new challenges of economic and business development 2013 · pdf filenew challenges of economic...
TRANSCRIPT
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 601
LEVERAGING SOCIAL CAPITAL ON PUBLIC SOCIAL
SOFTWARE PLATFORMS FOR ECONOMIC NEED SATISFACTION
IN THE AIRPORT INDUSTRY
Marion Tenge, University of Latvia, Latvia/
University of Applied Sciences Kufstein, Austria1
Abstract. Network ties that cross organizational boundaries, i.e. bridging social
capital, have been acknowledged by scholars of various disciplines as a major source of
competitive advantage. With the advent of public Social Software Platforms (SSP), such
as Facebook, organizations are provided with the opportunity to extend beyond
organizational boundaries and include the customer in the value creation process.
However, as Porter (2006, p. 225) noted, “the mere presence of firms, suppliers, and
institutions in a location creates the potential for economic value, but it does not
necessarily ensure the realization of that potential”. The aim of the research paper is to
explore, if airport organizations are able to increase their economic need satisfaction
when interacting with passengers on SSP. The paper adopts a strategy map approach to
deduce cause-effect relationships between engaging with passengers on SSP and
economic need satisfaction of airport organizations. Expert interviews with Corporate
Communication Managers of six out of eight major German airports (annual passenger
volume > 5 Mio.) provide initial insights into the current degree of economic need
satisfaction by contrasting the SSP Facebook with traditional communication channels
of the airports. The paper describes to what extent SSP contribute to economic need
satisfaction with respect to ‘customer insights’, ‘operational efficiency’, ‘innovative
strength’, ‘customer advocacy’ and ‘customer satisfaction’. The results show that while
airport managers already experience some increase in economic need satisfactions, they
are not yet able to tap into the full potential of SSP.
Key words: airport industry, economic needs, public social software platforms, social capital
JEL code: O33
1. Introduction
While traditionally airports used to be considered as infrastructure providers serving macro-economic
purposes, increased air traffic liberalization and airport privatization have forced airports to become more
commercially focused. Airports increasingly compete for passengers, who often have a choice between
two or more airports. Despite a growing awareness of the need for passenger-orientation to both sustain
independent development and reward shareholders, airports still suffer from a lack of genuine customer
insights. The passenger relationship and data is not owned by airports, but airlines and tour operators.
1 Corresponding author – e-mail address: [email protected], telephone: +49 177 8736325
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
602 Marion Tenge
Complexity is added by the fact that some airport services, such as shopping outlets or restaurants, are not
provided directly by airports to the passenger, but through concessionaires or tenants. With a growing
adoption of public Social Software Platforms (SSP) by customers, such as the online social network
Facebook, airport organizations eventually are able to virtually connect with their passengers and enter
into a dialogue for mutual benefit. SSP are web-based services that allow users to set up a profile within a
bounded system (Boyd and Ellison, 2007), connect to other users, groups or organizations and share
information updates or rich media (photos, videos etc.) with their network of connections based on
privacy settings (Tenge, 2013). Network ties that cross organizational boundaries, i.e. bridging social
capital, have been acknowledged by scholars of various disciplines as a major source of competitive
advantage. The concept of social capital is gaining momentum in organization studies. It has been proven
useful in explaining “an actors’ relative success in a number of arenas of central concern to organizational
researchers” (Adler and Kwon, 2002): for example achieving financial benefits (Burt, 1995), facilitating
information exchange and collaboration (Wasko and Faraj, 2005) and fostering innovative ideas
(Granovetter, 1973). Lin (1999, p. 30) defines social capital as “investments in social relations with
expected return”. Put in other words, investing time in maintaining network connections is beneficial, as
often the support of others is needed with regard to need satisfaction and goal attainment. The overall
notion of an organizational social capital theory is that relationship networks and other aspects “unrelated
to money can help organizations succeed economically” (Cohen and Prusak, 2001, p. 10). Intangible
assets come to the fore (cf. Johnson, 1999; Kaplan and Norton, 2004a). The production and transaction
oriented focus of industrialization has shifted to employees, customers and other organizational
stakeholders and the underlying networks that govern the relationship between those actors (Atkinson,
2006). Though the network-/relationship-approach is not a new field of business research, it currently
encounters a renaissance due to the emergence of SSP. SSP extend organizations beyond corporate
boundaries and enable them to re-establish network connections with their customers. SSP embrace
customer participation, while drawing on the ideological and technological foundations of Web 2.0. One
of the underlying principles of Web 2.0 is the definition of the “Web as a platform” (O’Reilly, 2007, p.
19), for facilitated idea sharing and joint value creation in a democratic manner (Kaplan and Haenlein,
2010). Content that is created by organizations and their customers on SSP is publicly visible and
persistent (McAfee, 2006).
The purpose of the paper is to explore, if airports are able to generate a return on their investment in a
social relationship with their passengers on the SSP Facebook. Facebook is the globally most adopted
SSP counting more than 1 billion active users (Facebook, 2012). Already 72.1% of German computer
users who account for 75.6% of the German population maintain a Facebook account (vor dem Esche and
Hennig-Thurau, 2013). The paper reports on initial results from expert interviews with German airport
organizations focusing on their ability to increase their economic need satisfaction when interacting with
passengers on SSP. As Porter noted “the mere presence of firms suppliers and institutions in a location
creates the potential for economic value, but it does not necessarily ensure realization of that potential”
(Porter, 2006, p. 225). The author adopts a Balanced Scorecard / strategy map approach (cf. Kaplan and
Norton, 2004b; Kaplan and Norton, 2004c) to propose cause-effect-relationships between interacting with
passengers on SSP and economic need satisfaction of airport organizations. Economic needs include the
needs for ‘customer insights’, ‘operational process efficiency’, ‘innovative strength’, ‘customer advocacy’
and ‘customer satisfaction’. As economic needs are theoretical constructs, they needed to be
operationalized by indicators. Indicators were deduced based on the developed generic airport strategy map
in the form of attitudinal questions. A semi-structured questionnaire was constructed including both open
ended-questions and likert-scale ratings. The likert-scale ratings indicate to what extend the respondents
agree that Facebook increases the economic need satisfaction of airports as compared to traditional
communication channels, such as e-mail, call-center or website. The questionnaire was distributed to six out
of the eight major German airports (annual passenger volume > 5 Mio.). The airports Berlin
(Tegel/Schönefeld) and Cologne-Bonn were excluded from the study. The existing airports in Berlin will
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 603
close down due to the planned opening of the new airport Berlin Brandenburg International. Cologne-Bonn
focuses predominantly on the low-cost traffic segment and is therefore only to a limited extend comparable
to the other airports in the sample, which have a rather balanced traffic segmentation. The airports included
in the sample have started to use Facebook 1.5 to 3 years ago and accounted for an average number of
Facebook ‘page likes’ of 27.928. The number of Facebook ‘page likes’ is equal to the number of individuals
who connected to an airport on Facebook and chose to receive information updates of the airport in their
own Facebook profile. The questionnaire was pre-tested by six social software experts holding management
positions in five different German companies in the tourism, media and online industry. The experts were
asked to assess the questionnaire in terms of logical consistency, ease of understanding, and contextual
relevance. The comments collected from these experts led to several minor modifications of the wording.
Based on the questionnaire for each airport face-to-face interviews with the Corporate Communications
Managers responsible for social software activities were conducted in the time period from November 2012
to January 2013. The interviews were recorded and transcribed. The results were submitted to quantitative
analysis (aggregation of Likert-scale items to variables, analysis of distribution of variables) and qualitative
analysis (text analysis, item identification based on frequency of occurrence). As SSP are a relatively
recent and fast changing phenomenon and little knowledge currently exists regarding the adoption of SSP
of organizations, it was necessary to integrate quantitative with qualitative analysis to be able to draw
meaningful conclusions.
2. The Balanced Scorecard / Strategy Map as Framework for Proposing Cause-
Effect Relationships between Leveraging Bridging Social Capital on SSP and
Economic Need Satisfaction of Airports
To propose cause-effect-relationships between interacting with passengers on SSP and economic need
satisfaction of airport organizations the author adopts a Balanced Scorecard (BSC)/ strategy map
approach. For each perspective of the BSC / strategy map (financial, customer, process, learning and
growth) the author discusses the relationship between bridging social capital, i.e. network connections
with customers, and organizational performance of airport organizations.
Performance measurement, in particular the concept of the BSC, has gained considerable momentum
in both managerial and academic contest. Notion of the BSC is that it is not sufficient to rely exclusively
on financial indicators and goals to achieve organizational performance (Kaplan and Norton, 1992).
Focusing only on lagging financial outcome indicators might promote organizational behavior that is
targeted at maximizing short-term performance, while sacrificing sustainable future growth. The BSC
places the emphasis on the enablers of performance (Mooraj et al., 1999). The BSC organizes strategic
objectives and measures in four different perspectives. The financial perspective focuses on the view of
the shareholders and is concerned with the lagging financial indicators such as profitability, growth and
shareholder value. The customer perspective defines the customer value proposition. Focus is on creating
customer satisfaction through an attractive value proposition and by this increase customer loyalty and
advocacy. The process perspective focuses on the internal processes the organizations needs to excel at to
deliver the customer value proposition. Hence, organizations need to concentrate on processes that have
the greatest impact on customer satisfaction and retention. The learning and growth perspective describes
how the intangible assets of an organization (for example human capital or information capital) are
integrated and aligned with strategy to create value. Learning and growth measures are lead indicators for
internal process, customer and financial performance. While the early BSC concept does not consider
cause-effect-relationships (Malmi, 2001), it was later evolved to include cause-effect relationships
between the four perspectives (Kaplan and Norton, 2001). In this respect strategy maps are a “natural
extension to balanced scorecards” (Neely et al., 2003, p. 130). Strategy maps can be used by
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
604 Marion Tenge
organizations for review and clarification of strategy, communication of strategy, for prioritization and
alignment of strategic initiatives and to focus the organization on long-term goals and mutual
understanding (Mooraj et al., 1999, 490; Kaplan and Norton, 1996b). A strategy map is a visual
representation of a corporate strategy and therefore must not be considered as “a strait jacket” (Kaplan
and Norton, 1996a, p. 34). Each industry/organization needs to develop their own BSC / strategy map
depending on the selected strategy. With the advent of SSP, such as Facebook, organizations have started
to extend their learning and growth perspective, process perspective and customer perspective beyond
organizational boundaries (Tenge, 2012). They are able to benefit from using SSP as part of their
information capital to leverage social capital, (network connections to customers) in order to enrich their
human capital (tacit knowledge of employees) to improve value creation in the process, customer and
financial dimension of the BSC / strategy map. Figure 1 shows how airport organizations can profit from
leveraging social capital by means of utilizing SSP for including the passenger in the value creation
process to achieve organizational performance.
Source: (Tenge, 2012)
Fig. 1. Generic Airport Strategy Map Based on (Kaplan and Norton, 2004c)
with Social Capital Dimension
The generic airport strategy map is targeted at airport organizations that pursue a growth strategy to
achieve long-term shareholder value and reflects the current strategy of all airports in the sample. As for
the internal (process) perspective of the strategy map, this involves a clear focus on the operational
passenger service processes (need for operational efficiency) as well as on continuous innovation
processes (need for innovative strength). In order to excel at the process and financial perspective, rich
customer knowledge is required in the learning and growth perspective of the strategy map (need for
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 605
customer insights). Based on passenger feedback some potential improvements or service innovations
might be evaluated as being ineffective, as they have no impact on overall customer satisfaction (need for
customer satisfaction). Customer satisfaction can be seen as a driver of profitability, as it is an
antecedents of customer loyalty (Storbacka et al., 1994). Satisfied customers are also likely to become
advocates for the airport (need for customer advocacy). Hence, the customer perspective of the strategy
map focuses on customer satisfaction and customer advocacy. The total degree of economic need
satisfaction of airports on SSP is dependent on the satisfaction of the underlying economic needs in each
perspective of the airport strategy map. The economic needs and their respective operationalization in the
research study are briefly discussed before reporting on the results of the expert interviews.
Need for Customer Insights Learning and Growth Perspective
Through dialogue with passengers on SSP airports gain insights into passenger needs, requirements
and attitudes with regard to the airport experience. Learning about gaps between the service quality
expectations of passengers in contrast to their perception of the way the service is performed is a
precondition for airport managers to carefully determine necessary investments in airport service quality.
The theoretical construct ‘need for customer insights’ is operationalized by the following attitudinal
questions:
1. On Facebook, we gain deeper insights into customer needs, requirements and attitudes;
2. Facebook helps us to better determine where the customers’ perceived service quality differs from
the expected service quality;
3. On Facebook we are able to better detect priority areas for service quality investment spendings
with influence on customer satisfaction (root-cause detection).
Need for Operational Efficiency Process Perspective
Increased smart phone ownership is providing passengers with ubiquitous access to SSP. They access
their social network ‘on-the-go’ and exchange real-time information. In this respect, they also expect a
faster response time of organizations (IBM, 2011). Especially for business travellers and frequent leisure
travellers smart phones have become a crucial element of their everyday lives. This development offers
the opportunity for airport organizations to increase their operational efficiency with regard to ease and
speed of information dissemination (e.g. in times of crisis or air traffic disruptions) and passenger
communications (e.g. passenger service, complaint management). The theoretical construct ‘need for
process efficiency’ is operationalized by the following attitudinal questions:
1. Facebook speeds up information dissemination;
2. Facebook accounts for a reduced response time to passenger inquiries/questions;
3. Facebook facilitates management of passengers service quality expectations;
4. Facebook facilitates complaint handling.
Need for Innovative Strength Process Perspective
Organizations that maintain network connections that cross organizational boundaries (weak ties that
span a structural hole) are more innovative as compared to their competitors, as external network
connections provide information sometimes not available within the organization itself (Granovetter,
1973). Innovative airport services of today may quickly become the minimum expectations of tomorrow.
It is therefore important for airports to timely notice shifting customer expectations to keep passengers
satisfied und to keep up with competing airports. To sustain stable revenues for themselves and their
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
606 Marion Tenge
business partners (airlines, shopping outlets, restaurants etc.) maintaining a dialogue with passengers is
beneficial for evaluation of new service ideas or introduction of new services to the passengers. The
theoretical construct ‘need for innovative strength’ is operationalized by the following attitudinal
questions:
1. Since using Facebook, we are able to notice shifts in customer expectations more timely;
2. On Facebook we get instant customer feedback on new service ideas;
3. Facebook facilitates the introduction of new services to the passengers.
Need for Customer Satisfaction Customer Perspective
Tailoring the airport service quality to passenger needs in the process perspective is a precondition to
achieve passenger satisfaction in the customer perspective. Airports conduct passenger satisfaction
surveys on a regular basis, for example surveys administrated by the Airport Council International for all
participating airports.
The theoretical construct ‘need for customer satisfaction’ is operationalized by assessing, if airports
experienced an improvement of their customer satisfaction scores.
1. Since using Facebook our passenger satisfaction scores improved
Need for Customer Advocacy Customer Perspective
SSP are based on informal communication between users. Web-based word-of-mouth (WOM)
communication enhances the traditional WOM communication from personal one-to-one to virtual many-
to-many communication. Interactions between users are publicly visible and persistent. When satisfied
passengers become advocates for an airport, positive WOM is amplified through their social graphs
(Jeong and Jang, 2011). By this, the reach of WOM is increases as compared to traditional
communication channels. The theoretical construct ‘need for customer advocacy’ is operationalized by
the following attitudinal questions:
1. We noticed an increase in the amount of positive WOM since using Facebook;
2. Since using Facebook the reach of positive WOM increased.
3. SSP as Mediator for Economic Need Satisfaction of Airport Organizations? –
Initial Results from Expert Interviews
The reasons for maintaining a Facebook profile for communication with passengers are not consistent
across the airport sample (see Figure 2). While 100% of the respondents agree that they use Facebook to
‘inform passengers about the airport and the airport service portfolio’ and to ‘generate positive WOM’
about the airport, only 83.3% of the respondents use Facebook to purposefully ‘gain information on
needs, requirements and opinions of passengers’ or to ‘increase passenger loyalty’. 66.7% of the
respondents maintain a Facebook profile with the goal to ‘improve the service quality of the airport’ or
because ‘passengers expects airports nowadays to be present on Facebook’. 50.0% of the sample
indicated to use Facebook to improve their ‘process efficiency through real-time communication with the
passenger’ and only 16.7% indicated that the reasons include the intention to ‘involve passengers in
innovation processes’.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 607
Source: own construction of author based on research results
Fig. 2. Reasons of Airports for Maintaining a Corporate Facebook Page
The results are not surprising, as all respondents reported that the department of Corporate
Communication is initiator and driver behind the Facebook activities. Therefore, communication goals
have priority over market research or process-oriented goals. Table 1 summarizes the results of the expert
interviews with regard to the attitudinal questions of the study. Basis for the rating was a 5-point-likert
scale. A rating of ‘3 = neither agree nor disagree’ indicates no advantage of Facebook as compared to
traditional communication channels, whereas a rating of ‘4 = somewhat agree’ indicates the existence of
some advantage and the rating of ‘5 = strongly agree’ is equivalent to a strong advantage of Facebook.
Generally, Facebook is considered to contribute to an increase of total economic need satisfaction (mean:
3.75). However, some economic needs such as ‘customer advocacy’ (mean: 4.17) or ‘innovative strength’
(mean: 4.06) are rated higher by the experts as compared to ‘customer insights’ (mean: 3.54) and
‘operational efficiency’ (mean: 3.83). Regarding the need for customer satisfaction (mean: 3.00),
Facebook does not contribute to an increase of need satisfaction in the view of the respondents.
Table 1
Contribution of Facebook to Economic Need Satisfaction
Mean Std. Deviation Kolmogorov-Smirnov Test
Total Economic Need Satisfaction 3.72 0.293 p = 0.838
Customer Insights 3.54 0.332 p = 0.721
Operational Efficiency 3.83 0.563 p = 0.550
Innovative Strength 4.06 0.443 p = 0.612
Customer Advocacy 4.17 0.816 p = 0.990
Customer Satisfaction 3.00 0.632 p = 0.518
p > 0.05: normal distribution can be assumed
5-point Likert-scale: 1 strongly disagree; 2 somewhat disagree; 3 neither agree nor disagree; 4 somewhat agree; 5 strongly agree Source: own construction of author based on research results
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
608 Marion Tenge
From the transcribed expert interviews explanations for the ratings were obtained to gain more
information about the underlying opinions of the respondents. The data was analyzed for recurring
patterns. If at least 67.7% of the sample mentioned the same topic, it was considered to be important and
coded into an item. The most obvious items are the “topics that occur and reoccur” (Taylor and Bogdan,
1975, p. 83). Table 2 shows that concerning the need satisfaction for ‘customer insights’ two items were
identified. The tonality of the items was both positive and negative. Airports report that Facebook enables
them to get a better feeling of customer moods and opinions, because “people speak their mind freely”
and they can “be closer to the passenger”. However, despite a constant increase of Facebook page likes
for all airports, they complain that the customer insights obtained are not yet representative.
Table 2
Need for Customer Insights – Results from Expert Interviews
No. Tonality of
Item Item Consolidated Interview Statements
1. Positive Get better feeling of
customer moods
and opinions
Be closer to the passenger / get insights into needs
Get insights into needs and positive, negative opinions
People speak their mind freely
It was not expected that a specific topic was of such
interest for the passengers
2. Negative Customer insights
not yet
representative
Only individual opinions
Critical mass not yet reached
Compared with total passenger volumes of the airport,
tool not representative
Other tools still more representative
Source: own construction of author based on research results
Table 3
Need for Operational Process Efficiency – Results from Expert Interviews
No. Tonality
of Item Item Consolidated Interview Statements
1. Positive Suitable tool for
crisis communi-
cation and commu-
nication of air
traffic irregularities
Own experience confirms, that it works, e.g. strikes
Useful tool to quickly inform in times of crisis, strikes etc.
Tool used for communication of irregularities, e.g. strike
Useful for communication regarding acute incidents
2. Positive Faster information
dissemination and
reaction possible
Communication on Facebook faster
Fast feedback to passenger possible
Faster information dissemination
Fast social channels complement traditional channels
3. Negative No increased
efficiency of
complaint
management
processes
Not focussed
Public discussion of complaints not intended
Internal processes not yet completely set up
Does not facilitate internal processes
Source: own construction of author based on research results
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 609
With regard to the need satisfaction for ‘operational process efficiency’ two positive and one negative
item were identified and summarized in Table 3. Airports consider Facebook as a suitable tool for crisis
communication and communication of air traffic irregularities that is appropriate for faster information
dissemination and reaction. All respondents confirmed during the interviews that they have already used
Facebook as a communication channel for acute incidents, for example strikes or severe weather
conditions. By contrast, currently no airport uses Facebook to increase the efficiency of complaint
management processes. Reasons include that respective internal processes are either not yet set up or not
adequate, complaint management on Facebook is not focused by the airport or that a public discussion of
complaints is not intended to avoid the risk of a viral dissemination of negative word-of-mouth.
With regard to the need satisfaction for ‘innovative strength’ two positive and one negative item were
identified and summarized in Table 4. All airports agree that Facebook accounts for a facilitated
communication of new services to the passenger. The second positive item that was identified relates to
the fact that airports reported frequent initiatives to generate passenger feedback regarding specific topics.
The approaches to generate passenger feedback have been reported to be rather ad-hoc than strategic.
This is in line with the result that only 16.7% of the respondents claimed to be on Facebook to
purposefully involve passengers in innovation processes. The respondents also stated that the obtained
passenger feedback did not contain actionable knowledge. Reasons included too little participation of
passengers as compared to total passenger volumes of the airport and the related problem of
representativity.
