‟s results and
sustainable development.

Evidences from SMEs management practice also reveal that the use of an excessive volume of
indicators (in respect to the size and scope of company operations, and its own organizational
structure) may involve ambiguity and conflicting information in measuring performance (Dumond,
1994; Kald & Nilsson, 2000; Self, 2004). Due to this, managers can be discouraged to adopt PM
frameworks as a diagnostic tool. This negatively impacts on traditional SMEs strategic capabilities
(Henri, 2006).

Therefore, a selective approach (Simons, 1995) to performance measurement design is

recommended in SMEs as an even more stringent professional practice than for larger firms.

4. Key constraining issues regarding current PM approaches effectiveness: the need for
introducing a “dynamic” perspective into SME PM systems

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One of the structural issues that characterize SME PM is related to a prevailing resistance in using
Planning & Control (P&C) systems, due to the fact that entrepreneurs are inclined to centralize
decision-making and design strategies according to their personal experience and feelings. This
implies a weak understanding of both the impact of current decisions on future growth and which
policies to undertake in order to cope with major change.

Likewise, a “passive” approach to P&C has proved to be counterproductive for the understanding of
business processes and enhancing communication with company stakeholders (Bianchi, 2002). On
this concern, a field research (Bianchi et al., 1998; Parks et al., 1991; Shuman et al., 1985) has
shown that many entrepreneurs conceive the adoption of P&C systems as a bureaucratic constraint,
rather than as a learning tool that may support them to be aware of the “business formula” they are
going to adopt (Coda, 2010).

Furthermore, the adoption of P&C systems in SMEs has been mainly oriented to a financial
dimension of performance. Though fundamental, financial measures are no longer able to provide
information that can support: dynamic complex management, measurement of intangibles, detection
of delays, understanding linkages between short- and long-term, and setting proper system
boundaries in strategic planning. To cope with such problems, the Balanced Scorecards (BSC) have
been adopted by many companies (Johnson & Kaplan, 1987; Kaplan & Norton, 1996). The two
main concepts underlying the BSC framework can be synthesized as follows: organizational
performance cannot be managed by only focusing on end-results, and performance cannot be
measured only in terms of finance. It also must include the “customer”, the “process”, and the
“learning & growth” dimensions.

However, in spite of its widely recognized advantages, even the BSC presents some conceptual and
structural shortcomings. Linard et al. (2002) assert that the BSC fails to translate company strategy
into a coherent set of measures and objectives, because it lacks a rigorous methodology for selecting
metrics and for establishing the relationship between metrics and firm strategy. Sloper et al. (1999)
remark that the BSC is a static approach. Although Kaplan & Norton stress the importance of
feedback relationships between BSC variables for describing the trajectory of a given strategy, the
cause-and-effect chain is always conceived as a bottom-up causality, which totally ignores
feedbacks, thereby confining attention only to the effect of variables in the lower perspectives
(Linard & Dvorsky, 2001). Misperceiving the dynamic relationships between the system‟s feedback
structure and behaviour (Davidsen, 1996; Sterman, 2000: pp. 107–133) often leads SME
entrepreneurs to make their decisions according to a linear, static and bounded point of view, in
terms of time horizon and relationships between variables.

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In particular, the BSC approach does not help one to understand (Bianchi, 2012; Bianchi &
Montemaggiore, 2008):

How strategic resource accumulation and depletion processes are triggered by the use of
different policy levers affect performance drivers;
How performance drivers affect outcome indicators;
How outcomes will affect strategic-asset accumulation and depletion processes.

In order to provide SME decision-makers with proper lenses for interpreting such phenomena,
understanding the feedback-loop structure underlying performance, and identifying alternative
strategies to adopt so as to change the structure for performance improvement, SD modeling has
been used (Kaplan et al., 1996, Linard, 1996, Morecroft, 2007; Richmond, 2001; Ritchie-Dunham,
2001; Warren, 2008). SD models can be properly linked to either accounting or financial models to
support strategic P&C (Bianchi, 2002) and also to implement DPM.

5. A Dynamic Performance Management approach to frame SMEs performance

Combining P&C systems and SD modeling to support SME decision-makers in managing

organizational performance according to a sustainable development perspective is the core of DPM.

Namely, SD modeling is adopted to map system structure to capture and communicate an

understanding of behavior driving processes and the quantification of the relationships to produce a
set of equations that form the basis for simulating possible system behaviors over time. If process
structure determines system behavior, and system behavior determines SMEs performance, then the
key for developing sustainable strategies aimed at improving strategic learning processes and
maximizing performance, is acknowledging the relationship between processes and behaviors and
managing the leverage points.