Table 4
Need for Innovative Strength – Results from Expert Interviews
No. Tonality
of Item Item Consolidated Interview Statements
1. Positive Facilitated
communication of new
services to passengers
Agreement to statement by all airports
2. Positive Frequent initiatives to
generate passenger
feedback regarding
specific topics
Passenger involvement takes place
Airport will continue to gather feedback
Feedback on new airport services gathered
Existing dialogue with departments to encourage use
of Facebook to gather feedback on new services
3. Negative So far, little actionable
knowledge from
feedback obtained
Too little passenger posts on requirements
Too little active and useful passenger feedback
Feedback not yet representative
Feedback not generalizable to all passenger
Source: own construction of author based on research results
Concerning the need for ‘customer advocacy’ again two positive and one negative item were
identified. The summarized items presented in Table 5 include the possibility to positively contribute to
an emotionalization of the airport and by this increase the emotional attachment of the passenger to the
airport. This is achieved by posting emotional stories and photos of the airport. As public opinion still
regards airports as mere providers of infrastructure and noise producers, emotionalizing the airport
experience is an important agenda point for the airport industry. Airports also reported on the opportunity
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
610 Marion Tenge
to purposefully increase WOM. Especially aviation related topics have been found to be of special
interest to the Facebook fans of the airport and trigger interaction. The effect of the positive aspects is
constraint by the fact that not all target groups can be reached on Facebook as compared to other
communication channels. However, vice versa, the experts also noted that new target groups emerge on
Facebook that cannot be reached by traditional media. It is therefore intended to integrate Facebook with
other channels.
Table 5
Need for Customer Advocacy – Results from Expert Interviews
No. Tonality
of Item Item Consolidated Interview Statements
1. Positive Emotionalization of
airport possible Increase emotional attachment of passenger to the airport
Feel fascination of aviation / aviation related postings
Tell interesting and emotional stories about the airport
and people at the airport
Humanization of airport / introduce departments and
people
The public still regards airports as infrastructure provider
2. Positive Possibility to
purposefully increase
positive word-of-mouth
(WOM) and virality
Emotional posts, i.e. no pure facts and figures, foster
WOM
Creation of posts that foster WOM
Aviation related topics arouse special interest /trigger
interactions
3. Negative Not all target groups
can be reached on
Not all target groups on Facebook
Other target group on Facbook
Limited reach
Source: own construction of author based on research results
Table 6 shows that it is not yet clear, if Facebook has an impact on the customer satisfaction scores of
airports, as it is currently not monitored and measured. Meaning, that no link exists between the Facebook
activities and operational performance indicators of the airport.
Table 6
Need for Customer Satisfaction – Results from Expert Interviews
No. Tonality
of Item Item Consolidated Interview Statements
1. Negative Influence of Facebook on
customer satisfaction not
measured
No monitoring, no benchmarking, no knowledge, if
relationship exists
Source: own construction of author based on research results
83.3% of the respondents believe that the future importance of Facebook and other SSP is going the
increase, 16.7% predict a stable importance. Given the growing importance of the communication
channel, organizational structure is seen as a success factor to be able to harvest its full potential
(Table 7). Challenges mentioned by the experts include the transition from departmental silos to an
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 611
interdisciplinary, network-oriented approach to Facebook maintenance, the development of standards and
routines and a lack of human resources.
Table 7
Organizational Challenges – Results from Expert Interviews
No. Tonality
of Item Item Consolidated Interview Statements
1. Neutral Organizational structure as
success factor for harvesting full
potential of Facebook
(interdisciplinary approach to
Facebook management)
Adequate organization of Facebook activities
as a precondition
Increase involvement of other departments
Routines need to be developed
Transition from hierarchical structure to
network structure necessary
Lack of resources
Source: own construction of author based on research results
4. Conclusions and suggestions for further research
The paper has shown that Facebook enables airport organizations to enter into a dialogue with
passengers and leverage bridging social capital, i.e. network connections that cross organizational
boundaries, to increase their economic need satisfaction. Despite that airports already report fruitful
benefits of their Facebook activities, they are not yet able to fully exploit the potential of the SSP. This is
due to both external and internal reasons:
1. Despite that the number of Facebook users connecting to airports is constantly increasing, the
critical mass needed for passenger feedback to be representative is not yet reached. This currently
restricts the utilization of Facebook for market research or an active involvement of passengers in
innovation processes.
2. As the Facebook activities of airports are anchored in the department of Corporate
Communications, communication goals, for example fostering positive WOM or faster
information dissemination, have priority over other business process-oriented goals.
3. Airports are still at the beginning of a transition process for a more interdisciplinary approach to
Facebook management, meaning that they face the challenge of adapting existing organizational
structures as well as routines and resources.
In the view of the author airports need to focus on two principal success factors to further increase the
degree of economic need satisfaction:
1. Development of critical mass: passenger insights must be representative to be of value for airport
organization. It is therefore necessary to increase the number of Facebook ‘page likes’ and
passenger interactions. As customers voluntarily enter into a dialogue with organizations on SSP,
i.e. without any contractual obligation to maintain the relationship, further research is needed and
currently conducted by the author, how the motivation of customers to engage with organizations,
volunteer information or even act as organizational advocates can be sustained or increased.
Obviously, more work is needed to fully understand the motivation of passengers to actively
engage with airport organizations on SSP. Knowledge of the underlying motives is vital for
airports to be able to correctly respond to customer needs. Otherwise, the expected future value of
the relationship will decrease from the perspective of customers and so will the investment of
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
612 Marion Tenge
effort in maintaining the relationship (cf. Lindenberg, 1990). Put in other words, in absence of
reciprocal behavior, social capital will be discounted (Flap, 2001).
2. Adaption of organizational structure: an interdisciplinary, network-oriented approach to Facebook
management is a precondition to be able to move from supporting communication processes to
also increasing the efficiency and effectiveness of other operational processes. However, prior to
embedding SSP into processes the identification of clear business goals based on corporate
strategy as well as of key performance indicators (KPIs) is essential for a holistic approach to SSP.
As SSP are a relatively recent and still emerging phenomenon the conduction of a longitudinal study
would be beneficial to assess changes in economic need satisfaction and adaption of organizational
structures of German airport organizations caused by an increasing adoption of SSP by passengers over
time. The study reports on a small sample size and is geographically limited to Germany. This restricts
the generalizability of the research findings. Notwithstanding, though the study focuses on the airport
industry, it can be adapted to any other industry by customizing the strategy map approach. It would be
interesting to explore the differences in economic need satisfaction across industries (e.g. consumer brand
organizations vs. service organizations).
Bibliography
Adler, P.S. and Kwon, S.-W., 2002. “Social Capital: Prospects for a New Concept”, The Academy of
Managemen Review, Vol. 27, No. 1, Jan., 2002, pp. 17-40.
Atkinson, H., 2006. “Strategy Implementation: a Role for the Balanced Scorcard?”, Management
Decision, Vol. 44, No. 10, pp. 1441-1460.
Boyd, D. M. and Ellison, N. B., 2007. Social Network Sites: Definition, History and Scholarship, Journal
of Computer-Mediated Communication, Vol. 13, No. 1, pp. 210-230.
Cohen, D. and Prusak, L., 2001. In Good Company: How Social Capital Makes Organizations Work,
Harvard Business School Press, Boston, Mass.
Facebook, 2012. Quarterly Earnings Slides Q4 2012. [Online] Available at: http://de.scribd.com/doc/
123034877/Facebook-Q4-2012-Investor-Slide-Deck [Accessed 2 March 2013].
Flap, H., 2001. “No Man is an Island. The Research Programme of a Social Capital Theory”, in Favereau,
O. and Lazega, E. (Eds.), Conventions and Structures in Economic Organization. Markets, Networks
and Hierarchies, Edward Elgar, London, pp. 29-59.
Granovetter, M.S., 1973. “The Strength of Weak Ties”, The American Journal of Sociology, Vol. 78,
No. 6, pp. 1360-1380.
IBM, 2011. “From Streched to Strengthened. Insights from the Global Chief Marketing Officer Study”.
[Online] Available at: http://www.public.dhe.ibm.com/common/ssi/ecm/en/gbe03433usen/GBE03433
USEN.pdf [Accessed 20 March 2012].
Jeong, E. and Jang, S., 2011. “Restaurant Experiences Triggering Positive Electronic Word-of-Mouth
(eWOM) motivations”, International Journal of Hospitality Management, Vol. 30, No. 2, pp. 356-366.
Johnson, W.H., 1999. “An Integrative Taxonomy of Intellectual Capital. Measuring the Stock and Flow of
Intellectual Capital Components in the Firm”, Technology Management, Vol. 18 5/6/7/8, pp. 562-575.
Kaplan, A.M. and Haeinlein, M., 2010. “Users of the World, Unite! The Challenges and Opportunities of
Social Media.”, Business Horizons, Vol. 53, pp. 59-68.
Kaplan, A.M. and Norton, D.P., 1992a. “The Balanced Scorecard. Measures that Drive Performance”,
Harvard Business Review, pp. 71-79.
Kaplan, A.M. and Norton, D.P., 1996b. The Balanced Scorecard: Translating Strategy into Action,
Harvard Business School Press, Boston, Mass.
Kaplan, A.M. and Norton, D.P., 1996c. “Using the Balanced Scorecard as a Strategic Management
Systems”, Harvard Business Review, pp. 1-13.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 613
Kaplan, R.S. and Norton, D.P., 2001. The Strategy-Focused Organization: How Balanced Scorecard
Companies Thrive in the New Business Environment, Harvard Business School Press, Boston, Mass.
Kaplan, A.M. and Norton, D.P., 2004a. “The Strategy Map: Guide to Aligning Intangible Assets”,
Harvard Business School Press, Vol. 5, No. 32, pp. 10-17.
Kaplan, R.S. and Norton, D.P., 2004b. Strategy Maps: Converting Intangible Assets into Tangible
Outcomes, Harvard Business School Press, Boston, Mass.
Kaplan, R.S. and Norton, D.P., 2004c. “The Strategy Map: a Guide to Aligning Intangible Assets”,
Strategy & Leadership, Vol. 32, pp. 10-17.
Lindenberg, S., 1990. “Homo Socio-Oeconomicus: The Emergence of a General Model of Man in the
Social Sciences”, Journal of Institutional and Theoretical Economics, Vol. 146, pp. 727-748.
Lin, N., 1999. “Building a Network Theory of Social Capital”, CONNECTIONS, Vol. 22, No. 1, pp. 28-51.
Malmi, T., 2001. “Balanced Scorecards in Finnish Companies: A Research Note”, Management
Accounting Research, Vol. 12, No. 2, pp. 207-220.
McAfee, A. P., 2006, n. p. Enterprise 2.0 – Version 2.0. [Online] Available at: http://andrewmcafee.org/
2006/05/enterprise_20_version_20/ [Accessed 19 February 2011]
Mooraj, S., Oyon, D. and Hostettler, D. (1999), “The Balanced Scorecard: a Necessary Good or an
Unnecessary Evil?”, European Management Journal, Vol. 17, No. 5, pp. 481-491.
Neely, A., Marr, B., Roos, G., Pike, S. and Gupa, O., 2003. “Towards the Third Generation of
Performance Measurement”, Controlling, Vol. 3, pp. 129-135.
O’Reilly, T., 2007. “What is Web 2.0. Design Patterns and Business Models for the Next Generation of
Software”, Communications & Strategies, Vol. 65, No. 1, pp. 17-37.
Porter, M.E., 2006. On Competition, The Harvard Business Review Book Series, 11th ed., Harvard
Business School, Boston, Mass.
Storbacka, K., Strandvik, T. and Grönroos, C., 1994. “Managing Customer Relationships for Profit. The
Dynamics of Relationship Quality”, International Journal of Service Industry Management, Vol. 5,
No. 5, pp. 21-38.
Taylor, S.J. and Bogdan, R., 1975. Introduction to Qualitative Research Methods: A Guidebook and
Resource, Wiley, New York, NY.
Tenge, M., 2012. “Public Social Software Platforms as Extension of Airport Organizations. A Social
Capital Approach for Building Organizational Performance”, paper presented at Conference
Innovative Approaches of Management Research for Regional and Global Business Development,
03.08.-05.08., Kufstein, Austria.
Tenge, M., 2013. Social Software Platforms as Motor of Relationship Marketing in Services: A
Conceptual Framework with Focus on the Airport Industry. In H. Kaufmann, & M. Panni (Eds.),
Customer-Centric Marketing Strategies: Tools for Building Organizational Performance (pp. 280-
296). Hershey, PA: Business Science Reference.
Vor dem Esche, J. and Hennig-Thurau, T., 2013. German Social Media Consumer Report 2012/2013,
Social Media Think:Lab Working Paper Series Westfälische Wilhelms-Universität Münster, pp. 1-45.
[Online] Available at: http://www.socialmediathinklab.com/wp-content/uploads/2013/02/WWU_
Social-Media-Consumer-Report_0213_Ansicht.pdf [Accessed 26 February 2013]
Wasko, M.M. and Faraj, S., 2005. “Why Should I Share? Examining Social Capital and Knowledge
Contribution in Electronic Networks of Practice”, MIS Quarterly, Vol. 29, No. 1, pp. 35-57.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
614 Marion Tenge
SOCIAL SOFTWARE PLATFORMS AS MOTOR
OF OPERATIONAL AIRPORT EFFICIENCY?
– A CONCEPTUAL FRAMEWORK
Marion Tenge, University of Latvia, Latvia/
University of Applied Sciences Kufstein, Austria1
Abstract. Purpose. Due to commercialization, privatization and liberalization, the
traditional role of German airport organizations as merely providers of infrastructure
gives way to a more market-oriented understanding. Airport service quality and the
ability to constantly innovate are important variables that contribute to overall airport
attractiveness. Despite that airports are becoming increasingly aware of the need for
customer-orientation, the majority of airports still suffer from a lack of genuine
customer (passenger) insights. This due to the fact that airlines and tour operators own
the passenger relationship and data. The emergence of public social software platforms
(SSP), such as the online social network Facebook, is now enabling airport
organizations to enter into a dialogue with the passenger and gain a deeper
understanding of passenger needs while leveraging social capital. The research paper
examines, if airports are able to increase their operational efficiency when entering into
a collaborative communication with their customers on SSP.
Design/methodology/approach. Based on a social capital / network approach to
organizational work, the paper discusses the convergence of social and technological
networks and the underlying motives of customers and organizations for joining social
software platforms.
Findings. The paper proposes a theoretical model to describe how a mutually
beneficial relationship between organizations and customers on Facebook can help
airports to reach economic goals. As a next step, the theoretical model will be
operationalized and empirically tested in 2012 using qualitative and quantitative research.
Originality/value. Social capital research as well as the adoption of SSP by
organizations is still mainly scoped within organizational boundaries. The paper
broadens the research focus to the focal actors organization and customer. From a
practitioners’ point of view, airport managers might find it useful to learn what
organizational challenges arise when engaging with customers on social software
platforms.
Key words: online social networks, social software, social capital, service quality, operational
efficiency, airport industry
JEL code: O33
1 Corresponding author – e-mail address: [email protected], telephone: +49 177 8736325
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 615
1. Introduction
In the last decades German airport industry has undergone a lot of changes due to commercialization,
privatization and liberalization. The traditional role of airports as providers of infrastructure serving macro-
economic purposes is changing and gives way to a more market-oriented understanding. Airport service quality
and the ability to constantly innovate are important variables that contribute to overall airport attractiveness in
addition to location, price, destination portfolio and flight scheduling [1]. Passenger insights are paramount for
aligning airport service quality with passenger needs. However, airports are complex business relationship
networks that lack genuine passenger insights. While no airport would exist without passengers, the passenger
relationship and data base is owned by airlines and tour operators. Complexity is added by fact that numerous
airport services are not provided directly by the airport to the passenger, but through concessionaires, tenants,
handling agents etc. Current measures of airport service quality, such as passenger satisfaction surveys, are
useful for benchmarking purposes, but do not reveal the true customer perspective. Typical passenger pain
points are waiting times at check-in and baggage-drop off counters, lack of cleanliness of airport facilities or
orientation in terminal buildings. Reducing the passenger to a statistical number while measuring the obvious
might take the form of both operational weaknesses as well as limitations on customer-centric services.
With a growing adoption of public Social Software Platforms (SSP) by customers, such as the
globally most adopted online social network Facebook, airports eventually are provided with the
infrastructure to enter into a dialogue with their passengers and to continuously gain direct passenger-
knowledge. SSP are web-based services that allow users to set up a profile within a bounded system [2],
virtually connect to other users, groups or organizations and share information, videos, photos etc. with
their network of connections based on privacy settings. As of December 2011 Facebook counts more than
800 million active users worldwide (Germany: 21.6 Mio.). 50% of all active users log on to Facebook
each day. More than 350 million active users access Facebook through mobile devices, for example smart
phones or tablets [3]. 73% of all international German airports maintain a corporate profile on Facebook
to provide information about the airport and offer a platform for discussion and feedback for passengers
and other stakeholders.
SSP shape the environment in that human interactions take place, meaning that they have an impact
on the transformation of human society [4]. When the CLUETRAIN MANIFESTO postulated that the
industrialization was not much more as an interruption of the social relationship between organizations
and their customers [5], this thought has been revolutionary. Ten years later, with the convergence of
social and technological networks, the prophecy turns into reality. Customers are becoming increasingly
empowered, as social infrastructure and platforms of participation are catching up with the business
infrastructure [6; 7]. During the time period of industrialization, economies-of-scale, division-of-labour
and mass marketing organizations merely talked at the customer. The social relationship between
organizations and their customers eroded – and so did social capital. The concept of social capital is
gaining currency in organization studies. It has been proven useful in explaining “an actors’ relative
success in a number of arenas of central concern to organizational researchers” [8]: for example achieving
financial benefits [9], facilitating information exchange and collaboration [10; 11] or fostering
organizational innovation [12].
The growing adoption of SSP is now enabling organizations to talk with the customer: “If you like thinking
in organizational terms, the customer has a seat at the table, and is part of your Monday morning staff meeting
in all departments” [13]. The advent of SSP demands for a new marketing paradigm. GUMMESSON defines
marketing as a dimension of society with the core variables of relationships, networks and interaction. He
argues that marketing must no longer be treated as an isolated discipline, but needs to be broadened to general
management and social life [14].
On SSP interpersonal relations as well as the relations between organizations and their customers are
extended into the digital world. By setting up a user profile, individuals publicly display their social
relations (connections) to other individuals, groups or organizations and by this enable researchers to get
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
616 Marion Tenge
a glimpse of their offline social network. SSP have become a popular research topic for interdisciplinary
scholarship. “Science advances whenever we can take something that was once invisible and make it
visible; and this is now taking place with regard to social networks and social processes” [15]. As
interactions on SSP may also be of non-economic nature, the research findings of scholars of psychology,
behavioral economics and sociology might prove to be useful for organizations that aim to engage with
their customers on SSP for mutual benefit.
2. Research Questions
To be able to tap into the potential of SSP, airport organizations need to understand their motivational
pull. The following research questions are formulated:
1. What are the motives of individuals for joining SSP?
2. How can airport organization leverage SSP for achieving economic goals?
3. Research Approach
The paper is based on a social capital/network approach to organizational work. A social capital
approach to organizational work is different from an atomic organizational theory, which is concerned
with individual transactions between an individual customer and an organization, such as single service
episodes, but ignores the relationship networks between the organization and its customers as well as
among customers. It takes the intangible elements of the customer-organization relationship, such as the
need of the customer to be cared for and recognised into account [11]. The network-/relationship-
approach is not new to business research. It rather encounters a renaissance due to the rise of social
software platforms. Taking a historical perspective, social capital was already vital in ancient trade, when
business relationships have been personal and local [16]. Touching on the need-satisfier approach of
MAX-NEEF the motivational pull of SSP is analysed. Contributions from Self-Determination Theory
(SDT) are used for deducing criteria for achieving customer engagement on SSP.
4. Research Gap
In organization studies social capital research as well as research on the adoption of SSP by
organizations is still mainly scoped within organizational boundaries (see for example [17] on knowledge
sharing in communities of practice, [18] for use patterns of social networks sites by Microsoft employees
or [19] for case studies on BBC, CIA, Google and Serena Software). With organizations and customers
connecting online, two focal actors are building a social relationship relatively new to social capital
research: a formal entity (organization), that consists of a collection of individuals (employees), and an
individual (customer) that – as opposed to an employee – is not part of the organization. This results in a
need to broaden the research focus. The research paper aims to make some initial contributions in this
research area. Other scholars are invited to refine, correct or expand on it in future.
5. Related Work
The majority of existing research on the collaboration of customers and organizations on SSP has
been conducted by media or management consultancies with a clear focus on consumer brand companies
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 617
not on service-oriented organizations, such as airports. In 2010 UNIVERSAL MCCANN, a global media
agency, published the international research study “The Socialization of Brands”, based on the survey
data of 37.600 internet users in 54 countries. The findings show that customers demand for a more social
and interactive relationship with consumer brands and that online social networks are driving brand
loyalty and sales [20].
A survey of HULME, conducted for the technology provider Alterian, using representative
quantitative and additional qualitative studies in addition to desk research showed that 75% of sampled
active social software users in the UK und US believed that “there would be a positive impact from
companies taking more time to find out about their needs and interests” [21] provided that feedback is
acted upon and the outcome benefits the customer. 82% of the sample expressed a positive interest to get
involved with developing products and services. The study also highlights that the implications for
organizations, for example concerning necessary departmental restructuring, are not fully understood at
the most senior management levels.
Communication patterns of organizations on Facebook are explored in a global desk research study by
A.T. KEARNEY [22]. In the time period of November and December 2010 the Facebook pages of 50
leading brand companies have been analyzed. Key finding is that most of the companies do not yet
leverage the benefits of a collaborative communication with their customers, but use Facebook primarily
as a one-way communication platform.
6. Understanding the Motivational Pull of SSP
Understanding the motivational pull of SSP is crucial for organizations that want to tap into their
potential. RHEINGOLD argues that “people in virtual communities do just about everything people do in
real life, but we leave our bodies behind” [23]. Consequently it can be argued that individuals establish
network ties to other individual or organizations to leverage social support in order to satisfy their
fundamental human needs und by this increase the quality of their lives. Social relations act as a mediator
for need satisfaction, as human beings are dependent on others to attain goals [24].
Put in other words, social capital is a precondition for goal achievement. Social capital is generally
defined as “investments in social relations with expected return” [25]. The expected return can be equaled
with the expected degree of need satisfaction. SSP provide individuals with facilitated access to social
capital.
While traditionally organizations mainly focused on the customer needs, the motivational pull of
social software platforms demands for a holistic approach. It is vital to not only consider the customer as
a customer, but first of all as a human being. Therefore, organizations need to take a broader perspective
and to also address the fundamental human needs of a customer rather than narrowing down the focus to
the customer needs. Only paying attention to the customer needs would reduce the human being “into a
category of restricted existence” [26]. During the research paper the following classification of
fundamental psychological human needs is applied [27]:
1) Self-Determination/Autonomy;
2) Relatedness;
3) Recognition;
4) Meaning/Orientation.
According to Self-Determination-Theory [28; 29], an autonomy-supportive social context combined
with a feeling of relatedness and feedback that signifies competence and fosters recognition increases the
motivation of individuals to engage in an activity. A controlling social context, lack of affectionate care
and negative competence feedback undermines motivation. In addition, individuals need norms and
values to guide their action and provide for orientation and meaning. Thus, we need to understand to what
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
618 Marion Tenge
extent organizations can generate satisfiers to support need fulfillment of their customers and avoid the
impairment of needs when entering into a dialogue on SSP. Table 1 suggests success factors for
organizations to create customer engagement on SSP.
Table 1
Achieving Customer Engagement on SSP by Generating Satisfiers
for Fundamental Human Needs
Human Need Satisfier
Self-Determination;
Autonomy
Autonomy supportive communication content
(actuality, relevance, actionable knowledge)
Autonomy supportive communication context
(communication not controlled by events, customer data
only used with permission)
Recognition Communication fosters customer contributions
Positive feedback on customer contributions is provided
Relatedness Communication acknowledges unique distinctness of customer
(personalized communication)
Communication creates a sense of community
Orientation Transparent communication of realistic service promises
Fulfillment of service promises
7. SSP as Motor of Economic Growth
Passenger insights are key to create and sustain unique value propositions, align the passenger service
process accordingly and by this increase passenger satisfaction, loyalty and profitability. Customer
satisfaction can be seen as a driver of profitability. Satisfied customers are likely to establish a strong
relationship to the service provider resulting in customer loyalty and positive word-of-mouth [30].
Learning about gaps between the service quality expectations of passengers in contrast to their perception
of the way the service is performed is a precondition for airport managers to carefully determine
necessary investments in airport service quality. All quality improvement efforts need to be financially
accountable. Based on customer feedback some potential improvements might be evaluated as being
ineffective, as they have no impact on overall customer satisfaction [31].
As innovative airport services of today may quickly become the minimum expectations of tomorrow,
it is also important for airports to timely notice shifting customer expectations to keep passengers satisfied
und to keep up with competing airports. To sustain stable revenues for themselves and their business
partners (airlines, shopping outlets, restaurants etc.) maintaining a dialogue with passengers is also
beneficial for airports to uncover new revenue opportunities based on customer knowledge or for
evaluating new service ideas. Figure 1 shows a generic airport strategy map.
SSP offer an opportunity for airports to engage with passengers and gain valuable insights into their
expectations and attitudes while increasing the efficiency of quality assurance and innovation processes
for mutual benefit. It is not surprising hat organizations that maintain network connections that cross
organizational boundaries (weak ties that span a structural hole) are more innovative or adaptive as
compared to their competitors, as external network connections provide information sometimes not
available within the organization itself [33]. Customers also increasingly expect organizations to
maintain a corporate profile on public SSP.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 619
Source: developed by author based on [32]
Fig. 1. Generic Airport Strategy Map
8. Theoretical Model
As previously shown airports join SSP to reach economic goals (satisfy need for subsistence), e.g.:
Gain richer and more context-aware customer insights as opposed to customer surveys;
Increase operational efficiency due to real-time communication with the customer (reduced time
for complaint handling, earlier detection of shifting customer expectations, facilitated management
of customer expectations with regard to airport service quality etc.);
Sustain customer satisfaction by interacting with the customer on a platform he is expecting the
organization to maintain a virtual presence while acknowledging the unique distinctness of each
customer (personalized communication);
Foster and increase reach of positive-word-of-mouth (customer advocacy).
Customers join SSP to satisfy their fundamental human needs:
Self-Determination/Autonomy;
Relatedness;
Recognition;
Meaning/Orientation.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
620 Marion Tenge
According to Self-Determination-Theory the generation of need satisfiers results in higher task
commitment and engagement. With regard to the interactions of passengers and airport organizations
on SSP, generating satisfiers for human needs results in an increased motivation of the passenger to
interact with the airport and to volunteer information or spread positive word-of-mouth. If human
needs are impaired, reciprocal behaviour will not occur. The future value of the relationship will
decrease from the perspective of the customer, and so will the investment of effort in maintaining the
relationship on SSP [34].
Based on the discussed theoretical foundations, the following basic hypothesis is postulated: The
adoption of SSP by airport organizations only increases the perceived social capital from the
perspective of the airport (economic need satisfaction), if the perceived social capital increases from
the perspective of the passenger (human need satisfaction). Figure 2 illustrates the suggested theoretical model based on the example of the SSP Facebook.
Fig. 2. Theoretical Model Based on Facebook
8. Conclusions and Further Research
The paper argues that understanding and responding to service quality expectations of passengers is a
precondition for delivering competitive airport services. It was shown that airports lack high quality
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Marion Tenge 621
customer insights, as airlines and tour operators have ownership of the passenger relationship and data
base. Current measures of airport service quality, such as frequent passenger surveys, are useful for
benchmarking purposes, but do not provide in-depth customer insights or the opportunity to establish a
relationship to the passenger beyond the process of actual service consumption. With the advent of public
SSP airports are able to enter into a dialogue with their passengers and take a genuine customer-centric
approach to airport service quality. The paper contributes to an understanding of the motivational pull of
SSP. Touching on the need-satisfier approach of economist Max-Neef and findings from Self-
Determination-Theory success factors for fostering customer engagement on SSP were deduced. Based
on the example of Facebook, the paper suggests the hypothesis that interactions on SSP that are governed
by norms of reciprocity increase the social capital for both, the passenger (human need satisfaction) and
the airport (economic need satisfaction). Though customer engagement is an off-balance-sheet item, it is a
key asset for co-creating an airport service experience that is aligned with passenger requirements and by
sustainable customer satisfaction.
Mutually beneficial relationships between airport organizations and their customers increasingly
become the motor of organizational development and competitive edge. If competing airports provide a
similar technical service quality, managing the social dimension needs to become dominating. Further
research is conducted to detail the theoretical model that will be subjected to empirical testing (qualitative
and quantitative research) resulting in either acceptance or refutation of the suggested hypothesis.
References
1. Fodness, D., Murray, B. Passengers’ Expectations of Airport Service Quality, Journal of Service
Marketing, 21(7), 2007, pp. 492-506.
2. Boyd, D.M., Ellison, N.B. Social Network Sites: Definition, History and Scholarship, Journal of
Computer-Mediated Communication, 2007, 13(1), pp. 210-230.
3. Facebook. Statistics, Retrieved December 20, 2011, from http://www.facebook.com/press/info.php?
statistics.
4. McLuhan, M., Gordon, W.T. Understanding media. The extensions of man. Corte Madera, CA,
Gingko Press, 2003, 369 p.
5. Levine, R., Locke, C., Searls, D., Weinberger, D. Das Cluetrain Manifest. Munich, Econ Ullstein List,
2000, 287 p.
6. Bernoff, J., Li, C. Harnessing the Power of the Oh-So-Social Web, MIT Sloan Management Review,
49, 2008, pp. 36-42.
7. Mangold, G.W., Faulds, D.J. Social Media: The new hybrid element of the promotion mix, Business
Horizons, 52, 2009, pp. 357-365.
8. Adler, P.S., Kwon, S.-W. Social Capital: Prospects for a New Concept, The Academy of Management
Review, 27 (1), 2002, pp. 17-40.
9. Burt, R.S. Structural Holes. The Social Structure of Competition. Cambridge, Mass, Harvard
University Press, 1995, 313 p.
10. Wasko, M.M., Faraj, S. Why Should I Share? Examining Social Capital and Knowledge Contribution
in Electronic Networks of Practice. MIS Quarterly, 29(1), 2005, pp. 35-57.
11. Cohen, D., Prusak, L. In Good Company. How Social Capital Makes Organizations Work. Boston,
Mass, Harvard Business School Press, 2001, 224 p.
12. Ruef, M. Strong ties, weak ties and islands: structural predictors of organizational innovation,
Industrial and Corporate Change 11(3), 2002, pp. 427-449.
13. Liebermann, M. Guide to Understand Social CRM. Chess Media Group Whitepaper, 2010, available
online from http://www.chessmediagroup.com/wp-content/uploads/resource/95dd4dd11f5def709a
3683f4efd97d26.pdf, 13 p.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
622 Marion Tenge
14. Gummesson, E. Relationship Marketing in the New Economy, Journal of Relationship Marketing
1(1), 2002, pp. 37-57.
15. Kleinberg, J. The Convergence of Social and Technological Networks, Communications of the ACM,
51(11), 2008, pp. 66-72.
16. Grönroos, C. From Marketing Mix to Relationship Marketing: Towards a Paradigm Shift in
Marketing, Management Decision, 32(2), 1994, pp. 4-20.
17. Constant, D., Kiesler, S. The Kindness of Strangers. The Usefulness of Electronic Weak Ties for
Technical Advice, Organization Science, 7(2), 1996, pp. 119-135.
18. Skeels, M.M., Grudin, J. When Social Networks Cross Boundaries: A Case Study of Workplace Use
of Facebook and LinkdedIn. In: Proceedings of the 2009 ACM SIGCHI International Conference on
Supporting Group Work; May 10-13, 2009, Sanibel Island, FL, USA. New York, NY: ACM, 2009,
pp. 95-104.
19. McAfee, A.P. Enterprise 2.0. New collaborative tools for your organization’s toughest challenges.
Boston, Mass, Harvard Business Press, 2009, 231 p.
20. Universal McCann. The Socialisation of Brands, Whitepaper published by Universal McCann. Retrieved
November, 20, 2010 from http://www.umww.com/global/knowledge/view?Id=128, 2010, 72 p.
21. Hulme, M. Your Brand: at risk or ready for growth? Building relationships with your customers in an
era of social change, Whitepaper published by Chess Media Group, Chicago, IL, 2010, pp. 1-26.
22. A.T. Kearney. Einbahnstraße Social Media, Retrieved February 20, 2011 from http://www.atkearney.de/
content/presse/pressemitteilungen_practices_detail.php/id/51302/practice/marketingandsales.
23. Rheingold, H. The virtual community. Homesteading on the electronic frontier. Cambridge, Mass,
MIT Press, 2000, 447 p.
24. Kadushin, C. The Motivational Foundation of Social Networks, Social Networks, 24, 2002, pp. 77-91.
25. Lin, N. Building a Network Theory of Social Capital, CONNECTIONS, 22(1), 199, pp. 28-51.
26. Max-Neef, M.A. Development of Human Needs. In: Max-Neef, M.A., Ekins, P. (eds.) Real-life
economics. Understanding wealth creation, New York, Routledge, 1992, pp. 197-214.
27. Dambmann, U.M. Erfolgsfaktor Gehirn. oder die Auflösung des Widerspruchs zwischen Gehirn und
Verstand, Münster LIT Verlag, 2004, 244 p.
28. Deci, E., Ryan, R. The Support of Autonomy and the Control of Behaviour, Journal of Personality
and Social Psychology, 53(6), 1987, pp. 1024-1037.
29. Deci, E.L., Ryan, R.M.: The “What” and “Why” of Goals Persuits: Human Needs and the Self-
Determination of Behaviour, Psychological Inquiry, 11(4), 2000, pp. 227-268.
30. Storbacka, K., Strandvik, T., Grönroos, C. Managing Customer Relationships for Profit: The
Dynamics of Relationship Quality, International Journal of Service Industry Management, 5(5), 1994,
pp. 21-38.
31. Rust, R.T., Zahorik, A.J., Keiningham, T.L. Return on Quality (ROQ): Making Service Quality
Financially Accountable, Journal of Marketing, 59, 1995, pp. 58-70.
32. Kaplan, R.S., Norton, D.P. The Strategy Map: a Guide to Aligning intangible assets, Strategy &
Leadership, 32, 2004, pp. 10-17.
33. Granovetter, M.S. The strength of weak ties, The American Journal of Sociology, 78(6), 1973,
pp. 1360-1380.
34. Lindenberg, S. Homo Socio-oeconomicus. The Emergence of a General Model of Man in the Social
Sciences, Journal of Institutional and Theoretical Economics, 146, 1990, pp. 727-748.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Evgeniya Tonkova 623
MARKETING ACTIVITIES TO INCREASE COMPANIES’ REVENUES
Evgeniya Tonkova, Varna University of Economics, Bulgaria1
Abstract. The problem with falling sales in times of recessions draws the attention
of researchers who look for marketing opportunities to overcome it, or compensate for
the fall. Activities are oriented either towards more efficient use of internal company
resources, or towards more active marketing involvement in the company’s business
through utilization of opportunities arising from changes in the environment. The ability
to increase revenues in times of crisis through traditional marketing techniques is a
subject to questions. It is necessary to rethink the marketing approaches and re-balance
marketing resources in order to implement the updated marketing strategy by focusing
on reducing risks and increasing sales. The main idea of this report focuses on the
representation of real approaches to increase the revenues based on flexible marketing
solutions. The study aims to establish the major marketing activities that are
implemented by companies in order to overcome the drop in sales and/or to compensate
for those; also studied are specific business practices to increase revenue. The research
focus falls on investigating the opportunities to increase the companies’ revenue
through the use of transfer effects of cross-selling, adding marketing channels,
improving the user overall experience, updating the product range, generating additional
services/sales, implementing flexible marketing tools and taking a full advantage of
marketing event territory. The active use of all the tools in the marketing toolbox will
ensure a more accurate customer targeting and result in better market positioning off
and online. Special attention is given to the role of information in revenue management
for companies in the current conditions.
Key words: marketing opportunities, flexible marketing, revenues, information
JEL code: M31
Introduction
Changes in the market in the last couple of decades concerning competition and the ratio between
demand and supply according to product groups contributed for companies’ unstable revenues. Such
summary is made only for a particular country but also in general within the framework of world
economy. The economic recession had its effect on companies’ revenues, their costs and profits which
was to a considerable degree formed also by expectations of participants on the market. The unfavourable
macro and micro changes for a considerable part of companies contributed for forming a fall in sales.
Various marketing means are directed at compensating this fall. At the same time, however, the
development of technologies and the implementation of new capital based structures for distribution
1 Corresponding author – e-mail address: [email protected], telephone: +359 898636050
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
624 Evgeniya Tonkova
create the opportunity to generate other revenues with high and relatively low costs. To direct companies’
attention to low-cost marketing is exceptionally important in conditions of recession. Flexible marketing
solutions are a prerequisite for a more favourable market positioning and the achievement of economic
efficiency.
The priority of “revenues” for companies
While in 2009 companies’ focus was mainly on achieving the goals set and cutting costs, in 2011
Bain&Company’s surveys show that for the majority of company managers increasing sales in the
coming three years is a priority2. Revenues are listed by Deloitte as a first dimension for effective
company management at times of crises with a focus on price setting, growth, client survey, ensuring
revenues and optimizing the organization of those employed in sales3. In this respect real-time revenue
management becomes especially important for companies with high dependence on the use of capacity,
especially in the sphere of services. The highly technological channels of distribution with more active
information exchange, democratization of information4 and client reviews have an impact on consumer
decisions and revenues5 which makes them attractive to work out on behalf of companies and on demand
in the process of making purchasing decisions by clients.
The traditional division of revenues into: revenues from selling a company’s own products and
services, revenues from selling other companies’ products (those produced by other producers) and other
revenues (also from e-channels6) has its high potential to work on from a marketing point of view. This
research has in mind the accounting classification of revenues and the basic subdivision of companies of
producers and intermediaries/retailers. The focus on opportunities for increasing revenues from selling
producers’ own products and services is directed to the tools (see Table 1).
The very same tools as variables are used also in researching the opportunities for increasing revenues
from selling other products and services. As a whole, this track can be defined as a considerable resource
for increasing companies’ revenues which recently has not been used efficiently. Through using it one
can achieve the following advantages:
Optimizing the product range by reporting relevant demand;
Providing a complex service;
Providing a complex offer for solving a problem completely and others.
Designing various distribution channels in the last couples of decades has lead to the opportunity to
generate revenues from advertising, commissions and others that are exceptionally important for the
effective functioning of channels.
Besides the variables described in Table 1, in researching retailers’ marketing activity one needs to
include also the specific variables like increasing working days and hours, taking advantage of a cross-
selling product range involving on-site events and others.
2 Management Tools & Trends, Bain&Company, pp. 2-4. 3 Управление в несигурни времена. Петте бизнес измерения, които организациите трябва да вземат под
внимание по време на криза. Deloitte, 2009, с.1-2. 4 See in detail Kotler, P., Jain, D. and S. Maesincee. Marketing moves: a new approach to profits, growth, and
renewal, HBSP, p. 7. 5 See in detail: Luca, M. Reviews, Reputation, and Revenue: The Case of Yelp.com, 2011, http://www.hbs.edu/
faculty/Publication%20Files/12-016.pdf. 6 Chaffey, D. E-business and E-commerce Management – Strategy, Implementation and Practice, Fourth edn,
Pearson Education, 2009, p. 80.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Evgeniya Tonkova 625
Table 1
Tools with potential for increasing revenues from selling producers’ own products and services
Tools Specifics of application
Increasing product-
range positions
An opportunity to use it by companies functioning with incomplete
capacity, developed channels and loyal customers. It is supposed that
adding a product-range position will contribute for increasing a producer’s
revenues which does not always happen.
Designing new
distribution channels
Designing new channels is done with the aim to increase producers’
revenues in conditions of strong competition and market instability. It is
oriented to diversifying risk and a flexible management of the
product/channel lifecycles. The idea is that adding a new channel to the
existing ones (multichannel marketing7/multichannel distribution) will
contribute for the increase of revenues from selling a company’s own
products and services. A positive effect of applying new channels is
observed in the retailing banking sector8.
Database marketing Target offering according to database is also seen as a potential tool for
increasing revenues from sales9. Applying the data from analytic tools
10 is
with high importance for revenue management.
Tools that stimulate
sales
Stimulating sales on behalf of producers is a traditionally used approach for
attracting consumers and building loyalty. In this survey there are classified
three basic groups of tools: ones that are oriented to increasing usefulness,
ones that are oriented to decreasing general costs for consumers and/or
intermediaries and ones for lowering risks for consumers and/or
intermediaries.
Integration with other
producers
Integration with other producers enables market access and effective
distribution of the company’s own products. It is possible also to have
integration only in the frame of a single function.
Integration with
retailers
Integration with retailers is oriented to a more favourable positioning of the
producers’ offer in the retail and wholesale outlets.
Flexible offering Flexible offering is of particular importance for companies with high
potential for economies of scale in production and distribution. It is also a
tool for efficient management of the company capacity in the field of
services.
Working out new
markets
Working out new markets is seen as an opportunity to increase revenues
from transferring from local to international business.
Other marketing tools The variety of marketing tools results into the question about which of
those are applied real time with the aim to increase companies’ revenues.
Note: The table of variables has been made by the author for the goals of this research
7 See in detail: Venkatesh Shankar, J. Jeffrey Inman, Murali Mantrala, Eileen Kelley, Ross Rizley. Innovations in
Shopper Marketing: Current Insights and Future Research Issues, Journal of Retailing (1, 2011), pp. 32-33. 8 See in detail: Vikram Lund, V., Watson, I., Raposo, J. and C. Maver, Optimizing Distribution Channels: The Next
Generation of Value Creation, IBM Corporation 2002, pp. 1-15. 9 See in detail: Seller, M., Gray, P. A Survey of Data Based Marketing, 1999, p. 3. 10 See in details: DemandGen Report, Data Rich: The Payoff of Marketing Measurement on Revenue Performance,
2012, p. 5.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
626 Evgeniya Tonkova
Table 2
Tools with potential for increasing retailers’ revenues
Tools Specifics of application
Increasing
product-range
positions
An opportunity to be used by retailers who function with incomplete capacity,
successfully introduced retail outlets and a large number of well-to-do
consumers. The idea is that each and every addition of product-range positions
will contribute for the increase of revenues. However, it is not always a fact and
does not guarantee efficiency11
.
Designing new
channels of
distribution
Intermediaries also make efforts for designing new channels: vending,
catalogues, e-channels, call channels and others. They expect that adding new
channels will contribute for higher revenues.
Database
marketing
Part of intermediaries has their own database which can be used efficiently in
target offering (databases for the cross-selling of new services and products12
)
and differentiating offers.
Tools that
stimulate sales
The variety of tools oriented to lower risk, higher usefulness and lower expenses for
consumers presupposes involving them in strategies for higher revenues from sales.
One pays special attention to the opportunity for applying the promotional set of tools
for achieving competitive advantages in the retail sector in conditions of recession13
.
Integration with
producers
Integrating producers with intermediaries therefore, needs to be seen as an
opportunity for increasing revenues for both sides.
Integration with
retailers
Integration with other retailers is possible in looking for opportunities for
survival. It is also applied in view of achieving higher marketing efficiency.