Particularly, it is possible to identify two converging streams of research regarding the application
of SD to performance management: (1) a dynamic resource-based view of performance, and (2) a
dynamic view of performance management (Bianchi & Rivenbark, 2012). Even though
complementary, the distinction between the two approaches is related to the different perspective
through which they frame performance.

According to a dynamic resource-based view (Morecroft, 2007; Warren, 2002), decision-making

processes aimed at affecting organizational performance focus on strategic resources. Strategic
resources are modeled as stocks of available tangible or intangible factors in a given time. Their
dynamics depend on the value of corresponding inflows and outflows. Such flows are modeled as
9
“valves” on which decision-makers may act through their policies, in order to influence the
dynamics of each strategic resource, and therefore – through them – performance indicators
(Bianchi, 2010). In this respect, models are designed based on the building up and decline of key
core assets (e.g., workers, equipment, workload, perceived service quality, financial resources). The
feedback loops underlying the dynamics of the different strategic resources imply that the flows
affecting such resources are measured over a time lag. Therefore, understanding how delays
influence strategic resources and achieved results becomes a key-issue to manage performance in
dynamic complex systems.

A dynamic performance management view it is primarily concerned with the identification of both
end-results and their respective drivers. To affect such drivers, each decision maker must build up,
preserve, and deploy a proper endowment of strategic resources that are systemically linked each
other. This also implies that decisions made by different policy makers upon interdependent
strategic resources should be coordinated each other, according a systemic view. Figure 2 illustrates
how the end-results provide an endogenous source inside a SME for the accumulation and depletion
processes that affect the strategic resources that cannot be purchased from the market. These are the
resources generated by management routines (e.g. company image & reputation, organizational
climate, employees burnout), equity and liquidity (Bianchi, 2012, p. 154). End-results are modeled
as in- or out-flows, which over a given time span change the corresponding stocks of the
corresponding strategic resources, as the result of actions implemented by decision-makers 2.

Fig. 2 – A dynamic view of performance management (Bianchi, 2010, 2012).

2
For instance, liquidity (a strategic resource) may change as an effect of cash flows (an end-result); the image of a SME
towards customers (strategic resources) may change as an effect of their satisfaction (an end-result).
10
Competitive performance drivers are associated to critical success factors in the competitive system.
They can be measured in relative terms – as a ratio between the organizational performance
perceived by customers and a benchmark – or a target value. Such a denominator must be gauged in
relation to perceived past performance, customers‟ expectations, or even (if relevant) competitors‟
performance.

Also social performance drivers can be measured in terms of ratios between organizational strategic
assets and a target, which can mostly be expressed in terms of either stakeholder‟s expectations or
perceived past organizational performance. For instance, a social performance driver could be
referred to the ratio between the actual and planned number of perceived undertaken social
responsibility initiatives.

Financial performance drivers also must be measured in relative terms. For instance, the debts-to-
total investments ratio often affects the change in company solvency perceived by investors. Such
driver is the ratio between two stocks. Efficiency measures affecting operational costs can be
gauged in terms of ratios as well. For instance, the employee‟s time per unit of workload is an
expression of the ratio between two stocks – employees (unit of measure: people) and workload
(unit of measure: widgets per week), multiplied by a constant (working hours per people per week).

To use a metaphor, while the end-results represent the speed of an organization‟s performance, the
performance drivers represent the acceleration of performance. On the other end, strategic
resources can metaphorically be depicted as the forces upon which decision-makers act, in order to
affect the acceleration rate, and through it, the speed at which an organization is traveling.

6. The Mosaicoon case

Mosaicoon is a company established in 2008 in Palermo (Sicily, Italy); its core-business is viral
marketing. Aimed at guarantying the success of its campaigns, Mosaicoon developed and
introduced an innovative marketing model that combines the components of traditional advertising
campaigns with those of interactive videos. Particularly, viral advertising is “a marketing technique
that uses pre-existing social networks and other technologies to produce increase in brand
awareness or to achieve other marketing objectives through self-replicating viral processes
analogous to spread of computer viruses” (Source: Wikipedia). In addition, the firm offers an
innovative automated reporting tool to keep track of video views, statistics and feedback from web-
users. This allows clients to understand the competitiveness of products and to better identify
possible improvements.

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More than high-technological equipment, the most important assets of the company are human
intelligence and creativity. In fact, interactive video creation and sharing mainly are based on both
attractiveness and strategic positioning on the web to enhance the “word of mouth” effect – which
in this case might be called “view of click” effect – between users.