Flexible offering Flexible offering is an exceptionally important tool for creating expectation
within consumers. It is applied when there is registered fall in sales and a
strongly expressed cycle in buying according to days and time.
Working out new
markets/segments
Highly technological distribution channels are viewed as an opportunity to work
out new market segments with a positive effect on retailers’ revenues from sales.
More working
days
A chance to apply it in critical conditions or when one registers lack of
realization of the sales plan. What is of interest for the researcher is the
assessment of the effect on behalf of the retailers applying it.
More working
hours in outlets
A chance to apply it in critical conditions or when one registers lack of
realization of the sales plan. What is of interest for the researcher is the
assessment of the effect on behalf of the retailers applying it.
Taking advantage
of cross-selling
product range
Product-range update based on company’s survey or information from outside.
One summarizes what generates the purchase of every product-range category.
The tool is taken into consideration in positioning the products in space in the
particular retail outlets.
11 See in detail: Broniarczyk, S., Hoyerq, W. Product: Retail Assortment: More ≠ Better, Retailing in the 21st
century: current and future trends. Berlin 2010, pp. 271-284. 12 See in detail: Wagner A. Kamakura, Michel Wedel, Fernando de Rosa, Jose Afonso Mazzon. Cross-selling
through database marketing: a mixed data factor analyzer for data augmentation and prediction, Intern. J. of
Research in Marketing 20 (2003), pp. 45-65. 13 Retail’s Recession Survivors: Not Waiting for a Rescue, A.T. Kearney, Inc., 2009, p. 7.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Evgeniya Tonkova 627
Tools Specifics of application
Taking advantage
of organizing on-
site events
A tool of exceptionally high potential for increasing sales. Yet, it is not used to
the full because of managerial flaws.
Other tools for
increasing
revenues
Various tools that can be used by retailers with expectations for a positive impact
on revenues.
Note: The table of variables has been made by the author for the goals of this research
Design of the survey
The focus of the research is on problems of Bulgarian companies in conditions of economic crises and
the use of marketing tools oriented at higher revenues with the respective registered effect. The aim of the
research is to highlight the basic issues accompanying business subjects and the marketing efforts for
solving them as oriented to revenue increase. The hypotheses as a subject of the empirical research in the
report are as follow:
1. Are there any considerable differences in using marketing tools for increasing revenues on behalf
of manufacturers and retailers?
2. Are there any considerable differences in the effect generated by them?
The descriptive research survey is based on a questionnaire14
and involves 308 Bulgarian companies
that are functioning at the moment of doing it (10-30 January 2013). The sample is balanced according to
basic classifying principles like specialization, field of economic activity and a company’s main activity.
Main results of the survey
The data of the survey show that companies in Bulgaria are affected by the crisis in various directions
and degrees. It is evident that prevalent is the opinion about a relatively negative, negative and strongly
negative impact of the crisis on companies’ activity with a general relative share of 70.5%.
Table 3
Managers’ opinion about the impact of the crisis on company’s business
Impact Relative share
Positive 6.8
Relatively positive 6.8
Neither positive, nor negative 15.9
Relatively negative 25.0
Negative 25.0
Strongly negative 20.5
General 100.0
14 The questionnaire is done by company managers in the period January 5 - January 20, 2013.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
628 Evgeniya Tonkova
Issues that are most often registered by companies last year are fewer sales, less clients, worse
financial results and problems with competitors (Table 4). The high market risk, the problem of the
quality of the products offered and survival are the least declared as business issues.
Table 4
Problems in doing companies’ business
Problems for companies in 2012 Relative share*
Fall in sales 52.3
Less clients 40.9
Worse financial results 40.9
Incomplete use of capacity 20.5
Imposing new administrative barriers 22.7
Drastic increase of production costs 22.7
Problems with competitors 25.0
High market risk 6.8
Problem with the quality of products and services offered 11.4
Problem with survival 11.4
Another issue 4.5
Note: The score of percentage is above 100 because respondents have marked more than one issue.
The results of the survey show that most of the companies in conditions of crisis have oriented to
flexible offers and designing new channels of distribution that have been assessed as having a
prevailingly positive effect of application. Impressive for a researcher is the high relative shares of a lack
of effect from applying tools like: integration with other producers and retailers, database marketing and
working out new markets. There is confirmed the alternative hypothesis for the presence of considerable
differences in the marketing tools used by manufacturers, as well as a difference in the effect registered
by them.
Table 5
Marketing tools used for increasing revenues from producing and selling producers’ own products
and the effect of applying the tools
Tools Relative share of the
companies using the tools*
Effect from using the tool (%)
Positive No effect Negative
Increasing the product-range
positions
60.0 50.0 40.0 10.0
Designing new channels for
realization
66.7 60.0 30.0 10.0
Database marketing 53.3 44.4 55.6 0
Tools that stimulate sales 60.0 44.4 55.6 0
Integration with other
producers
53.3 33.3 66.7 0
Integration with retailers 40.0 14.3 85.7 0
Flexible offers 73.3 90.9 9.1 0
Working out new markets 60.0 50.0 40.0 10.0
Other marketing tools 20.0 0 100 0
Note: The score of percentage is above 100 because respondents have marked more than one issue.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Evgeniya Tonkova 629
However, the variety of tools applied for higher revenues from a company’s own production is not
linked only to having a positive effect. Besides the positive effect registered in companies (from 14.3% to
90.9% for the particular tools), one observes also lack of effect (9.1% to 100% for the particular tools),
and for three of the researched tools there is even a measured negative effect for 10% of the companies.
The effect of applying the various marketing tools is only conditional and is represented through a self-
evaluation of the respondents. It encompasses not only the direct effect, but also the transfer effects and
the end result in the company revenues.
Producers have oriented mainly to increasing the range of other producers’ products they offer and
applying tools for stimulating their sales. However, one observes that as a whole there are high relative
shares of the lack of effect from applying marketing tools, which means inefficiently invested means in
marketing that is oriented to increasing revenues from selling other producers’ products.
The positive effect has biggest accrual in using tools that stimulate sales and flexible offering. The
results of the research confirm the hypothesis that not all companies have and use the potential for selling
other companies’ products successfully. There manage well those of them which rely on linked and
complementary demand within the framework of the product range in conditions of stimulating and
flexible offering.
Table 6
Marketing tools used for increasing revenues from selling other producers’
products and the effect of applying those tools
Tools Relative share of the
companies using the tool*
Effect of applying the tools (%)
Positive No effect Negative
Increasing the product-
range positions
81.8 12.5 87.5 0
Designing new
distribution channels
54.5 20.0 80.0 0
Database marketing 55.6 20.0 80.0 0
Tools that stimulate sales 66.7 50.0 50.0 0
Integration with other
producers
44.4 25.0 75.0 0
Integration with retailers 44.4 0 75.0 25.0
Flexible offers 55.6 40.0 60.0
Working out new
markets
55.6 20.0 60.0 20.0
Other marketing tools 33.3 0 100 0
Note: The score of percentage is above 100 because respondents have marked more than one issue.
The prevalent part of production companies have used marketing tools for increasing “other revenues”
in the previous year (63.6%) and revenues from selling services (69.2%).
Retailers have oriented also to various marketing tools for increasing revenues. The tools used most
often are increasing product-range positions, flexible offering and working out new markets/segments.
The highest share of positive effect is observed in increasing product-range positions, flexible offering
and stimulating sales. The survey shows that a considerable part of the companies have had expenses for
a set of tools whose application has registered no effect at all. Such examples are the increase of working
hours and days in outlets and involving on-site events. Moreover, there is even registered negative effect
in part of the companies which have applied the tools of increased working days and working out new
markets/segments.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
630 Evgeniya Tonkova
What makes an impression in Tables 5, 6 and 7 is the negative effect from working out new markets
registered by part of the producing and retailing companies. One could find the reasons for this in the
crisis that affected the prevalent part of the countries and in the risks characteristic for this type of
expansion. There is confirmed the alternative hypothesis for the presence of considerable differences in
the marketing tools used by retailers and a difference in the effect registered by them.
Table 7
Marketing tools used for increasing retailers’ revenues and the effect of using the tools
Tools Relative share of the
companies that use the tools*
Effect of applying the tools (%)
Positive No effect Negative
Increasing product-range
positions
78.3 72.2 27.8 0
Designing new distribution
channels
52.4 41.7 58.3 0
Database marketing 33.3 37.5 62.5 0
Tools that stimulate sales 52.4 58.3 41.7
Integration with producers 33.3 37.5 62.5 0
Integration with retailers 57.1 50.0 50.0 0
Flexible offering 66.7 64.3 35.7 0
Working out new
markets/segments
57.1 46.2 46.2 7.7
Increasing working days 38.1 22.2 66.7 11.1
Increasing working hours in
outlets
38.1 12.5 87.5 0
Taking advantage of cross-
selling product-range
33.3 37.5 62.5 0
Taking advantage of onsite
events
38.1 33.3 66.7 0
Other tools for increasing
revenues
15.0 25.0 75.0 0
Note: The score of percentage is above 100 because respondents have marked more than one issue.
The prevalent part of retailing companies have used marketing tools for increasing “other” revenues in
the previous year (52.5%) and revenues from selling services (60.7%). The activity of retailers in this
field is weaker than that of producers.
Most companies have made changes in their product range in the last 5 years (Table 8). The highest
activity is observed in the period 2009-2010.
Table 8
Relative share of companies who have changed their product range
Period Relative share of companies who have changed their product range
2008/2007 68.8
2009/2008 78.9
2010/2009 90.9
2011/2010 66.7
2012/2011 78.9
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Evgeniya Tonkova 631
Survey data show a prevalent activity directed to more services for customers, working out new
product lines and a new activity (Table 9).
Table 9
Directions planned for increasing the product range
Directions for increasing the product range Relative share
Adding new product lines 26.7
Adding new product items to the already existing product lines 16.7
Adding new services 36.7
Carrying out a new activity 20.0
The highest share of application among companies is that of technological innovations, followed by
product, process and logistic ones.
Table 10
Application of innovations in 2012
Innovations Relative share*
Product 40.7
Technological 48.1
Process 33.3
Logistic 25.9
Remark: The score of percentage is above 100 because respondents have marked more than one issue.
The prevalent part of innovations are the result of investing company’s own means – 92.9% and only
13.5% of the companies have used also means of EU programs.
Of interest is the classification according to satisfaction from the means invested in marketing in the
previous year. The prevailing assessment is “rather satisfactory” – its relative share is 35.1%. However,
one is left under the impression of the high relative share of “neither satisfied, nor dissatisfied”. About a
quarter if those questioned show relative or complete dissatisfaction from the means invested in
marketing.
Table 11
Satisfaction from the means invested in marketing in 2012
Satisfaction from the means invested in marketing in 2012 Relative share
Completely satisfied 13.5
Rather satisfied 35.1
Neither satisfied, nor dissatisfied 27.0
Rather dissatisfied 13.5
Completely dissatisfied 10.8
Total 100.0
Of interest is the fact that only 13% of those questioned use consulting services for the aims of
managing company sales. The decisions concerning the management of company sales are influenced by
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
632 Evgeniya Tonkova
the owner’s subjective view (80.5%), the manager’s subjective view (29.3%), experts’ views within the
framework of consulting services (24.4%) and the marketing manager’s competence (14.6%).
Conclusions and recommendations
The conclusions that are to be made from the survey can be summarized in the following directions:
1. Companies in Bulgaria are affected to different degrees by the crisis, what prevails is the
negative dimension.
2. Companies use various marketing tools for increasing revenues, but applying those does not
always lead to a positive effect, which highlights the issue of the efficiency of the means
invested in marketing.
3. Marketing solutions in companies therefore, need to be based on a professional and expert
ground in order to balance the influence of owners and company managers.
4. Basing marketing decisions on a professional and expert ground will contribute for them being
more efficient and leading to greater satisfaction from applying them.
The results of the research direct the attention of marketing specialists to the following characteristics
and concerns:
The variety of marketing tools oriented at higher revenues with potential for working out on
behalf of companies has to be seen as an independent application or as a set of tools.
In selecting tools one has to have in mind the specifics of the product/channel/market.
The efficiency applying an independent marketing tool or a set of tools is not guaranteed,
which means that a preliminary argument for applying it is necessary.
What is necessary is synchronization and coordination of the marketing activity among the
separate participants in the channel of realization since all of them contribute for the
generation of revenues.
It is necessary to put marketing in companies on professional ground which is to influence
the marketing performance of companies and their financial results.
The professional direction to various marketing tools, integrating them or having alternatives of
applying them is a key factor for improving company market positions in conditions of change. The
flexibility of marketing decisions based on actual information and the creativity15
in approaches, means
and messages is the winning orientation for overcoming current problems and working out future
marketing designs.
Therefore, companies need to direct their attention to handling the opportunities of having a feedback
with their customers. Taking advantage of new ideas and non-standard decisions that customers give is a
prerequisite for arousing and maintaining the audience interest through updating the marketing offer. The
interest to this information on behalf of consumers is going to increase. Registering, accumulating and
analyzing customer information16
in revenue management and applying it in database marketing is a
prerequisite for more purposeful offering and more efficient use of the tools invested in marketing.
The results of the study direct one’s attention to issues that concern the effect of the used marketing
tools aimed at increasing revenues. In order to secure the effect aimed, companies need to use modern
systems and modules for processing information both in the stage of designing their activity and in
tracing the parallel/consecutive and the direct/transfer effect of applying the respective tools. Tracing the
15 Tore Kristensen, A Cognitive Creative Approach to Marketing Management, Innovative Marketing, Vol. 2,
Issue 1, 2006, pp. 19-22. 16 Lederer, P., Yeoman, I. The natural extension of marketing , Journal of Revenue & Pricing Management (2003) 2,
pp. 81-82.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Evgeniya Tonkova 633
transfer effect in marketing activity allows one not only to define the effect on revenues, but to define the
effect of other key variables on the company business as well.
Involving actively marketing in programs for revenue increase is of considerable importance for
companies that have problems in using the capacity. For them the positive effect of using marketing tools
is expressed not only in revenue increase, but also there is registered considerable thorough positive effect
on efficiency and profitability. Seeking ways to increase revenues makes companies in the field of
services more flexible, dynamic and creative in conditions of changing environment with ensuing
problems and opportunities. The high risks that accompany new markets orient companies to implement
opportunities for revenues increase. The emphasis of the marketing activity falls on creating conditions
for long-term cooperation with current consumers and consumer involvement in the process of working
out market offers.
Bibliography
Управление в несигурни времена. Петте бизнес измерения, които организациите трябва да
вземат под внимание по време на криза. Deloitte, 2009, с. 1-2.
Broniarczyk, S., Hoyerq, W., 2010. Product: Retail Assortment: More ≠ Better, Retailing in the 21st
century: current and future trends. Berlin, pp. 271-284.
Chaffey, D., 2009. E-business and E-commerce Management – Strategy, Implementation and Practice,
Fourth edn, Pearson Education, 80 p.
DemandGen Report, Data Rich: The Payoff of Marketing Measurement on Revenue Performance, 2012,
p. 5.
Kotler, P., Jain, D. and S. Maesincee. Marketing moves: a New Approach to Profits, Growth, and
Renewal, HBSP, p. 7.
Lederer, P., Yeoman, I., 2003. The Natural Extension of: Marketing, Journal of Revenue & Pricing
Management, 2, pp. 81-82.
Luca, M., 2011. Reviews, Reputation, and Revenue: The Case of Yelp.com [Online] Available at:
http://www.hbs.edu/faculty/Publication%20Files/12-016.pdf [Accessed 1-10 March 2013].
Management Tools & Trends 2011, Bain&Company, 2011 [Online] Available at: http://www.bain.com/
Images/BAIN_BRIEF_Management_Tools.pdf [Accessed 5-20 January 2013].
Retail’s Recession Survivors: Not Waiting for a Rescue, A.T. Kearney, Inc., 2009.
Seller, M., Gray, P., 1999. A Survey of Data Based Marketing.
Tore Kristensen, 2006. A Cognitive Creative Approach to Marketing Management, Innovative Marketing,
Vol. 2, Issue 1, pp. 19-22.
Venkatesh Shankar, J. Jeffrey Inman, Murali Mantrala, Eileen Kelley, Ross Rizley, 2011. Innovations in
Shopper Marketing: Current Insights and Future Research Issues, Journal of Retailing, 1, pp. 32-33.
Vikram Lund, V., Watson, I., Raposo, J. and C. Maver, 2002. Optimizing Distribution Channels: The
Next Generation of Value Creation, IBM Corporation, pp. 1-15.
Wagner A. Kamakura, Michel Wedel, Fernando de Rosa, Jose Afonso Mazzon, 2003. Cross-selling
through Database Marketing: a Mixed Data Factor Analyzer for Data Augmentation and Prediction,
International Journal of Research in Marketing, 20, pp. 45-65.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
634 Claudia van der Vorst
THEORY OF DECISION MAKING
FOR THE EFFECTIVE ANALYSIS OF ERP SELECTION AT SME
Claudia van der Vorst, University of Latvia /
University of Applied Science Kufstein, Austria1
Abstract. The decision making theory in the area of organisation theory is very ma-
ture as a field of research. Since mid of the 20th
century the management decision mak-
ing theory is divided into normative (rational) decision making and descriptive (behav-
ioural) decision making. With the work of Kahnemann and Tversky the economical
behaviour was strengthen.
Mainly these theories have been taken into consideration analysing an important de-
cision making process at Small and Medium Size Entities (SME) – the selection and
purchase of an Enterprise Resource Planning (ERP) System. This strategic decision is
one very critical. The management usually focus mainly on the implementation an ex-
tensive process which often cause cost overruns. Focus for this research was purely on
the selection of the ERP system and all influencing decision criteria. The reflection with
the efficiency of the process as well as the satisfaction with the decision was one result
along a developed process.
Expert Interviews and Case Studies have been executed to support the theoretical ap-
proach and literature review. The interviews provide a clear overview of the current
practice and support the hypothesis that ‘a clear and structured process and the aware-
ness at senior management level from the very beginning’ would lead to a high efficient
long-term decisions. The focus of the case studies was mainly on testing the model,
process and theoretical findings.
In summary a theoretical model along a clear execution process, clear decision mak-
ers and a structured set of decision criteria for this specific research scope are the main
scientific results for this study.
Key words: decision making, Enterprise Resource Planning (ERP), Small and Mid-size Entities (SME),
selection process
JEL code: D80, L20
Introduction
Strategic decisions have been made since centuries by every emperor and leader in history but the
term strategic decision making in management has been discussed just in the 20th century. Theorists as
Barnard, James March, Herbert Simon, and Henry Mintzberg laid the foundation for the study of manage-
1 Corresponding author – e-mail address: [email protected], telephone: +49 151 18398885
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Claudia van der Vorst 635
rial decision making with their research and novel papers. The awareness of a dependency on culture,
economy and politic has resulted in a movement away from the traditional approach to consider all as-
pects of psychologies, economists, sociologists, organisational theorists, statisticians, philosophers and
others. Risk is an inescapable part of making a decision, especially a strategic decision, meaning the im-
plications of it might be enormous (cf. Buchanan et. al., 2006 and Harrison, 1993).
Strategic decisions for small and mid-size entities (SME) are very critical and more relevant than ever
given the need for globalization. Due to the historical approach and set up of these companies, business
processes even for critical areas are not structured. Especially the question of “who makes the decision
and how?” has rarely been analysed.
As an example, one very critical and special event is the process of ERP selection. It is a one off stra-
tegic decision process in which usually the decider has little or no experience. This acquisition is a fun-
damental cost factor. In a lot of industries in mid-size companies it is over 5% of the yearly turnover (cf.
Biermann, 2005). The decision for one specific ERP package defines not just the IT framework with
hard- and software, the selected system is the backbone for all business processes. The interviews with
industry experts provide a clear overview of the current practice and support the propositions that aware-
ness at senior management level from the very beginning would lead to successful long-term decisions. A
clear and structured approach should be followed as well as experience from large entities leveraged for
SME considering their specifics.
The main aim for this research will focus on the use of a proposed theoretical model for in a very
practical environment. Combining theoretical approaches with operational findings based on a specified
example.
The novelty of the research is a suggested theoretical model which has been developed with the input
and requirements of experts and tested in real life cases in combination with detailed operational results.
The efficiency of strategic decisions which are usually made like this example on an irrational basis can
be increased using a rational approach.
Theoretical background and literature
The history of decision making reaches back hundreds of years. With diverse and different focus on
the various sciences and intellectually disciplines like mathematics, sociology, psychology, economics
and political sciences just to name a few. The research into risk and organizational behavior has just the
main desire to help to achieve better outcomes. Leaders of all kinds have been forced to make decision
like the emperors in wars, but it wasn’t until the seventeenth century before humankinds understanding of
numbers was up to calculate risk and decision making. Daniel Bernoulli, Friedrich Gauss and Francis
Galton have been the ones before the 20th
century to come up with studies of random events, normal dis-
tribution and concept of regression just to name some examples coming close to the economic study of
risk analysis. In the 20th
century the studies and interest of researchers in the management fields occur and
new theories have been developed rapidly. Chester Barnard separates personal from organisational deci-
sion making. Neumann and Morgenstern describe with their game theory the mathematical basis for eco-
nomic decision making. Herbert Simon and James March shared the fascination of organizational behav-
ior and Simon rejected the classical notion of rational decision making. Henry Mintzberg positions deci-
sion making in the context of managerial work in the 1980ties. Followed by Amos Tversky and Danies
Kahnemann publishing the prospect theory, which demonstrates how people fail to make rational deci-
sions in an areas of uncertainty and founded the area of behavioral economics.
The scientific field of decision making is getting mature the area of management decision making.