Mosaicoon‟s product portfolio includes design, execution and tracking of advertising campaigns. A
total of five different project types constitute the existing services provided by the firm: (1) viral
campaigns, (2) web, (3) interactive, (4) video marketing, and (5) distribution.

So far, Mosaicoon staff consists of 20 people and, according to current managerial forecasts, the
workforce will grow up to 25 employees. The company‟s organizational structure is divided into
four main strategic business areas: Commercial, Creative, Seeding and Financial.

Viral and Interactive campaigns represent the 30%-40% of company‟s total revenues, while
Seeding activities around the 70%. Company‟s client portfolio mostly includes multinational large-
sized firms.

6.1 The design of a DPM system into Mosaicoon

Since Mosaicoon is articulated in different highly inter-related business units, in order to assess
company‟s performance according to a dynamic approach, an inter-departmental perspective has
been adopted to evaluate the contribution that each area provides to another one located downwards
the business value chain. In doing so, we firstly made explicit the end-results related to each
business area, to focus subsequently on the identification of those performance drivers that affect
them. Then, going backwards, we also defined the strategic resources whose allocation allows
decision-makers to intervene on performance drivers. The interconnections between business areas
are made explicit by taking into account that the results of one area generate an impact on the
strategic resources of another one.

On this concern, the emerging framework – displayed in figure 3 – illustrates how we designed
Mosaicoon business structure, according to an “instrumental” view of performance, as defined in
section 2. Particularly, such framework combines the different business areas through feedback
mechanisms in order to capture interdependencies between both performance drivers with end-
results, and these latter with strategic resources.

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Fig. 3 - An instrumental perspective to frame Mosaicoon performance.

Each business area is connected with a set of indicators affecting the „results‟ emerging from each
process to which it contributes. It also implies that, for each process, the impact of other areas on
end-results, and the effects generated by material and information delays are taken into account.
Proposals, accepted proposals (i.e., new projects), realized projects, and views were identified as
related products of the mentioned business areas. To start with, for the Commercial business area
we identified as main end-result the change in number of new proposals. Then, four main ratios
were designed as correlated performance drivers: (1) “Number of contacts/Target number of
contacts”, (2) “Number of commercial staff/Total staff”, (3) “Time allocated to increase
contacts/Target time to increase contacts”, and (4) Relative image (i.e. “company image/desired or
target image). Finally, as main strategic resources, we distinguished five stocks: (1) Contacts, (2)
Staff in commercial BU, (3) Liquidity, (4) (Average or perceived) Time to increase contacts, and
Perceived Image.

The same approach has been applied to the “Creative” business area. Firstly, relevant end-results for
the decision makers are identified according to the “products”. In these terms, we have the
following end-results: 1) “New projects” (related to the product named “Accepted proposals”), and

13
2) “New realized Viral videos”, as well as “Cash flow” (both related to the product named
“Realized videos”). In relation to such end-results, the following drivers have been identified:

- “Relative quality” and “Price ratio” (related to the “Accepted proposals”), and
- “Time to transform proposals into viral videos”, “Relative quality”, “Staff ratio”, and
“Campaigns ratio” (related to the “Realized videos”).

Respectively, main strategic resources are stocks of Proposals and Proposals quality, for the first
“product”, and stocks of Projects, Liquidity, Total Staff, Skills and Time to create project, for the
second “product” in the “Creative” business area.

Finally, for the “Seeding” business area, the identified end-results are: “Change in Image”, “New
views”, and “Cash flow”. The variables which most drive performance, have been identified as
follows: “Seeding partners ratio”, “Relative quality of the videos”, “Campaign Price ratio”,
“Views/Target Views ratio”, and “Campaigns ratio”.

The applied framework clearly illustrates how the end-results of one business area (e.g., “Change in
number of new proposals” (Commercial business area) influence the strategic resource of
“Creative” business area, i.e. the “Number of proposals” stock. Identical connection is seen between
end-result of the Commercial business area (“Change in number of new realized viral videos”) and
the strategic resource of the Seeding business area (“Viral videos” stock).

Main changes in company‟s strategic resources are modeled as in or out-flows of the stock that
change over a given time, as a result of actions implemented by decision makers. There are also
causal relations between different strategic resources: image may affect the number of realized
videos. Furthermore, both image and quality may affect the Seeding area product (Number of
Views). On that way, following the “instrumental view” was confirmed very useful in model
building.

6.2 The model structure

The Mosaicoon SD model combines different sectors through feedback mechanisms in order to
capture the behavioral complexity of the different business areas and correlated products. Four
business areas are included: Commercial, Creative, Seeding, and Financial business area. The
feedback system related to Mosaicoon is displayed in figure 4. There are four reinforcing and eight
balancing loops.