The differentiation of rational and irrational decision making is a more recent field of research (cf. Bu-
chanan et al., 2006)
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
636 Claudia van der Vorst
There are multiple possibilities to differentiate the different disciples of decision making. Harrison de-
fines decision making models in four categories: the rational (classical), the organisational (neoclassical),
the political (adaptive) and the process (managerial) decision making (cf. Harrison, 1993, p.28). More
common is the distinction between normative or prescriptive and descriptive or positive decision making
which was developed and established end of the 20th
century. Most of the time decision making theories
are focusing mainly on the normative theory which is concentrating on identifying the best decision to
take, assuming the ideal decision maker who is fully informed and able to calculate the risk to make a
fully rational decision based on a structured approach. Therefore normative decision making is always
related on a predictable process on how people should make a rational decision. The descriptive decision
making is the younger discipline focusing on the fact what people actually do and how decisions are real-
ly made. Therefore descriptive decision making is linked to the rather irrational approach of making deci-
sions. Since the normative, optimal decision making often created hypotheses for testing against the actu-
al behavior the two areas are very closely linked.
As decision making is such a crucial part of the business and increasingly happens at all levels of
management it needs to be differentiated. Based on the different levels mainly three should be considered:
Strategic decisions done be owners/ board members, Tactical decisions done be managers and operational
decisions done by most employees. (cf. Bowett, 2013). Given this categorization the example of ERP
selection for SME, is definitely a strategic decision.
Strategic decision making has a long been a topic of interest in the organization theory and strategic
management. Considering multiple research papers and theories foster that strategic decision making is
highly complex considering a lot of dynamic variables. The identified groups of Harrison (cf. Harrision,
1996, p. 46) categories the variables but support strongly that the example of selection decision is defiant-
ly a strategic decision. “The decision must be critically important to the long-term success of the total
organization.”. (Harrison, 1996, p.46).
Models of decision making
Following the question on how to make decisions rather that how decisions been made, models have
to be considered as well. An approach Mintzberg (cf. Mintzberg et. al., 2001, p.89) analysed is the simple
process of rational decision making. He quotes that decisions are always following the same structure in
four steps: “Define – diagnose – design – decide.” This is a very simple model but very often used. He
added, to be more effective, companies should embrace intuitive or action oriented forms of decision
making. But none of the step-by-step approaches of rational decision making basically consider this.
P.A.C.E.D is another model often used for teaching decision making, basically with the underlying as-
sumption of rational decision making. PACED stands for: „Define the Problem, list Alternatives, list and
rank Criteria, Evaluate alternatives using criteria, Decide best alternative.” Following this model a ration-
al decision could be supported. Others quote or define models to follow, but basically very similar just
with some more details and focus on individual steps of the process (cf. Bowett , 2013). Reviewing the
methodology of decision making, Schwarber (cf. Schwarber, 2005, p.1087) points out that: “in terms of
methodology, the elements that go into superior decision making never vary.” These elements are objec-
tives, alternatives and risk. Later in his study the person making it was involved. Overall there are multi-
ple different decision making models available. The suggested model developed by the author later on,
considers this theoretical part which follows a purely rational basis. Irrational models have not been found
in literature but this would contradict the irrational approach. Basically rational models are the basis sup-
ported by the human factor.
In summary, reviewing the different theories, the identified field of research fits in the area of strategic
decision making mainly focusing on rational decision making processes and models. The irrational more
descriptive part has definitely an impact but the level considered so far couldn’t specify any detail.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Claudia van der Vorst 637
Research question and analysis
Researchers have analyzed considerably extensive the implementation of ERP systems, the optimiza-
tion of ERP systems, management of ERP issues and details of ERP functionality (cf. Schlichter et al.,
2010, p.496). Very few analyzed the failure of ERP implementations, the selection of the system and the
models how to ensure a successful implementation (cf. Sternard et al., 2011, p.1513.)
Based on relevant literature the author identified the most important criteria2 for selection and measur-
ing satisfaction that are the key driving forces behind successful ERP implementation. Analysing them
individually before each system selection is part of a suggested method driving this research. Given that,
very specifically for the selection and decision making part of an ERP system is still only little research
work done in this area.
This research paper is part of a wider research approach executed over the last 3-4 years. Focusing on
the theory, the suggested model and the real life case studies it takes the results of previous research into
consideration. A paper published and presented at the international conference in Kufstein3 in August
2012 discussed some hypotheses along the expert interviews. One key result according to the expert in-
terviews was the confirmation that this important strategic decision is mainly done on an irrational basis.
28 experts supported the hypothesis: “The satisfaction with the ERP system is mainly gut feel. Only prob-
lems, complains and negative impressions are registered. If the ERP system runs successfully it is not
captured in numbers”.
So, on this basis it would help to support this manly irrational taken decision with a rational approach.
People felt kind of satisfied and happy with the decision but the failure rates are very high. A more struc-
tured approach in the very beginning would support the success and satisfaction with the ERP system in
the end. On that basis the following research question was developed for this research:
“Is there relationship between the use of a structured approach e.g. executing a model and the effi-
ciency of the decision?
This research question leads to the main proposition for this research paper:
Using a suggested model leads to a higher efficiency with the decision
The use of a structured model to support the qualitative discussion of the decision making at SME was
the basis for further reviews and development during the expert interviews.
Theoretical model development
On the basis of the theoretical decision making and the operative approaches of ERP life-cycle devel-
opment the following model was generated with the input of experts and reviews in the later interviews.
This model takes multiple theoretical models as a basis (see Theoretical Background and Literature).
These models cannot be compared and one evaluated as the best one. A deeper comparison with the ERP
live-cycle models was conducted but these ERP models are mainly focusing on the implementation part
of the life-cycle not on the selection, the decision making part. Shaul (cf. Shaul et al, 2012, p. 362) de-
fined the EPR life-cycle in four fundamental phases, planning, implementation, stabilization of the ERP
system into normal operation, and enhancement. This is one cycle where only the planning phase would
2 Results have been presented at the international conference: “New Challenges of Economic and Business Devel-
opment” in Riga from 10.-12. May 2012. Title of the paper: “Approach for selecting ERP software at mid-size
companies reflecting critical success factors”. 3 International Conference “International business and economics conference” in Kufstein, Austria from 03.-05.
August 2012, Title of paper. “Why do you need an ERP system as a SME Company? How do you know which is
the right one? Expert opinions” published by author.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
638 Claudia van der Vorst
be relevant for decision making. All other models mention from ERP providers or in literature vary only
very little and mainly in terminology and wording. Just recently the acquisition part (selection) gets more
popular mainly covered by the scientists Verville, Palanisamy and Bernadas (cf. Verville et al., 2010,
p. 36). The acquisition is part of the planning phase. Shaul mentioned as well in a very recent publication,
that problems occurring with the ERP systems should be based on so called critical success factors and
should be traced back to earlier phase requirements and decisions (cf. Shaul et al., 2012, p. 371). Markus
et al. argued as well that the planning phase is usually underestimated and preventing and resolving future
problems start before implementing. He points out that analyzing the planning phase can prevent future
failures (cf. Markus et al, 2000, p. 255).
Fig. 1. Decision Making Model created by author 2012
Discussing existing models with the experts and comparing them with the rational decision making
models which are used for the bigger companies the suggested model (see Figure 1) was developed by the
author. Key elements influencing the strategic decision making have been identified and discussed. The
main aim of the model is to be simple and understandable for managers and executives of SME. There-
fore complexity was reduced as much as possible and elements reduced or summarized.
The key elements guiding and influencing the decision making model are: the decision making pro-
cess, the deciders and supporting knowledgeable people and a list of detailed decision making criteria
which are defined and prioritized at the very beginning. The impact on the decision making by politics,
company organization structure and information provided can be neglected but might be considered as
influencing factors for the defined elements.
The model itself is very generic; it could be used for almost any strategic decision making process at a
SME. Only the content of the elements needs to be distinct specifically according to the detailed research
field, like this example of the ERP selection.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Claudia van der Vorst 639
These three elements identified on a theoretical basis are derived mainly from literature. This is an in-
ductive input which can mainly be divided in the three mentioned elements and the wider content support
the details according to the ERP selection at SME:
The process structure which has been deduced from various existing processes which has been de-
veloped for either acquisition, IT or different parts of the ERP life-cycle.
The people to be involved which have been analyzed focusing on decision making of SME com-
panies and acquisition.
The most relevant set of decision making criteria which has been derived from literature for the
entire ERP life-cycle and very specifically are linked to the relevant requirements and triggers.
The efficiency of the decision can be evaluated in relation to the satisfaction with the system. Satisfac-
tion can be analysed according to review the fulfillment of the use of the process, the involvement of
important knowledgeable people and the definition and set up of decision making criteria. Very specifi-
cally the decision criteria are categorized according to the literature review. A very recent study from
Shaul (cf. Shaul et al., 2012) reviewed the criteria relevant to the different phases of a life-cycle which he
called critical success factors (CSF). The decision criteria are defined and prioritized in the beginning and
evaluated later on for efficiency. Even on a pure qualitative basis this gives an indication about the effi-
ciency and satisfaction with the decision.
Research description
The research is based on a qualitative research approach. An ERP life-cycle (selection, implementa-
tion & operation) is very complex and challenging to execute, even for large organisations, but especially
so for SMEs which seldom use a structured process (cf. Verville, et al., 2003, p. 585). Therefore it will be
a more valid research approach for the research to use a series of Semi-Structured Expert Interviews and
Company Case Studies as quantitative approaches where the return rate is expected to be very low.
This empirical approach of the research relied heavily on qualitative, rather than quantitative
measures. A more quantitative approach would only have been plausible if SMEs were observed to utilise
structured and more directly comparable methodologies to drive their ERP implementations. Given this
complexity, the author decided to use triangulation as an approach for this qualitative research with the
intention to enrich the quality of the research due to the different approaches. According to Mayring (cf.
Mayring, 2002, p. 147) the triangulation can be based on different sources of data, different interpretation
of the same results, different methods as well as different theories. For this research different research
methods have been chosen due to be able to compare results on a qualitative basis.
Semi-structured expert interviews with a subject matter expert (the author) were preferred to question-
naires as this ensured greater consistency in the presentation and interpretation of questions and their an-
swers during the actual interviews. The research field of SME and its executive level has not reputation for
being very responsive. Schmitz (cf. Schmitz, et al., 2007, p.252) stated a response rate of questionnaires of
15.1% which was seen as very high and Verville (cf. Verville, et al., 2003, p. 585) in a similar research field
stated to just use qualitative methods due to the low response. Therefore as suggested by Atteslander (cf.
Atteslander, 2000, p.12ff ) the method of semi-structured interviews has been chosen. The main findings
have been supported and the suggested model been tested including the process, criteria and people. The real
life company case studies have been identified as the only method to support the results with intensive input.
These two different methods support the validity, quality and reliability of the research results. A question-
naire with eight topics was developed and used as the basis for each of the interviews. This approach led to
more reliability in the subsequent comparison of the information and data collected. From the information
allocated from literature and during this series of semi-structured interviews a hypothetical ERP decision
making model was developed (see figure 1) and reviewed and then tested using two real life case company
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
640 Claudia van der Vorst
case studies. The first Company Case Study was used to initially test the “decision making model” and a
corresponding set of “decision criteria”, “the decision process” and the “deciders” in order to drive the ERP
selection decision. The second Company Case Study focused on an intensive and detailed execution and test
as developed during the first company case study.
The expert interviews have been executed in person or on the telephone along the set of questions.
The timeframe for each interview was one up to two hours. The first interviews confirmed the critically
and relevance of the topic. The model was reviewed, updated and discussed during the last 2/3 of the
interviews. The experts have been high knowledgeable managers, IT executives or owners of a small and
medium-size production company.
Company Case Study I: Small Production Company in the process of selecting an ERP system. The
model and elements with all details have been discussed and used, during the selection process. The com-
pany has been supported during the entire cause of the implementation. Just after go-live and after the
system reached a saturation point, about a year later additional interviews have been executed with differ-
ent experts of the company.
Company Case Study II: A medium size production company had to select an ERP system. They used
the model and elements in all details and tested the results from the interviews and Company Case Study
I. After the final decision for one ERP solution the key decision makers have been interviewed.
Research results and discussion
The overall research question has been presented along with the main proposition: Using a suggested
model leads to a higher efficiency with the decision. Supporting questions have been developed along the
use of the detailed elements of the model developed. The research question and proposition have been
developed and analyzed with input from the literature review, the semi-structured expert interviews and
the company case studies.
Fig. 2. Overall results created by author 2013
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Claudia van der Vorst 641
An overall diagram was developed to summarize the results. This diagram points out the use of the
model in terms of quality executed during the decision making. Quality in this diagram combines the
three key elements analysed and generated according to this specific decision. As higher the quality
meaning: as higher the use of the proposed process, the people and the use of decision criteria, as higher
the efficiency of the decision meaning the satisfaction with the system.
Comparing all results in relation, the use of the model and the quality of the decision making accord-
ing to the proposition an overall trend could be summarized according to the analysed details. Using the
suggested model developed with the input of the experts and leveraging all analysed and defined details,
the proposition can be confirmed leading to a higher efficiency in decision making.
Results of Company Case Study I in detail
Comparison of the key criteria for EPR selection
Group of criteria
Requirements
Company Case
Study I first ideas
Company Case
Study I revised
more detailed
analysis
Company Case
Study I results at
go live
Company Case
Study I results
one year after go
live
Strategy / Organi-
sation
A cheap system
should be imple-
mented to cover
all sales function-
ality. CEO has
clear understand-
ing of his view of
company needs.
Management team
has been involved.
Clear requirements
defined and priori-
tised. Scope com-
pletely reviewed.
Decision making
process structured.
The CRM part
went live as
planned before an
important fair. The
external sales
people could be
trained and con-
nected. The report-
ing requirements
of the CEO been
fulfilled after go
live of the ERP
part 4 month later.
Fit with strategy
overall evaluation
with a 8 (10 is the
best evaluation).
Only security,
user access and
risk-legal was
evaluated lower
(6). They like
their ability to
influence the
processes as well
as how decision
and acquisition
went (9).
Functionality Main focus was on
all client data to be
covered and sup-
port for the sales
process. Timeline
4-8 weeks.
Scope extension to
a full CRM and
EPR system with
the full manage-
ment functionality.
Timeline extended
to 6 months.
Scope covered as
expected. Some
changes required
over time due to
very late specifica-
tion. But imple-
mentation success-
ful in scope.
Functional fit,
implementation
ability, flexibility,
ease of customisa-
tion, user friendli-
ness, training and
online help are
rated (8).
Technology No internal IT
department. The
maintenance
should remain
with the existing
supporting IT
company.
Old hardware
should be reused.
Hosting seemed
possible for some
functionality.
Additional soft-
ware support
needed.
CRM sever hosted
successfully. ERP
server in-house.
Solution worked
fine with old IT
support company.
The technology
was overall rated
as (9). The inte-
gration with others
and clear technical
concept was rated
lower.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
642 Claudia van der Vorst
Group of criteria
Requirements
Company Case
Study I first ideas
Company Case
Study I revised
more detailed
analysis
Company Case
Study I results at
go live
Company Case
Study I results
one year after go
live
Vendor Would be nice to
stay with existing
brand.
No open source
system wanted. No
freeware. Re-
quirement to
check all packages
of existing brand
plus packages of
packages used by
friends and col-
leagues of the
CEO.
CRM & ERP
solution was fine
but the external
consultant compa-
ny maintaining the
reports, forms and
interfaces was not
very professional.
Possible im-
provements have
been identified in
the first months.
Vendor been rated
with an overall
(9). Very satisfied
with market posi-
tion, industry
skills, long term
stability. The
problem with the
external software
support was
solved by chang-
ing to a new pro-
vider. After almost
a year they are
very happy with it.
Economical As cheap as possi-
ble. Short term
investment and
long time service
costs should be
low (under 5000
Euro).
Cost was not the
first priority any
more. Price should
be OK but very
cheap is not an
option. High prior-
ity on intangible
factors like scope
extension, hosting
and additional
reporting.
The licenses been
bought to the
extend as needed.
Additional budget
released for yearly
changes, mainte-
nance and hotline.
Economical was
rated (6). It is
much more expen-
sive as though and
calculated in the
beginning due to
many add ons. On-
going service and
support is very
expensive.
Fig. 3. Results of Company Case Study I created by author 2012
The detailed results of the company case studies confirm in addition that the use of the suggested
model would support this usually very irrational decision with the attend to follow a structured and ra-
tional model.
Conclusions and Suggestions
Searching the literature dealing with the decision making theory in combination with the criteria for
decision making and ERP selection models which are focusing on the planning and selection phase, it
became clear that these subjects are not completely covered by researchers, in addition, these topics are
currently not related. This research examined the ERP selection part of the overall ERP life-cycle with the
focus on SME companies. It developed and empirically tested a model relating the selection of an ERP
system and the level of satisfaction with the overall ERP life-cycle by defining a set of criteria. The pro-
posed model assumed a quality approach for execution with the people involved and the criteria defined.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Claudia van der Vorst 643
The model was tested and validated with mainly one very long company case study and a second very
detailed company case study focusing on the detailed analysis of the set of criteria.
This study contributes to academic research by producing empirical evidence to support the theories
that the suggested model used would lead in the defined research field to a higher efficiency in executing
the decision. Specifically the process, the people involved in the decision making process and the set of
criteria defined have a positive impact on the satisfaction of the chosen ERP system for a SME company.
According to the wider audience of experts consulted, there is empirical evidence that any other company
consulted in the same region, industry and with the same size would conclude to the same result.
Conclusions
1. The suggested model (Fig. 1) has been developed as a generic model to support strategic decisions
which are usually executed following a behavioral approach, mainly on an irrational basis. Given stra-
tegic decisions are critical for companies, very specifically the analysed scope of SME, the rational
model would be very supportive for an efficient decision. The valid structure and use of the suggested
model could be confirmed by experts and with company case studies.
2. The three key elements defined with the suggested model have been detailed and for this very specific
research case, the selection of an ERP system at SME companies, they confirm to increase the effi-
ciency of the decision.
Suggestions
The use of the provided model is suggested to be used by executives of a SME company, who need to
make a strategic decision and do not have enough information, interest, theoretical background or experi-
ence to do so. Using the suggested model very specifically for the detailed study of ERP selection the
identified elements are analysed, tested and evaluated in much detail. The decision making process is
suggested as well as the involvement of the right people and a set of criteria is proposed as a starting
basis.
The phenomenon that a strategic decision is just made on a pure irrational basis was confirmed for
SME not for bigger entities, global companies or corporations. Therefore the suggestion is to executives
in small and medium size companies to consider this rather theoretical model like the suggested one, to
support effective strategic decision making with rational input.
Bibliography
Atteslander, P. 2000. Methoden der empirischen Sozialforschung. Walter de Gruyter Verlag, New York.
393 p.
Biermann, P. 2005. Marketinglösung für das mittelständische Kundensegment der Schweizer Branche
für IT.
Bowett, R. 2013. Organisation – Decision-making in business. [Online] Available at: http://www. tu-
tor2u.net [Accessed 25.02.2013 1.37PM.]
Buchanan, L.; O’Connell, A. 2006. A brief history of decision making, Harvard Business Review and
Harvard Business School Publishing, pp. 33-41
Harrison, F.E. 1993. Interdisciplinary Models of Decision Making, Management Decision, MCB Univer-
sity Press Limited, Vol. 31, No. 8, pp. 27-33.
Harrison, F.E. 1996. A process perspective on strategic decision making, Management Decision, MCB
University Press Limited, Vol. 34, No. 1, pp. 46-53.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
644 Claudia van der Vorst
Markus, M. L., Axline, S., Petrie, D. & Tanis, C. 2000: Learning from adopters’ experiences with ERP:
problems encountered and success achieved, Journal of Information Technology, 15, pp. 245-65.
Mayring, P., 2002. Einführung in die Qualitative Sozialforschung. BELTZ Verlag, 5th Ed., 170 p.
Mintzberg H.; Westley. F. 2001. Decision making: It’s not what you think. MIT Slon Management Re-
view, Spring, pp.89-93.
Schwarber, P. 2005. Leaders and the decision making process. Management Decision, Vol. 43, No. 7/8,
pp. 1086-1092.
Schmitz, C. & Biermann, P. 2007: Beschaffungsprozesse mittelständischer Unternehmen. ZfKE –
Sonderdruck.
Schlichter, B. R. & Kraemmergaad P. 2010: A comprehensive literature review of the ERP research field
over a decade. Journal of Enterprise Information Management, 23(4) pp. 486-520.
Shaul, L. & Tauber D. 2012: CSFs along ERP life-cycle in SMEs: a field study. Industrial Management
& Data Systems, 112(3) pp. 360-384.
Sternard, S., Gradisar M. & Bobek S. 2011: The influence of external factors on routine ERP usage.
Industrial Management & Data Systems, 111(9), pp. 1511-1530.
Verville, J. & Harlingten, A 2003: A six-stage model of the buying process of ERP software. Industrial
Marketing Management, 32, pp. 585-594.
Verville J., Palanisamy, R. & Bernadas, C. 2010: Cultural Influences on the Decision Process for Ac-
quiring Enterprise Software: A Comparison of Mexico and the United States. IJGMS, 2(2), pp. 35-66.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Sandra Heiden 645
APPLICATION OF INNOVATIVE APPROACHES AND TECHNIQUES TO
INCREASE THE EFFECTIVENESS OF KNOWLEDGE MANAGEMENT
PROCESS IN ORGANISATIONS
Inesa Voronchuck, University of Latvia, Latvia;
Irina Lando, University of Latvia, Latvia1
Abstract. The new recently developed economic situation in Europe requires
employees to be able to acquire new skills quickly and adapt to the changing
environment.
Demand for the highly skilled employees is constantly growing and learning becomes
a part of the daily routine. Employees are studying after office hours, therefore, there is a
high demand for the training curriculums that would help employees to acquire new
knowledge within short time periods and would be highly efficient and effective.
It is critical to understand how much an employee can learn during this time, and
whether it is possible to teach a person to think faster.
The effect the training courses offered by the authors is an ability to think and
analyse information faster, develop and assess alternative solutions, reach plausible
decisions. The research conducted by the authors is devoted to the speed memorizing
and speed reading techniques. The author has developed the training program, tested it
on multiple groups and introduced it in practice. The training program provides with an
effective and measurable practical results.
Objective of this training program is to increase the speed of reading and memorizing
for more than three times during a six day course. The authors has also developed an
advanced training program to improve mental capacity, expand possibilities of
memorizing data. The program develops skills of effective interoperability when
working with extensive volumes of information.
This research is based on the author’s study conducted in 1999 – 2012 and contains
data of training results of 4,587 people.
Key words: knowledge management, speed reading, adult education, vocational education, innovative
teaching methods
JEL code: M12
Introduction
The new economic situation in Europe requires more effective utilisation of human capital. Private
and state employers can no longer afford employing significant numbers of staff. As a result of staff
1 Corresponding author – e-mail address: [email protected], telephone: +37167273009
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
646 Sandra Heiden
numbers reduction, employees’ indispensability and an effective use of professional skills and abilities, as
well as the ability to continuously improve professional skills and be retrained according to the business
needs become the key elements of success. It is also important to understand whether adults can be
trained to think faster and be able to process significant volumes of information. Current research is
dedicated to development of methods of improving effectiveness of information processing and thinking.
The author has launched a series of training sessions dedicated to improving memory capacity and
speed reading techniques in Latvia and abroad in 1999-2012. The author has summarised all training
results in the individual reports and have consolidated them in the Ph.D. thesis “Application of
innovational training methods in organisations”.
The results of the research conducted by the author established effectiveness and efficiency of the
speed reading and speed memorizing techniques and proved they can be used in various areas, such as
private business – for increase of employees’ competitive advantage, universities (the author conducted
similar trainings in the Stockholm School of Economics and the University of Latvia), and ordinary
schools for children over 8 y.o. (author has accumulated results of over 1,500 trainings for
schoolchildren).
The skill-set acquired during such trainings allows trainees not only estimate and analyse information
quickly, but also do it effectively.
Actuality
Actuality of innovational training methods’ use develops in companies that need to manage significant
organizational changes within short time periods. For example, implementation of a new strategy,
expansion into the new markets, personnel re-training within limited timeframes, significant changes in
the economic environment, such as an economic crisis and staff layoffs that result in the additional
responsibilities delegated to the remaining employees.
As a result of rapid organizational changes, many employees are working in the stressfull conditions
and need to manage additional workload.
Training methods offered by the author include speed reading and speed memorising techniques and
have been used for training top managers and „C suite” executives, owners of the following companies in
Kazakhstan: coal mining company “Karazhira”, “Azia Energo”, “Kazah Trans”; in Russia: “Russian
Railways” (Moscow), “Rosselmash” (Voronezh), “Morozko”, “Bahetle”, “Sabantuy” (Kazan),
“Linguagelink” (Samara, Sankt-Petersburg), “Metallurgical combine” (Lipeck); in Latvia: “Norvik
Banka”, “Swedbank”, “Rietumu banka”, “Eiroaptieka”, “BTA” and many others, within the scope of
“Open Mind” project, “Latvian Association of Logopedists”, facilitating the Latvian language course to
43 teachers from Rezekne, as well as training students under the program of speed memorising in the
University of Latvia, and the speed reading program in the Stockholm School of Economics in Riga.
Description of the issue
In the period of Latvia’s accession to the EU one of the main requirements of the European
Community was introduction of “more innovation in education and training” and following the concept of
life long learning. By that time the author had already developed, tested and put into practice the
programs for the National Program for the Latvian Language Training for training the teachers, who
taught adults. At present, the relevance of the study conducted by the author is only growing stronger
.The retirement age is only shifted upwards, which means that the number of available job places is being
reduced. At the same time the new economic conditions, and consequences of the economic crisis in the
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Sandra Heiden 647
EU along with the continuing reduction of available employment drive up the demand for the increased
competitiveness in the labor market. Yet, the continual development of new technologies requires
constant relearning and mastering new knowledge. For example, in the present day young people, after
completion of high school often speak three foreign languages fluently and with ease, which is not to say
about the older generation of people who should learn. The need for proficiency in English is on the
increase also. Moreover, the technology developments necessitate constant retraining. The new skills are
to be acquired in a short time. To do so it is necessary to develop the technologies that will serve as a tool
to help adults learn new things quickly. The author has developed the programs that can be efficiently
used in training professionals in any field. On the other hand, often these kinds of training attend senior
managers, executives and business owners. However, in terms of strategic development of the Latvian
state, the methods developed by the author can be used successfully to teach both school and university
students (albeit with implementation of certain changes in the organization of the learning processes).
And, since the youth is the future of any country, its foundation for a prosperous future, in the opinion of
the author, for facilitation of development of the young generation, it is advisable to introduce such
training as early as at the primary school age, to prepare the future work force capital.
Novelty
For the first time in Latvia the author has introduced innovational training methods for the large scale
training courses aimed at residents of the rural areas and farmers. The author used speed memorising
programs with application of association and figurative thinking developed by her earlier. As a result,
these methods proved to be new and unknown to majority of trainees.
Most trainees noted that they have not heard about techniques used to improve learning processes
before. Trainees were not familiar with speed memorising approaches that would enable them to
effectively retrieve necessary information later.
The author considers it is of paramount importance that the trainees were explained the basics of the
learning techniques that would help them to acquire new information in an efficient and effective way. If
a person is not able to acquire new information after a 1.5 hour training session, any teaching efforts
would be useless.
In the described project it was important to facilitate trainings within relatively short time periods, as
the author was asked to cover all travel and office expenses. As a result, it was necessary to organise
training courses so that training hours would be delivered within a minimal number of days. Availability
of trainees also represented a challenge - some of them were not able to take off a couple of days off
work, especially during harvesting period.
According to the training requirements, all trainees were asked to complete a test at the end of the
course with a passing rate of 75%.
The above factors motivated the author to develop new approaches to training of employed adults, use
her prior experience in learning, teaching and facilitating training courses.
For the first time in Latvia innovational training methods have been tested in practice for the large
scale training courses facilitated to adults who lacked learning skills necessary to acquire and retain
significant amounts of information within short time periods.
Materials and Methods
Training was carried out in the form of workshop session trainings, because the purpose of the
training was to master the practical skills.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
648 Sandra Heiden
While working on this paper the authors would implement exactly the system of workshop sessions
training. The author believes that such a system is most suitable for implementation of the learning
process where the methods of fast memorizing and speed reading are used.
First, because the delivered instruction is of applied nature and aimed at achieving specific results.
Therefore, the classes are designed in such a fashion that the workshops for memorizing comprise 80%
and theory 20%, while in the speed reading classes 90% of the time is devoted to practice and 10% to the
theory. The theory is directly connected with practice and it serves only to illustrate the required
exercises. In general, there are two very different aspects of training, i.e., lectures and practical lessons
(workshops). The training conducted by the author requires constant practicing, which cannot be replaced
by lectures.
Second, in the classroom the teacher must constantly receive feedback from the students.
Such an arrangement allows implementing several principles simultaneously.
Straight away we can see the difference between how a particular individual talks the talk and walks
the walk. It becomes rather obvious whether the person already uses the new techniques or keeps clinging
to the old ones. Also, the group has the opportunity to learn from each other, and utilize both the positive
experience (of those who got the results already) and negative (errors of others are immediately evident).
This kind of feedback assessment helps make the learning process as effective as it can get.
Third, creation of a relaxed atmosphere, which author considers to be crucial since the positive mood
is very important for any type of training. When students find pleasure in learning, then learning is easy
and effective. Creation of such an atmosphere requires a very large emotional input from the teacher. A
similar effect was described by the Bulgarian psychotherapist Georgi Lozanov in his work on
suggestopedia (Lozanov, 1977).
Fourth, during training for fast memorization and speed reading, students are offered to try to practice
a set of different methods and only after the practical application of a particular technique can they make
a conclusion as to which of the offered methods was the most suitable for each of the students.
Individuals with flexible mental capabilities can use all the proposed methods with equal efficiency, but
sometimes a person may prefer only one of the offered memorizing techniques or quick reading
strategies. This is where the teacher’s professionalism comes into play during this kind of training, i.e. the
teacher’s ability to render assistance to the student who finds it hard to implement something in practice.
In addition, the particular learning style of an adult individual should be taken into account (Honey,
Mumford, 1982).
All data obtained in the learning process were recorded and then processed by a computer-
implemented software.
Results
During training it was found that the minimum result, achieved in the course of speed reading is an
increase in speed reading by two or three times the initial speed.
The speed reading program is designed for six days of training, four academic hours a day. This
format of learning is factored by both the peculiarities of the brain (i.e., due to purely physiological
reasons) and other reasons.
On the average, people are able to increase their reading speed two to three times compared to their
original speed of reading. The maximum result obtained during the training conducted by the author was
an increase in reading speed sevenfold.
From the viewpoint of the author it does not make sense to strive for any particular result. More
important is that each student can increase the reading speed compared to the speed they had at the
beginning.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Sandra Heiden 649
In the process of the speed reading the attention is getting increased dramatically and, as a result,
comprehension of the read information increases sharply.
However, it is worth mentioning that the greater the vocabulary the reader has, the faster this
individual can read.
In the course of training conducted by the author the key factors affecting the speed of reading of
adults have been identified.
1) Psychological barriers. Most of the adults before the start of training already know what to expect
of themselves. What’s more, when adults during training succeed in learning and get the results
higher than those they expected of themselves, they may begin to doubt whether everything has
been done right. We all know how to read and adults find it difficult to understand why should
they need to be able to read fast.
2) Attention or lack thereof. Even at school we get used to read paying equal attention to the short
and the long words. In fact, the short words we can just recognize without reading them through.
Furthermore, there are many established myths related to the process of reading. For example, all
of us have heard the myth that you need to read slowly and carefully. But a slow presentation of
information invokes a decrease of concentration and the person gets distracted. Off topic /random
thoughts arrive. Which are not associated with the specific text. So it’s no wonder that it is the
rapid reading that increases attention.
3) Re-reading or regression. Most often re-reading of the same part of a text takes the same time for
adults as reading for the first time. However re-reading decreases the amount of paid attention. So
before you re-read the incomprehensible part of the text, you are better off finishing reading the
entire passage, chapter or section to the end, so that you get the general idea of the text. And only
then you can re-read the points that were not understood. However re-reading makes sense only if
you pose questions. That is what specific question you want answered.
4) Correct eye movements over the lines. In 1878 the French ophthalmologist Javal in France
conducted a number of experiments on eye movements during reading. Up to this finding it was
thought that in order to comprehend the text while reading the eyes must dwell to read every word.
It was this discovery that triggered further researches in the field of fast reading.
5) The Perception of chunks. In school we are still are taught to read the syllables, one after another.
This is because syllables are much smaller than words, and are easier to learn. But reading the
separate syllables splits the semantic information. Children at first do not like reading exactly
because they do not understand the meaning of what they read. Any adult can check out the said
above, by taking an unfamiliar book and reading aloud the syllables of two pages, and then trying
to retell what’s been just read. It will not work because the information is so split that it simply
does not add up into a single picture.
6) Pronunciation or vocalization. When readers pronounce internally what they’re reading to
themselves, they hear their own voice. This means that even though the lips are closed, the speech
apparatus continues working. And since the vocal cords are composed of muscles that need the
time to contract and stretch, it turns out that we cannot read faster than we speak. How many
words per minute can we say? Often it depends on the peculiarities of the language. For example,
if you listen to the BBC news for those for whom English is their native tongue, it has been
estimated that the rate of presentation of information is over 400 words per minute.
7) Experience. The more one reads, the more different are the words one can recognize from the text
without having to read those. In addition, people who read a lot possess a rich vocabulary on
different topics. As a result, no matter how offensive it may seem, the more experienced is the
reader, the more quantitative results he or she can achieve at the end of the classes. Usually
experienced readers in six days pass the mark of 1,000 words per minute.
8) The peculiarities of operation of the brain. A person cannot read faster than he thinks, because for
the process of reading it is important to comprehend whet is being read.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
650 Sandra Heiden
9) The purpose of reading. Reading speed is a function of the purpose of reading and by it is wholly
determined. It is often said that the speed reading of complex literature is impossible. Not true. It
all depends on the experience and vocabulary of the reader. But there is a difference between
leisure reading, and the reading to acquire new knowledge, or reading necessary for work. The
speed reading can be compared with a new sports car. While driving within the city one has to
observe speed limits, traffic signals, road signs, etc but on a highway off the city limits you can
drive at full speed restricted by the power of the engine. But if your car is too old, you can’t go any
faster than you car allows you even on a highway. This is the difference between an experienced
reader and the not –so- experienced one.
10) Academic knowledge about the reading processes. It can help avoid many mistakes in the teaching
process, since there are established erroneous and limiting beliefs that may interfere with learning,
such as „one must read slowly to remember better,” „there is the diagonal reading „, „people who
read fast do not remember much”, etc. It should be remembered that people who read at low
speeds, even with a good understanding of the text are just unable to read large amounts of
information, and therefore make conclusions on various topics.
The quantitative results obtained from the training are summarised below (see Figure 1.)
0
200
400
600
800
1000
1200
1400
1600
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Fig. 1. Corporate training results of 31 organisations
The chart presents an average speed of reading of trained employees at the beginning and end of the
training course.
During the training of top management it was established that the initial average speed of reading was
219 words per minute with understanding of the context at 50% (six questions were asked to check
overall understanding of the text. Most trainees have answered three out of six questions). After
completion of the training programme the average speed of reading reached an average of 823 words per
minute with understanding of 100% (all six questions were answered correctly). Thus, on the average the
speed of reading increases in 3.41 times (see Figure 1).
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Sandra Heiden 651
Speed of readings of adults who are not part of top management on average increases in 2.67 times.
Authors consider that the difference in the results depends on a habit of maintaining high levels of
intellectual capacity on a regular basis.
As presented on the chart, the initial speed of reading does not differ significantly. Usually, adults
read 180 – 250 words per minute. During the training courss that provides a constant intellectual
challenge and increases information load, the results can increase more than 3 times. Analysis of the
training results among trainees of different organisations can explain a difference in the level of
competition (the higher is the level of competition, the quicker trainees get used to respond to variations
and solve more difficult intellectual and non-standard problems). This means they have higher intellectual
capacity and are ready for higher intellectual load.
The end result also depends on the general level of development. During the experiment it has been
established that top managers usually achieve the best results.
Discussion
Application of Speed reading techniques in the author’s view may be of practical nature. In order to
quickly read one must think fast. Here the author sees the possibility of using Speed reading techniques
for training of staff in organizations. The working day is eight hours, but the question is, how much and
what kind of work can accomplish an employee during this time.
If the employees are focused on results rather than processes, and their income depends on the results
of their work, the efficiency of such employees can be improved by teaching them the Speed reading
techniques. After accomplishment of the course 98% of students reported an incredible enthusiasm and
desire to do something.
This is despite the fact that usually the students were adults and that the percentage includes the
corporate courses trainees (i.e. courses organized by request of corporations) and that classes were
conducted in the evening after work hours.
Organization of this kind of training requires a greater effort on the part of the teacher.
Since classes takes place in the form of intense training, to ensure the high quality results each student
should always be tested to evaluate their success via feedback and make adjustments in the learning
process of each individual student to ensure effectiveness.
The teacher should be able to motivate students and encourage them to focus on achieving the best
results, help eliminate the psychological barriers that may occur during training.
The author believes that it is not quite correct to try to calculate the average initial speed and the
average final speed. It’s more like counting the average temperature in the hospital. Much more relevant
is how much each of the learners advanced in comparison with the initial test.
In addition, during an interview it is worth to determine whether the student during training managed
to keep a positive attitude, because this kind of learning requires some effort from the student.
The techniques described in this article should be applied as early as primary school age to ensure that
people in their adult life gain a high level of intellectual development, and consequently, a higher level of
income.
The author believes that the techniques and methods of memorizing and fast reading should be
introduced more widely in the territory of Latvia.
First of all, it is connected with the strategy of focusing on the future of the state.
According to an international survey of educational achievements Program for International Student
Assessment (PISA) conducted in 2009 on the level of intellectual development of school students (it’s
economic future of the state),
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
652 Sandra Heiden
Latvia is only on 30th place among 65 countries with respect to the skills of its students to analyze
information and practically apply the skills learned in school. At the same time Estonia is on 13th place in
the world, while Lithuania on the 40th.
In the PISA study the children accomplish the tasks of six degrees of complexity.
If the student reaches level 2, it means s/he knows how to use this knowledge only in the simplest non
curriculum situations. The 3rd level is a little better, but still speaks of undistinguished student’s abilities.
The 4th level is when the student is able to use knowledge to get new knowledge.
And those who do the tasks of the 5-6th levels can be regarded as an intellectual elite.
In Latvia, 62% of all students are on the 2-3rd levels, the 4th level reached 17% of the students, and
the 5th 2.8%. In Latvia the highest level 6 reached just 0.07% of the students.
Significantly more (16.8%) of the students in our country are of the lowest 1st Level. But those who
even don’t reach that level comprise 0.36%.
The author believes that one can make a prediction about the level of income of the adults who will
grow out of these kids who don’t know how to analyze information and make logical conclusions. In
other words, these individuals will grow up to represent only the cheap labor.
Based on the above evidence, authors consider it necessary to develop the speed reading and storing
information skills among university students in order to maintenan competitiveness of the future young
experts on the our market and competitiveness of the country forming the future intellectual elite.
Conclusions and offer
The methods of speed reading and memorizing have been used for decades in the developed countries.
These methods can be effectively used for training personnel in various organizations.
The methods are of interest in and of themselves; methods become more effective when used for
specific purposes, whichever an organization might pose and they can be successfully applied to solve
practical issues related to professional requirements. The non-traditional teaching methods can be applied
depending on the objectives and the specific learning environment.
The application of the methods can be affected by the number of people in a group, the overall level of
education of the trainees, goals and objectives of the specific courses.
The dominant idea for implementation of speed reading and fast memorizing methods, in author’s
opinion should be directed to the possible practical application of these methods in various fields.
In English-speaking countries, these teaching methods are widespread. The methods are used for
teaching of both the open access groups and staff of corporations.
In the U.S.A training with using methods of speed reading have been conducted for the educators
from the perspective of public administration.
The increased interest in methods of speed reading and memorizing can be explained by the general
demand for the need to expedite processing of information.
From the teacher, such a system involves the creation of an environment where acquisition of new
methods would be done in a natural way, in the process of use of the materials necessary to perform job
duties, and the course would be focused on ensuring the achievement of educational goals.
When choosing a method of teaching the primary emphasis should be the efficacy.
The author suggests a more widespread adoption of the methods proposed by the author in practice.
Education of this kind is expedient to begin with school-age children to prepare a competitive workforce.
Already, in Latvia, in spite of 11.6% unemployment rate (in 2011, according to the Institute of Statistics)
there is a shortage of highly qualified personnel. On the other hand there is a “brain drain”.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Sandra Heiden 653
Therefore, the methods proposed in this article might help when it is necessary to retrain the staff in
the event of a sharp reduction of the number of employees in organizations. When those left are supposed
to perform the duties of the fired /laid off employees.
The methods described in this article can be learnt at minimum time and immediately applied in
practice to perform job duties.
The speed-reading and memorizing methods can be effectively used to educate students so that they
can significantly save time and effort needed for acquiring a particular subject, and provide an
opportunity to read through the whole list of literature recommended for the course.
It should be noted also that at the speed of reading below 250 words per minute a student must spend
about eight hours a day just to read the relevant literature.
Arrangement of classes should take into account the factors affecting the efficiency of learning and
reading speed of adults. Comprehension of these factors helps avoid many mistakes and streamline the
learning process.
The main conclusion of this article is that the methods speed reading and speed memorizing can
within a short term give the maximum measurable results.
Considering the factors influencing the speed of reading established during the training it is possible
to introduce the speed reading at all levels, including training of professionals to maintenance skills
necessary for retraining and managing high volumes of processing text information.
Bibliography
Highlights from PISA 2009. [Online] Available at: http://nces.ed.gov/pubs2011/2011004.pdf.
Honey P. and Mumford A. “Using Your Learning Styles”, Peter Honey Publications, 1995, 35 p.
Lando I. “Application of non-conventional methods of training for personnel training for adaptation to
new economic conditions” International Conference for Doctoral Students “Current Issues in
Economic and Management Sciences” LU: ISBN 978-9984-45-418-4 Rīga 2011.g. 10-12. nov.
Lando I. “Non-Standard Methods of Learning for Personnel” Conference “Continuing and Distance
Education for Developing of Workforce” (THENUCE – European Thematic Network in University
Continuing Education, LU) ISBN 9984-572-72-2 Riga 19-20.Okt. 2001. p. 111.
Lando I. “The experience of implementation of the innovation training methods for adult training within
the framework of the European Union project” the vocational education and training” „First
International Scientific Conference on Project Management in the Baltic Countries“. 2012. gada 8.-9.
februāri. Rīga: LU, Conference Proceeding: ISBN 978-9984-49-470-8, 2012, 244 p.
Lozanov, G.K. (1977), Suschnost, istoriya i eksperimentalnie perspektivi suggestopedicheskoi sistemi pri
obuchenii inostrannim yazikam [Essence, History and Experimental Perspectives of Suggestopedic
System for Teaching Foreign Languages], Metodi Intensivnogo Obucheniya Inostrannim Yazikam
[Intensive Methods for Learning Foreign Languages] 3, pp. 7-16.