The main reinforcing loop is R1. If company increases number of employees in the Commercial
area, this will bring an increase in the customer base (number of contacts). Likewise, this will cause
14
an increase in the number of proposals, and consequently will lead to greater number of accepted
projects. Since most of the accepted projects will be finalized as viral videos campaigns, that
number will increase as well. This will lead to increase in “Number of Views”. Other conditions
being equal, this will lead to an increase in the revenues, liquidity and investments. Finally, the
more investments are planned the greater hiring rate will be causing increase in the number of
employees. This loop has proven to be the most important one and the strongest one in the model.

The second reinforcing loop was found in relation to the Seeding business area. As the Quality of
Videos increases, so does the Number of Views. Compared to the Planned number of views the Gap
in number of views is decreasing in that case. Gap in number of views and Number of cooperators
have the same polarity, direct positive influence, since the bigger the gap is, the more co-operators
the company needs. The more co-operators needed to reach the planned number of views, the
higher the costs of the company are and that leads to reduction in liquidity. Finally, liquidity
positively influences investments in skills, which in turn raise the Quality of Videos, which closes
the reinforcing loop.

The last reinforcing loop is mostly connected with Seeding business area and consequently with the
Financial business area. Namely, the higher the Quality of Videos is the more Number of Views it
will reach. That leads to higher Revenues and consequently to higher liquidity, which allows more
Investments in skills and therefore better Viral Videos Quality.

Regarding the Commercial area, it is expect to hire a Desired number of employees (up to 25
people). On this concern, the main limit is related to wages. In fact, wages negatively influence the
level of liquidity (loop B6). Likewise, loop B5 shows how an increase in liquidity generates higher
investments which, in turn, may drain liquidity. This represents a limit to growth.

Loop B3 shows that an increase in contacts within the company‟s database positively affects the
time employees will spend to maintain existing contacts. This may decrease the time available for
gaining new contacts. A reduction of time spent to gain new contacts, in turn, will lead to a decrease
in new contacts inflow.

Loop B8 illustrates that the larger the gap between planned and actual number of new contacts is,
the higher the desired number of new employees will be. This latter involves an increase of the gap
between desired and actual employees in the Commercial area. Similarly, the larger the gap is, the
higher the hiring rate will be. As the hiring rate rises, there will be more people working in the
Commercial area that will allow the company to increase its contacts.

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A balancing loop related to Seeding business areas is loop B7. It shows that the higher the number
of co-operators is there will be more views of the campaign. That will diminish the gap in number
of views defined as the difference of planned number of views and actual number of views.

The “Creativity” business area also faces certain limits to the infinite growth. The first balancing
loop is particularly interesting since it shows how the Quality of Videos influences Image of the
Company in the positive way, naturally. The company‟s decision makers, with the increasing
image, then decide to raise the price (their policy is, once the image is built, to attract only the “best
customers”, leading brands and they increase the prices of their videos). That in turn will have some
limiting effects to the “Number of Viral Videos” that will be realized. In fact, ratio Actual price per
campaign over the Standard price is one of the key drivers in the Seeding area. The second loop in
this area, marked as B4 shows so-called “Burn out” effect of the employees and shifts the light on
this possible vulnerability in this business area.

The balancing loop related to Seeding business areas is also loop B7. It shows that the higher the
number of co-operators is there will be more views of the campaign. That will diminish the gap in
number of views that is defined as the difference of planned number of views and actual number of
views.

16
Fig. 4 – Mosaicoon‟s model structure.
17
6.3 Alternative policies simulation and scenario analysis

After the model was built and tested the validity, the logical question emerged from the side of
decision makers: what can be recommended to manage the performance of Seeding and Viral
Campaigns using System Dynamics methodology? In order to answer this question the exogenous
parameters, which have the most influence on the key performance indicators, were identified:
Planned number of new contacts, Planned number of realized viral videos, and Desired number of
views per project.

In the simulations, the initial values of these variables were altered. The most influential
endogenous variables were found to be quality and investments in marketing. Therefore, two main
different investments from the stock of liquidity are distinguished. Firstly, three policies regarding
marketing investment with different levers were outlined.

“Policy 1” implies that from all investments (by the rule of the company it is set to be 70% of the
Liquidity) allocation to marketing is 0.33, or one third of the whole amount. “Policy 2” allocates 0.7
to the marketing and finally “Policy 3” gives 0.5 multiplications to the initial amount of money
available to invest. Respectively, the rest of the amount is to be invested into increase of skills.

This means that whole investment (70% of the stock‟s outflow) is invested in certain manner to
either aggressive investment into marketing or aggressive investment into the increase of skills, or
as in “Policy 3” equal investment in skills increase and in marketing.

Fig. 5 - Policy 1, aggressive investment in skills.

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“Policy 1” implies that Quality increases very fast, although with some oscillations due to the
delays in the system. Connected with that, Increase of Image is significant. Then, the Number of
contacts gradually will increase up to the limit of the company (set by number of employees). The
top will be reached at the end of 2015, other conditions being equal. The end value reaches 20.800
contacts. Consequently, there will also be limits to growth in the number of new proposals, new
projects and realized videos.

If we decide to implement “Policy 2”, the following results occur (see figure 6). In this case, as
expected, Quality increases with a lower rate but the company‟s Perceived Image is increasing aside
from this effect (by direct investment in marketing). This aggressive investment in marketing will
lead to a better and more stable effect on Image. However, cash flow is showing considerably
smaller growth rate.

Fig. 6 - Policy 2, aggressive investment in marketing.

As a final point, if we run the third policy, which includes equal investment in skills and marketing,
then the results of the model are as presented in the figure 7. Increase of image for both runs –
“Policy 2” and “Policy 3” – remained the same. However, differences in the cash flow are
noticeable. The company could reach the higher amount, in long term, of cash flow by
implementing the same investment in skills and in marketing.

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Fig. 7 - Policy 3, equal investment in skills and marketing.

As alternative scenario, it is suggested to the company‟s decision makers to introduce overtime.

This is because more time must be devoted to maintain existing customers with an increase of
number of projects and number of contacts, and the maximum number of employees is set on the
level of 25 employees in the commercial area, which implies that this is the only way to comply the
desired completion rates. As it is illustrated in the figure 8, with introduction of the overtime,
employees compensate the increase in the effort required per task with an increase in the capacity
and in the long term, it will lead to the increase in number of videos. Instead of the normal value of
160hours per months per employee, the second run was done with the value of 200, and with
40hours more per 200 hours per month per employee, in the long term company will reach
accumulated amount of 1700 projects, which is about 200 more projects that without introduction
overtime. Having in mind the average price per viral video campaign (around 60.000 euro per
campaign) the effect is considerable.

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Fig. 8 - Introducing overtime.

At the same time, since change in service attractiveness occurs only after a certain delay (it takes
time for current and prospect customers to realize the firm‟s overall quality has been changed), it is
crucial to constantly monitor it and strive for a sustainable quality level at all times. Creating quality
pressure requires management to become aware of the implications of their service and then,
through training, incentives and measurement, persuade employees that avoiding these costs is a
priority and that they will not be punished for slowing their work to correct any quality problems
they detect (Sterman, 2000).

One of the initial limitations of the model was setting the maximum number of people working in
commercial area on 25 employees. This is a serious limit to growth of the company. If, just for the
testing purposes, the model is set with a huge amount of maximum employees in commercial area,
for instance 100 employees, then the company could reach 30% more of the viral campaigns and
cash flow. Therefore, limit reconsideration was one of the final suggestions to the company‟s
decision makers.

7. Closing remarks

This paper has outlined how to design and use a DPM approach aimed at pursuing a sustainable
development in SMEs. Such an approach has allowed us to remark the usefulness of SD
methodology applied to SME performance management. In fact, combining SD models with PM
systems may support entrepreneurs to better identify and measure key-performance indicators and
to effectively influence policy levers to pursue a sustainable development in SMEs.

21
Particularly, the emerging framework is related to an “instrumental view” of performance
measurement that focuses on how results are achieved (i.e., means-ends analysis). According to this
perspective, the identification of the strategic resources driving performance is possible through a
prior identification of:

(1) the measures that really matter for pursuing a sustainable organizational development;
(2) the “administrative products” which are delivered by main decision areas in a small business.

The paper has also addressed the need to tailor performance analysis and the identification of
responsibility areas to the characteristics of SMEs. On this concern, a leaner and more selective
approach is needed in respect to what is usually done in strategic performance management through
conventional financial analysis, or even through BSC frameworks applied to larger firms.

The application of such DPM framework to a small business, named Mosaicoon, has been discussed
in the second section of the paper. As a result, the empirical evidences emerging from this case
study reveal how the design of a DPM approach, as the one hereby suggested, may effectively
improve the strategic learning processes of SME decision makers and support them in adopting
long-term competitive strategies according to a sustainable development perspective.

Further research will be necessary to develop more applied knowledge on DPM systems tailored to
SME characteristics that provide challenges for researchers.

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