The Condition of Education 2011. [Online] Available at: http://nces.ed.gov/programs/coe/pdf/coe_irl.pdf.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
654 Barbara Wagner
IMPACTS OF EMOTIONAL INTELLIGENCE
ON LEADERSHIP EFFECTIVENESS
Barbara Wagner, University of Latvia, Latvia1
Abstract. This paper aims to identify the impacts of emotional intelligence on leadership
effectiveness. First, different approaches to leadership are shown and analyzed and narrowed down to a
working definition of leadership. This definition is furthermore translated into categories of leadership
categories as a first step to measure effective leadership. The categories are then filled with items from
various leadership and management definitions in order to find an itemization of leadership. Itemizations
used by previous academics, such as Stogdill’s Leadership Behaviour Description Questionnaire (LBDQ)
and Bass and Avolio’s Multifactor Leadership Questionnaire (MLQ) are presented and analysed. The
latter is then decided to be the most promising one for valid leadership research. In the second part,
emotional intelligence is introduced and the capabilities of emotional intelligent persons are shown. It is
then analysed if the defined characteristics of effective leaders would be enhanced by emotional
intelligence, which is confirmed by this secondary research as well as by different primary researches.
Recommendations for further research are given.
Key words: leadership, emotional intelligence, LBDQ
JEL code: M12
Introduction
In today’s work environment with international teams, a constant lack of skilled workers and
experts and a generation joining the workforce which is more technically literate, connected and mobile
than any other generation before (Bristow et al. 2011) leadership is gaining importance and therefore
coming into the focus of management research. The main research questions within leadership research is
what makes an effective leader, are there certain traits, abilities or behaviours that might be identified,
how could those be measured and developed and which other abilities might be of importance. In this
paper, the impacts of emotional intelligence on leadership effectiveness are analysed. As a fairly new
concept, emotional intelligence has only been discussed for the past twenty years and valid researches on
the effects of emotional intelligence in the work environment are still rare. This paper tries to add to the
discussion with an analysis of the links between emotional intelligence and effective leadership.
Research results and discussion
The words “leader” and “leadership” did not come into the English language until the 13th century. It
came from the Anglo-Saxon “leiden” which is to go forward, or to go up to. And it was then used usually
to describe the person at the head of an army. (Ramsden 2008, p. 20) Today, researchers usually define
leadership according to their individual perspectives and the aspects of the phenomenon of most interest
to them (Yukl 2006, p. 2). Leadership definitions can roughly be differentiated into goal-oriented,
influence-oriented, vision-oriented and coordination-oriented. The goal-oriented definitions of leadership
1 Corresponding author – e-mail address: [email protected], telephone: +49 176 619 361 67
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Barbara Wagner 655
focus on company goals, which are the reason for the existence of leadership in the work environment.
Therefore, the goal-orientation seems to be a logical definition base for leadership in the work
environment. On the other hand, most of the authors focus on the goals and the achievement thereof only
without taking into account the process of leadership and how the goals are reached (Bower 1997, p. 7;
Holzbaur 2001, p. 55; Franke 1972, p. 50). The influence-oriented leadership definitions take into account
that individuals need to be influenced in order to work towards company goals and that those goals have
to be seen as common objectives. Leadership is – according to this perspective – seen as the influencing
process necessary to have employees reach company goals. While taking a broader perspective than the
goal-oriented perspective, those definitions do not clearly state the difference between individual and
company goals and how leaders can reduce this difference (Scanlan 1982, p. 30; Riggio 2011, pp. 119-
120; Lorsch 2010, p. 414). While clearly stating the importance of formulating visions which combine
company goals and individual goals, most vision-oriented definitions of leadership do focus on visions
only and do not explain the process of translating goals into visions and the process of turning visions into
reality (Charteris-Black 2007, p. 219; Hinterhuber, Krauthammer 2001, p. 18; Carnegie 2011, p. 45). The
coordination-oriented definitions of leadership show the complexity of leadership and its task but do
leave out the process of leadership as well as the relationship between leaders and followers (Potthoff
1979, p. 80; Hungenberg, Wulf 2006, pp. 329-330; Link 2010, p. 7). Summarizing the perspectives,
leadership is defined as the process of translating company goals into visions, which are understandable
and shareable by different stakeholder groups and influencing employees to share those visions and
coordinately work towards them. While leadership has been defined by translating goals into visions and
influencing people to work towards those visions, management can be seen as the underlying structure,
defining the goals and providing the structures and control mechanisms. Both concepts do have joint
goals but different, complimentary ways to reach them. So the company goals would be reached most
efficiently if leadership and management were performed at the same time. Concerning the roles of
leaders and managers, it is according to Yukl obvious that a person can be a leader without being a
manager (e.g., an informal leader), and a person can be a manager without leading (Yukl 2006, p. 5). It
does take very different personality traits for leaders and for managers, as the definitions above have
made clear. Therefore leadership and management abilities are rarely found in the same personality. This
is the reason why a differentiation between leaders and managers is advisable.
In order to conduct further research on leadership, emotional intelligence and motivation it is
necessary to define some kind of measurement system for all three concepts. Only if one is able to
measure the concepts, one is able to research interrelations and effects. Therefore different measurements
used by previous researchers are analysed before selecting the appropriate measure for this research.
“Measurement is about assigning numbers to objects, ideas, views or answers. It is the systematic and
disciplined observation, quantification and interpretation of phenomena guided by a theory in one way or
another. In science, the accurate and systematic measurement of phenomena can give great practical
control over the subject, and can make possible the formulation of principles or laws which can make
confirmation or refutation unambiguous and clear” (Chopra, Kanji 2011, p. 69). In the social sciences,
phenomena such as quality, leadership, emotional intelligence, poverty, inequality and social capital are
so ambiguous and perplexing that there is no agreement among social scientists regarding the
conceptualization of the construct and what it constitutes (Chopra, Kanji 2011, p. 70). It is therefore
necessary to clearly conceptualize the phenomenon in question and fit the measurement method to this
conceptualization. The conceptual definition of the phenomenon is the first step a social scientist or
researcher has to make. A purchaser of a test will first want to know how a particular construct such as
poverty or emotional intelligence is defined (Chopra, Kanji 2011, p. 70). The second step is to define how
a phenomenon is measured in an accurate representation of the construct which means creating different
items in a measurement system. This means to interpret or convert the conceptual definition into an
operational definition of the construct very carefully and accurately. This challenge involves establishing
casual connections, specifying the measurement model, estimating of the model, model identification and
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
656 Barbara Wagner
assessment of model fit, including validating the reliability of the measurement model (Chopra, Kanji
2011, p. 70).
Formulating a vision
Influence
employees to
share the vision
Motivate
followers to
work towards
the vision
Vision
External relations
Focus
Personal
relationships
Goal setting and
measurement
Teamwork and
collaboration
Performance monitoring
Conflict resolution
Motivation
Decision making
process
Change management
Effort recognition
Incorporating
feedback
Respect
Source: own illustration
Fig. 1. Effective Leadership categories and items
Leadership was defined as the process of translating company goals into visions, which are
understandable and shareable by different stakeholder groups and influencing employees to share those
visions and coordinately work towards them. This definition implicates three broad categories of
leadership qualities: first, a leader has to be able to translate company goals into understandable and
shareable visions, second a leader needs to know how to influence his employees to share those visions
and thirdly the leader has to motivate his followers to coordinately work towards the visions. According
to Chopra’s advice, these categories now have to be itemized. For this task the itemization of leadership
from different researchers is analyzed to see if the items proposed fit the above definition. Due to the
often synonymous use of the terms leadership and management, itemizations of the term management are
not excluded in this analysis. In a survey conducted by Alexander, Hearald and Mittler, the measurement
was based upon ten conceptual categories of leadership: creativity/innovativeness, vision, personal
relationships with members, teamwork and collaboration, goal setting and measurement, performance
monitoring, resource acquisition, focus, external relations, and conflict resolution (Alexander et al. 2011,
p. 347). Vision and external relations are skills that seem to be useful for the formulation of a vision that
incorporates corporate goals and may be understood and shared by different stakeholder groups. For the
influence on employees to share the vision, personal relationships with members and focus seem to be the
most helpful skills among the selection proposed by Alexander et al. In order to motivate followers to
coordinately work towards the vision, goal setting and measurement is necessary, as well as teamwork
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Barbara Wagner 657
and collaboration, performance monitoring and conflict resolution. Resource acquisition and creativity do
not seem adequate measures for leadership as defined above. Alexander further explains effective
leadership as paying attention to issues of process, such as recognition of member effort, incorporating
feedback and input, and ensuring respect for all opinions (Alexander et al. 2011, p. 343). Attention to
process issues and the recognition of member effort seem best suitable in the part of working towards the
vision realization. Incorporating feedback and respect for all opinions are important when influencing
employees to share the vision. According to Trehan, for success in professional life and for performing
various managerial roles and functions effectively, a manager is expected to excel in leadership,
motivation, communication, decision making, interpersonal relations and change management (Trehan,
Shrivastav 2012, p. 55). Since the task at hand is to find items to measure leadership, the usage of
leadership as itself for an item is not helpful. Motivation fits best into the category to motivate employees
to work towards the vision, while communication is mostly used to influence employees to share the
vision. Decision making is probably best suited to the category vision formulating, although this category
does not implicate this item. Interpersonal relations may be seen as a synonym for the personal
relationships with members and therefore be allocated at the category influence employees to share the
vision. The same category seems to be appropriate for change management, since a newly adapted vision
might be combined with necessary changes.
Chopra defines management as a system comprising a range of human actions designed to facilitate
the desired outcome. This human action subsumes planning, organizing, leading, coordinating,
controlling, staffing and motivating. This also includes “managing” oneself, a prerequisite to attempting
to manage followers (Chopra, Kanji 2011, p. 63). If leading is excluded once again from the items due to
the above mentioned reasons, this definition adds planning, organizing, coordinating, controlling, staffing
and motivating. Motivation has already been added to the items, while the other items are very clearly
management functions and do not apply to the core of leadership, according to the differentiation between
management and leadership in the literature review part. Therefore, the definition of Chopra does not add
any new items.
In 1963 Stogdill developed the Leadership Behavior Description Questionnaire (LBDQ) which
follows Stogdills typology of leadership style into consideration and initiating structure. The first versions
of the questionnaire contained two factorially defined subscales—Consideration and Initiating Structure
in Interaction. Several new subscales have been developed, such as Production Emphasis, Tolerance of
Member Freedom of Action, Influence with Superiors, and Representation of the Follower Group
(Stogdill 1969, p. 153). This questionnaire has been used as basis for different studies (e.g. Hartmann et
al. 2010; Sweney et al. 1975). Hartmann’s scale consists of five-point, fully anchored scales that measure
respondents’ agreement with eight statements concerning consideration behavior, and eight items
concerning initiating structure behavior. Respective sample items are “My supervisor treats his employees
as equal” and “My superior determines in detail what should be done and how it should be done”. The
items expressed the leadership style in which supervisors manage the activities of their subordinates
(Hartmann et al. 2010, p. 287). Since Stogdills questionnaire is mainly used to describe leadership
behavior and is designed to identify the performed leadership style, it does not seem adequate for the
general measurement of leadership which is the main task at hand.
Another often used (Kanji 2008, p. 417; Trehan, Shrivastav 2012, p. 55; Clarke 2010, p. 9) Leadership
questionnaire is the Multifactor Leadership Questionnaire (MLQ) which is based on Bass’s model of
transformative leadership. Bass’s conceptualization of transactional and transformational leadership
included seven leadership factors, which he labeled charisma, inspirational, intellectual stimulation,
individualized consideration, contingent reward, management-by exception and laissez-faire leadership.
In subsequent writings, he noted that although charismatic and inspirational leadership were unique
constructs, they were often not empirically distinguishable, thus reducing his original multifactor model
to six factors (Avolio et al. 1999, p. 441).The MLQ (Form 5X) was developed to address concerns with
earlier versions of the MLQ survey, including problems with item wording, lack of discriminant validity
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
658 Barbara Wagner
among certain leadership factors, and the incorporation of behaviors and attributions in the same scale
(Avolio et al. 1999, p. 442). “The six factors and their operational definitions are: (1) Charisma/
Inspirational provides followers with a clear sense of purpose that is energizing, is a role model for
ethical conduct and builds identification with the leader and his or her articulated vision; (2) Intellectual
Stimulation gets followers to question the tried and true ways of solving problems, and encourages
them to question the methods they use to improve upon them; (3) Individualized Consideration focuses
on understanding the needs of each follower and works continuously to get them to develop to their full
potential; (4) Contingent Reward clarifies what is expected from followers and what they will receive if
they meet expected levels of performance; (5) Active Management-by-Exception focuses on monitoring
task execution for any problems that might arise and correcting those problems to maintain current
performance levels; and (6) Passive-Avoidant Leadership tends to react only after problems have
become serious to take corrective action, and often avoids making any decision at all” (Avolio et al. 1999,
pp. 444-445). Clarke used the Multifactor Leadership Questionnaire Form 5X (MLQ-5X) to measure
transformational leadership behaviors. All of the MLQ-5X responses are made on a five-point scale
ranging from 0 (not at all) to 4 (frequently, if not always) (Clarke 2010, p. 9).
Table 1
Comparison of leadership measurements
Category Items by definitions Bass’s MLQ-5X
Formulating vision External relations
Charisma / Inspirational Vision
Influence employees to share
the vision
Decision making Intellectual Stimulation
Focus
Personal relationship Individual consideration
Incorporate feedback
Respect Charisma / Inspirational
Change management
Motivate followers to work
towards the vision
Process Management-by-Exception
Conflict resolution
Motivation Charisma
Performance monitoring Contingent Reward
Goal setting + measurement
Effort recognition Individual Consideration
Teamwork
Source: own illustration
As shown in the above table, the leadership categories drawn from the definition of leadership may be
itemized either by the items of independent definitions of leadership and management or by the MLQ – 5X.
The MLQ – 5X is based on Bass’s theory of transactional and transformational leadership. As became clear
in the literature review part, transformational leadership is believed to be the most effective currently known
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Barbara Wagner 659
leadership style. Due to those reasons as well as for the sake of comparability in leadership research, it is
decided to use the MLQ – 5X in this research for the measurement of leadership.
Beginning in the 1990s, the idea of emotional intelligence began attracting a good deal of attention,
both among psychologists and in the popular press. Many people seem to agree that emotional
intelligence is important, even though they are not exactly sure what it is. After all, emotions are
important and intelligence is good, so emotional intelligence must be valuable, too (Shiota, Kalat 2012, p.
301). Earlier, emotional intelligence was not discussed because emotions were seen as “undesired
influences on the logical-analytical behaviour and were left outside in order not to scratch the ideal of the
rational acting manager” (Schlegel 2003, p. 13). Salovey subsums the forms of personal intelligence
proposed by Gardner (Gardner 1993, p. 8) under his basic definition for emotional intelligence which
structures these abilities in five sections: Self-perception, to know ones own emotions; suitability, to
handle emotions; goal-directed, to translate emotions into actions; empathy, to know what others feel;
relationships, basis for popularity, leadership and interpersonal effectiveness (Salovey, Rothman 1991,
pp. 280-282). According to Caruso, Emotional intelligence comprises four areas of competencies which
are named hieratically: identify emotions, use emotions, understand emotions, and manage emotions
(Caruso, Salovey 2005, pp. 7-8). Summarizing, emotional intelligent persons recognize their own
emotions and the ones of others, know how to influence and regulate those emotions and can manage
them in order to use emotions for effective actions.
The main criteria for effective leadership were defined according to Bass and Avolio as charismatic /
inspirational, intellectual stimulation, individual consideration, management by exception and contingent
reward. The question is now if these characteristics can be enhanced by emotional intelligence. “Being
able to use emotions for goal achievement opens the possibility for self motivation and creativity” (Hauer
2003, p. 38). This statement by Hauer implicates that emotional intelligent people tend to be more
motivated and creative, a fact that can lead to them being inspirational role models. Trehan states that
effective leaders mostly rely on the expression of feelings to help convey their messages. So when
effective leaders want to implement significant changes, they rely on the evocation, framing and
mobilization of emotions (Trehan, Shrivastav 2012, p. 59). Therefore emotional intelligent leaders are
more likely to be seen as believable and integer since their word will be supported by the displayed
emotions. This advantage is likely to add to the charisma of leaders. Charismatic persons are described as
persons who care, understand others and believe in their strengths (Avolio et al. 1999). These abilities all
base on empathy, one of the main abilities within emotional intelligence. The second characteristic of
transformative leaders is the intellectual stimulation. According to Shiota, emotional stimuli grab our
attention; therefore emotional arousal does improve memory. Emotions – if under control – help us
making more correct and holistic decisions (Shiota, Kalat 2012, p. 333). It may be deducted from this
statement that emotional intelligent leaders do tend to make better decisions and may have an improved
memory. They may therefore be able to better intellectually stimulate their followers. This impact is
possible but will not necessarily happen in all cases. Therefore one cannot say that emotional intelligence
necessarily improves the intellectual stimulation. The next characteristic of effective leaders is individual
consideration. Per definition, emotional intelligent leaders do know the emotions of their followers and
know how to influence them. Since emotions are highly individualized, leaders do have to consider each
employee individually in order to know his or her emotions and to influence them if needed.
Individualized consideration is therefore implicit in the concept of emotional intelligent leadership.
Management by exception is the next characteristic of transformative leaders. An emotional intelligent
leader can recognize the emotions of his followers and will treat them accordingly, meaning that in case
of strong emotions usual management techniques may not be useful. Therefore an emotional intelligent
leadership style will implicitly have tendencies of management by exception. If this management style is
fully executed or not does, on the other hand, not depend on the emotional intelligence of the leader but
on other situational variables. The last characteristic of an effective leader according to Bass and Avolio
is the contingent reward. Emotional intelligent leaders are likely to display more positive emotions since
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
660 Barbara Wagner
they know how to regulate their negative emotions. These emotions are likely to be contagious, since a
leader is under direct and constant observation of his followers (Goleman et al. 2003, p. 37). So emotional
intelligent leaders are likely to create a positive work environment, what may be seen as a reward for the
employees. If other rewards are granted or not, does not necessarily depend on the emotional intelligence
of the leader but on other context variables.
Conclusion
As seen above, emotional intelligence is very likely to add to the leadership qualities charisma /
inspirational and individual consideration. It may furthermore enhance intellectual stimulation, management
by exception and contingent reward. Based on this purely secondary research one can conclude that
emotional intelligence will make leaders more effective and successful. This conclusion is supported by
different findings from primary research as well, such as Trehan who found emotional intelligence important
for leadership, motivation, communication, decision making, interpersonal relations, and change
management at 99% level of confidence (Trehan, Shrivastav 2012, p. 65). Cartwright subsumed the meta-
analysis of various studies with the statement that the ability to perceive emotion is a factor associated with
effective leadership (Cartwright, Pappas 2008, p. 161). Clarke proved the relationship between emotional
intelligence and transformational leadership with personality and cognitive abilities as control variables
(Clarke 2010, p. 15). Bin Sayeed came to the same conclusion, summarizing that leaders are most likely to
lead their followers if they have insights into their needs, values, and hopes. This insight may be facilitated
through a higher level of emotional awareness and sensitivity. Leaders can create emotional responses in the
followers, communicate and instill commitment toward a common vision and create shared norms. Focusing
on individual followers, leaders should be supportive, considerate, empathetic, caring, and giving
personalized attention. These requirements may be easier for an individual who is high on emotional
intelligence and is able to accurately perceive and understand others’ emotions, while managing his/her own
emotions (Bin Sayeed, Shanker 2009, pp. 596-597).
Since the correlation between emotional intelligence and leadership may be seen as confirmed, further
research should be conducted, first on the ability to measure and develop emotional intelligence and
second on the impacts of emotional intelligent leadership e.g. on the motivation of employees, their
loyalty, customer satisfaction or goal achievement.
Bibliography
Alexander, Jeffrey A.; Hearld, Larry R.; Mittler, Jessica, 2011. Measuring leadership in multisector health
care alliances. In Nonprofit Management and Leadership, 21 (4), pp. 341-361.
Avolio, Bruce J.; Bass, Bernard M.; Jung, Dong I., 1999. Re-examining the components of
transformational and transactional leadership using the Multifactor Leadership Questionnaire. In
Journal of Occupational and Organizational Psychology, 72, pp. 441-462.
Bin Sayeed, Omar; Shanker, Meera, 2009. Emotionally Intelligent Managers & Transformational
Leadership Styles. In The Indian Journal of Industrial Relations, 44 (4), pp. 593-610.
Bower, Marvin, 1997. The Will to Lead. Running a business with a network of leaders. Boston: Harvard
Business School Press.
Bristow, Denny; Amyx, Douglas; Castleberry, Stephen B.; Cochran, James J., 2011. A Cross-
Generational Comparison of Motivational Factors in a Sales Career Among Gen-X and Gen-Y
College Students. In Journal of Personal Selling and Sales Management, 31 (1), pp. 77-86.
Carnegie, Dale, 2011. Führen mit Persönlichkeit. Wie Sie sich selbst und andere zu Höchstleistungen
motivieren. With assistance of Carolin Skiba. Frankfurt, M: Scherz.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Barbara Wagner 661
Cartwright, Susan; Pappas, Constantinos, 2008. Emotional intelligence, its measurement and implications
for the workplace. In International Journal of Management Reviews, 10 (2), pp. 149-171.
Caruso, David R.; Salovey, Peter, 2005. Managen mit emotionaler Kompetenz. Die vier zentralen Skills
für Ihren Führungsalltag. Frankfurt am Main ;, New York: Campus-Verl.
Charteris-Black, Jonathan, 2007. The communication of leadership. Design of leadership style. London
[u.a.]: Routledge.
Chopra, Parvesh K.; Kanji, Gopal K., 2011. On the science of management with measurement. In Total
Quality Management & Business Excellence, 22 (1), pp. 63-81.
Clarke, Nicholas, 2010. Emotional intelligence and its relationship to transformational leadership and key
project manager competences. In Project Management Journal, 41 (2), pp. 5-20.
Franke, Joachim, 1972. Psychologische Überlegungen zu einer zeitgemäßen Führungsform. Zürich:
Industrielle Organisation des Betriebswirtschaftlichen Institutes der ETH.
Gardner, Howard, 1993. Frames of mind. The theory of multiple intelligences. 2nd
ed. London: Fontana
Press.
Goleman, Daniel; Boyatzis, Richard E.; McKee, Annie, 2003. Emotionale Führung. 1st ed. [München]:
Ullstein.
Hartmann, Frank; Naranjo-Gil, David; Perego, Paolo, 2010. The Effects of Leadership Styles and Use
of Performance Measures on Managerial Work-Related Attitudes. In European Accounting Review,
19 (2), pp. 275-310.
Hauer, Peter, 2003. Die Emotion und konstruktivistische Erwachsenenbildung. In Rolf Arnold (Ed.):
Emotionale Kompetenz. Theorien und Anwendungen. 200th
ed. Kaiserslautern: ZBT/Abt. Foto-Repro-
Druck der Universität Kaiserslautern, pp. 33-58.
Hinterhuber, Hans H.; Krauthammer, Eric, 2001. Leadership mehr als Management. Was
Führungskräfte nicht delegieren dürfen. 3rd
ed. Wiesbaden: Gabler.
Holzbaur, Ulrich D., 2001. Management. Ludwigshafen: Friedrich Kiehl Verlag GmbH.
Hungenberg, Harald; Wulf, Torsten, 2006. Grundlagen der Unternehmensführung. Berlin, Heidelberg:
Springer-Verlag.
Kanji, Gopal K., 2008. Leadership is prime: How do you measure Leadership Excellence? In Total
Quality Management & Business Excellence, 19 (4), pp. 417-427.
Link, Jörg, 2010. Führungssysteme. Strategische Herausforderung für Organisation, Controlling und
Personalwesen. 5th
ed. München [u.a.]: Vahlen.
Lorsch, Jay, 2010. A contingency theory of leadership. In Rakesh Khurana, Nitin Nohria (Eds.):
Handbook of leadership theory and practice. Boston, Mass: Harvard Business Press, pp. 411-429.
Potthoff, Erich, 1979. Führungsinstrumentarium in Unternehmen und Verwaltung. Beiträge zur
Betriebswirtschaftslehre in der Praxis aus verschiedenen Etappen eines beruflichen Lebens. Köln:
W. Kolhammer.
Ramsden, John, 2008. Leadership creates superiority, management produces mediocrity. In: Management
versus Leadership. With assistance of Matthias Hirzel. 2nd
ed. Frankfurt, M: HLP Management
Connex, pp. 19-28.
Riggio, Ronald E., 2011. The management perspective: engineering effective leadership in organizations.
In Ronald E. Riggio, Michael Harvey (Eds.): Leadership studies. The dialogue of disciplines.
Cheltenham: Edward Elgar, pp. 119-128.
Salovey, Peter; Rothman, Alexander, 1991. Envy and Jealousy: Self and Society. In Peter Salovey (Ed.):
The Psychology of jealousy and envy. New York: Guilford Press, pp. 271-286.
Scanlan, Burt K., 1982. Erfolgreiche Mitarbeitermotivierung. Gekürzte Paperbackausg. Landsberg am
Lech: Verlag Moderne Industrie.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
662 Barbara Wagner
Schlegel, Gunnar (2003): Emotionale Intelligenz und Emotionspsychologie. In Rolf Arnold (Ed.):
Emotionale Kompetenz. Theorien und Anwendungen. 200th
ed. Kaiserslautern: ZBT/Abt. Foto-Repro-
Druck der Universität Kaiserslautern, pp. 13-22.
Shiota, Michelle N.; Kalat, James W. (2012): Emotion. 2nd
ed. Australia;, Belmont, CA: Wadsworth.
Stogdill, Ralph M., 1969. Validity of Leader Behaviour Descriptions. Personnel Psychology, 22,
pp. 153-158.
Sweney, Arthur B.; Fiechtner, Leslie A.; Samores, Robert J., 1975. An Integrative Factor Analysis of
Leadership Measures And Theories. The Journal of Psychology, 90, pp. 75-85.
Trehan, Daljit Rai; Shrivastav, U. S. S. (2012): Perception of Top Management Executives Towards
Importance of EI for Professional Success. In IUP Journal of Management Research 11 (3), pp. 54-67.
Yukl, Gary A. (2006): Leadership in organizations. 6th
ed. Upper Saddle River, NJ: Pearson/Prentice Hall.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Barbara Wagner 663
IMPACTS OF LEADERSHIP BEHAVIOUR
ON SUBORDINATE MOTIVATION
Barbara Wagner, University of Latvia, Latvia1
Abstract. After defining important key terms, this paper shows different types of
leadership behaviour by analysing them as action and non-action. While action is defined
by conscious, disciplined, long-term goal-oriented behaviour, non-action is characterized
by lack of focusing, lack of energy and the disability to cope. Non-action and passiveness
are distinguished and different reasons for non-action are shown. Some leaders are non-
active due to a lack of focus and tend to lack prioritizing (thematic straying), be driven
only by the immediate situational needs only (reactiveness), lack planning and reflection
(activism), be unable to develop new plans of action (use of behavioural templates) and
lack the ability to translate intentions into actions (state orientation). Other leaders lack
the energy to act, caused by the denial of the need for action (defensive avoidance), an
inwardly, uninvolved attitude (distanced activity) or the subjective lack of influence
(learned helplessness). After these different types of leadership behaviour and its roots are
described, a short excursion shows the most important facts and differences between
intrinsic and extrinsic motivation. As a result, the different types of leadership behaviour
are analysed in regards to their impact on subordinate motivation or demotivation. It is
shown, that leadership action tends to be more motivating for employees then non-action,
while still bearing some threats. Leadership action can motivate employees by serving as
an example, giving orientation and meaning to their tasks. On the other hand, if a leader
seems to be too perfect in its behaviour, employees tend to feel inferior and lose their
motivation. Leadership non-action does not have any potential to motivate subordinates,
even though the different characteristics do have different levels of negative impact on
subordinate motivation. As a conclusion, hands-on suggestions are given how leaders
should behave in their day-to-day worklife in order to motivate their subordinates.
Key words: behaviour, motivation, leadership, management
JEL code: M12
1. Introduction
One of the many and complex tasks of leaders is to motivate their subordinates in order fort hem to
deliver high quality results in a timely manner as well as staying loyal to the company. There is an
increasing amount of motivational theories, analysing which incentives are most likely to create the
desired effects. Some focus on the monetary aspect, believing that motivated employees can be obtained
through huge salaries and other benefits. Other theories focus more on the so-called intrinsic motivation,
using the attractiveness of tasks and the distribution thereof to motivate the employees.
1 Corresponding author – e-mail address: [email protected], telephone: +49 176 619 361 67
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
664 Barbara Wagner
This paper has a completely different focus. It is based on the theory, that leaders do have a
continuous influence on the motivation of their employees through their conscious and unconscious
behaviour. The focus of this paper is therefore on the analysis of different leadership behaviours and their
impact on subordinate motivation. The goal is to formulate suggestions for leadership behaviour in order
to motivate their subordinates even during the daily routine.
2. Definition of Key Terms
2.1. Definition Leadership and Subordinates
“A person can be defined as a leader according to his or her hierarchally higher position as compared
to other members of an organization, who are referred to as followers or subordinates.“ [1] This definition
of leadership and subordinates uses the position of both as unique differentiation. While being applicable
in most former cases, modern organizational structures tend to have more and more “primus enter pares”,
leaders on the same hierarchical level as their subordinates. A definition by tasks and actions seems
therefore more up to date.
Leadership can also be defined as “the situational influence of employees, which uses leadership
instruments and is oriented towards a success which is to be reached jointly.”[2] This definition focuses
on the actual task of leading without referring to the hierarchical positions of leaders and employees. It
therefore appears more practical than the previous discussed definition. Nevertheless, it does have its
weakness by presenting the leader as the active and the employee or subordinate as the passive part in the
leadership relationship. With this interpretation, highly qualified, self dependent employees can only
contribute their knowledge and engagement as a good will, since they are supposed to play a more
passive part.
Leadership shall therefore be defined as “a mutual interpersonal influence, interaction and continuous
design of a company’s reality for joint target achievement.”[3] Leaders do bear the responsibility for the
achievement of goals and will therefore rule over the subordinates in conflict situations.
1.2. Definition Behaviour
Behaviour can be described as the sum of individual or groups acts and responses to external
stimulations and influences. [4] The behaviour of an individual or a group is influenced by personality,
thoughts, beliefs, desires and previous experiences. The personality of a person can be described and
analysed by using the different traits. One common model for personality traits are the “Big Five”
dimensions of personality. These are Extraversion (positive emotions, warmth), Neuroticism (anxiety,
vulnerability), Agreeableness (trust, tender-mindedness), Conscientiousness (competence, self-discipline)
and Openness to experience (fantasy, ideas). [4] These traits form individual thoughts and beliefs, which
have an direct impact on one’s behaviour.
Another way to understand behaviour is desire or “moving pleasures”. Moving pleasures are impulses
to act because one is in a disagreeable situation. [5] Another reason for actions is the wish to fulfil one’s
desires. Reiss distinguishes 16 basic desires, controlling our actions: “Power, Independence, Curiosity,
Acceptance, Order, Saving, Honour, Idealism, Social Contact, Family, Status, Vengeance, Eating,
Physical Activity and Tranquility.” [6]
With this background, behaviour shall be defined as personality-influenced actions and reactions,
oriented to fulfil desires and reach an agreeable status.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Barbara Wagner 665
1.3 Definition Motivation
The word motivation comes from the Latin word “movere” (to move) and therewith relates to things
that make us do something, that make us move. Motivation can be described as “those processes initiating
and keeping up goal-oriented behaviour”[5] In order to understand the concept of motivation, two
different points of view should be considered. First, the causal point of view, asking why an individual is
acting (or acting in a specific manner). Second, the teleological point of view, asking for which goal an
individual is acting. In business, the key interest lays in performance, which describes (company-) goal-
oriented acting. Therefore, the teleological point of view is taken. In this sense, motivation can be defined
as “the pursuit of goals, implying reciprocity between individual and situation”. [7]
2. Leadership Behaviour
Due to it being linked so closely with the personality, behaviour has many different patterns and may
therefore be categorized in uncountable ways. For the purpose of this paper, with a clear focus on
leadership behaviour, the most distinguishable forms of leadership behaviour shall be presented in this
chapter. The most important differentiation of leadership behaviour is between action and non-action.
Both categories have different sub-dimensions, clarifying and summarizing different types of leadership
behaviour.
2.1 Action
The difference between action and behaviour in general is, according to Weber, that actions have
a subjective meaning for the individual. [8] This implies that action is oriented to a specific subject
and a particular goal. Parson and Shils also argue, that in case of action, a person’s behaviour is
chosen consciously and guided by an actor’s will to attain a certain goal. Unintentional activities are
therefore not considered actions. [9] Action may also be described as “a self-started, active approach
to work and pursuing certain goals beyond what is required”. [10] In managerial contexts,
harbouring more complex and enduring requirements, action is not only self -starting and proactive,
“but also self-driven, e.g. continuously self-nurtured”. [11] Undertaking actions also requires a
certain amount of effort, in order to consciously chose the action and exert it. [12] These
characteristics of actions (subjectively meaningful, self-started / self-driven and increased effort)
form the dimension of energy-related actions.
The second dimension of actions is the focus-related dimension. One central characteristic of focus-
related action is, that it is long-term oriented. [12] This long-term focus reflects behaviour “which
demands significantly more preparatory activities, a better understanding of work processes and potential
strategies which enable a person to control a situation rather than being dominated by it.”[13] Action is
also characterized by being goal-oriented and conscious. Since action does not necessarily imply
observable behaviour or physical movement, it is sometimes hard to tell action and non-action apart. One
way is, to discern, whether a certain form of behaviour is based on an individual’s own reference system
and can therefore be described as an action. A third characteristic of focus-related action is the discipline
needed to perform an action even despite setbacks and difficulties.
2.2. Non-Action
Non-action is not equivalent with passivity. Some none-actions involve a great deal of activity, while
nonetheless not constituting action as described above. “Non-action constitutes behaviour which is
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
666 Barbara Wagner
characterized by deficient energizing or focusing and implies that in situations where action is in principal
possible, potential […] is not exploited.”[12] Non-action in the energy-related dimension is owed to a
lack of energizing; it is then described as defensive avoidance, closely related to the denial, that action is
needed. [14] Deficient energizing is also shown in distance activity, representing a form of non-action in
which, due to a lack of subjective meaningfulness, the other energetic aspects of action (self-starting, self-
driven, effort) are blocked. [12] The third dimension of non-action due to lack of energizing is the learned
helplessness which occurs, when a person repeatedly tries in vain to influence processes of subjective
meaningfulness. [15] As a result, the focus and energy are more and more blocked by potential problems,
which seem insurmountable to the individual.
Non-action can also be owed to the lack of focusing, which is than categorized in the focus-related
dimension. A phenomenon which indicates a deficient channelling of energies is known as thematic
straying. According to Dörner et.al, who introduced the term, thematic straying is likely to occur when a
person pursues several different objectives with roughly the same priority and are lacking prioritizing,
selecting and committing to a certain goal. [16] Non-action due to lack of focusing can also be observed
in the forms of reactiveness or activism. When individuals show a short-term horizon and a rather diffuse
representation of goals, their actions are not goal-directed but impelled by immediate, situational
demands. This behaviour is known as reactiveness and can result in cognitive overload. [13] While
reactiveness occurs due to a lack of foresight, activism is mostly linked with a lack of focus. Individuals
act highly energetic but poorly goal-directed or consciously. This behaviour is likely to occur in situations
of crisis, when the stress-level increases and activities become ineffective. [16] Poorly focused energy
may also result in non-action in the form of use of behavioural templates. This phenomenon describes the
application of traditional, but inappropriate, behavioural patterns. Dörner and Stäudel suggest that,
“templates are likely to be used in the case of negative emotions”. [16] In this case, people tend to use
behavioural patterns instead of developing new action plans. Another phenomenon of non-action is
known as state orientation. In this case, “attention is focused on past, present and future states, rather than
on actions that may bring change”. [17] Action deficits are in that case neither based on failure to make
an effort nor upon a lack of knowledge or abilities. The reason for non-action is rather the inability to
translate intentions into actions.
2.3. Summary
Action Non-Action
En
erg
y-
rela
ted
Subjectively meaningful Defensive avoidance
Self-started / self-driven Distanced activity
Increased effort Learned helplessness
Fo
cus-
rela
ted
Long-term orientation Thematic straying
Reactiveness
Focus on goals Activism
Discipline Use of behavioural templates
State orientation
Fig. 1. Action and Non-Action in the focus-related and energy-related dimensions
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Barbara Wagner 667
3. Motivation
3.1. Extrinsic Motivation
Extrinsic Motivation describes the pursuit of goals because of a given stimulus. This stimulus, which
Skinner described as reinforcement, increases the probability that certain behaviour is shown. [18] This
stimulus can be external, such as praise from parents or teachers or a payment raise from the employer.
The reinforcing stimulus can also come from the individual itself, when defining certain treats for other
tasks which have to been completed. The motivation for performing the tasks is then laying in the treat,
not in the task itself. [5] Extrinsic motivation is therefore focused on stimuli outside the task in question,
not necessarily coming from an outside person.
In an organization, the main extrinsic motives are money, security and prestige. Money-related
motives are the monthly salary as well as other monetary incentives promised by the employer when
certain goals are reached. These incentives are a classic example for extrinsic stimuli – they reinforce the
possibility for goal-reaching behaviour. Security is, according to Maslow, one of the most basic needs of
an individual. [19] A workplace which is perceived as secure satisfies this need and therefore provides a
motivation to behave in the desired way in order to keep the job. Prestige can be an extrinsic motivation,
if the job is seen as highly prestigious. This is mainly achieved through job titles or through a known
brand or company. All the mentioned motives are extrinsic, since they do not directly relate to the job or
task itself.
Extrinsic motivation is known for being not as effective as intrinsic motivation, which is described
below. Some experiments have also proven, that intrinsic motivation for a certain task can decrease, if an
extrinsic motivation (e.g. an incentive) for this task is given. [5]
3.2. Intrinsic Motivation
Intrinsic motivation is based in the task itself – the performance of the task is perceived as a pleasure,
which motivates the individual to repeat its performance. [5] If certain behaviour is intrinsic or extrinsic
motivated depends also from the individual and its perception of motivation.
In an organizational context, it is harder to influence the intrinsic motivation than it is to influence the
extrinsic motivation. Lepper and Hodell found four factors which are likely to positively influence the
intrinsic motivation: challenge, curiosity, control and phantasy. [20] Activities, which challenge the
talents of an individual and are neither too hard nor too easy are likely to increase the intrinsic motivation.
The achievement of set goals increases the perception of the individual to have control over its own
actions and results. In an organizational context, this may be achieved through the promotion of
employees or through job enrichment. Curiosity is likely to positively influence the intrinsic motivation if
discrepancies between the actual knowledge of the individual and the newly presented information are
present. In this case, the individual is likely to research new information to explain the discrepancy.
Another way to increase the intrinsic motivation is to increase the perceived amount of control. The more
control a person perceives to have, the higher the intrinsic motivation. In an organization, the more saying
employees have in the processes, the more likely they are to be intrinsically motivated. Another finding
is, that the intrinsic motivation is higher, when phantasy is targeted as well. In the business context, this
can happen through practical experiences and the connection of topics to totally different topics (out of
the box thinking). [5]
As showed above, it is hard for leadership to directly influence intrinsic motivation. The task of
leaders is therefore to create a framework for intrinsic motivation. [3] How the behaviour of leadership
influences this framework is shown in the next chapter.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
668 Barbara Wagner
4. Impacts of Behaviour on Motivation
4.1. Impacts of Action on Motivation
As described above, leadership action implies energy and focus and their various sub-categories. The
impacts of these categories on subordinate motivation shall be shown in order to gain a holistic picture.
Action of a leader implies that the goal he or she is working for is subjectively meaningful. These
meaningfulness, if obvious to the subordinates, may transfer to them and show them the reason for their
day to day business. If a leader appears to be self-started and self-driven, subordinates may perceive him
or her as intrinsically motivated and not only repeating the corporate wordings. This perceived intrinsic
motivation can serve again as an example for the subordinates in a way, that if their leader is intrinsically
motivated, they can reach this form of motivation as well. When a leader shows an increased effort
through his actions, employees may be motivated to match that effort and work more or harder. On the
other hand, it is also possible that employees perceive this effort as a pressure on themselves to work
more and will therefore become demotivated.
The long-term orientation and the focus on goals of action are likely to motivate subordinates, since it
provides security and orientation. Subordinates are in this case more likely to judge, which behaviour is
desired by the company and what is expected of them. Furthermore, if they do not have to worry about
leadership’s changes of minds, they do have more energy to focus on their tasks. Another aspect is, that if
set goals are reached through joint effort, subordinates are likely to perceive this achievement as
motivating. The discipline of leadership is most likely to serve as an example for subordinates, e.g. to not
show up late or to concentrate on their tasks even with the temptation of doing the tasks slower or later.
Nevertheless, should a subordinate be generally less disciplined than its leader, her or she may feel
constantly less valuable or inferior to the leadership, which may result in demotivation.
4.2. Impacts of Non-Action on Motivation
If a leader takes defensive avoidance, the subordinate may either overtake this attitude, which is not
likely to have a direct impact on their motivation. Should a subordinate observe this attitude at his
leader’s behaviour without believing that it this the right course of action, the subordinate will get highly
demotivated due to a lack of control. Should a leader behave distantly and without making an effort,
subordinates will firstly not feel the need to make an effort themselves and secondly lose motivation to
act according to corporate standards, since they do not have to expect reactions to their behaviour. If
leadership is non-active because of learned-helplessness, this lack of control is likely to overspill to the
subordinates and having a demotivating effect, especially in regards to the intrinsic motivation.
If the behaviour of a leader shows thematic straying, subordinates may become less motivated, if they
feel that their subjects or tasks are not becoming enough importance or attention. Employees may in this
case, no longer see the sense in their daily task and begin to perform them less effectively. Should a
leader react only in respond to the immediate situational need, subordinates will lack routine and reliable
standards to orient themselves on. Furthermore, they may perceive their leader as stressed, which is likely
to increase their stress level as well. A similar effect is to be expected from activism, when the leader acts
superficial and rash. Subordinates will lack orientation and security, if leadership decisions are made
quickly, superficial and without being explained to the subordinates, who may feel left out which may
lead to a perceived lack of control. Should a leader use behavioural templates, subordinates do know
exactly which reactions to expect and are able to plan their behaviour accordingly. This will give them a
certain amount of security and orientation, even though a motivation is not to be expected due to the lack
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Barbara Wagner 669
of new inputs or creative action plans. A leader’s state orientation is likely to paralyze its subordinates as
well, since they are not shown, how to change the situation or reach the goals.
5. Conclusion
As shown in the previous analysis, leader’s action is more likely to improve the motivation of
employees than non-action is. While acting, leaders should always be aware, that subordinates take their
actions as example and may fear that the same discipline and efforts are expected from themselves. Non-
action will not motivate the subordinates, even though not all aspects do have a negative influence on the
motivation of employees.
As a result, leaders should show an energetic and focussed behaviour, conscious about their actions
and results, knowing about the long – term goals and priorities and find a subjective meaningfulness in
what they are doing. If this set of mind is obvious to the employees, a framework for their intrinsic
motivation is created.
References
1. Bass, B.M. (ed.), Bass and Stogdill’s Handbook of Leadership, Theory, Research and Managerial
application. 3rd edition, New York, 1990.
2. Rahn, H.J., Unternehmensführung. 5th edition, Ludwigshafen, 2002.
3. Franken, S., Verhaltensorientierte Führung. Handeln, Lernen und Ethik in Unternehmen. 2nd edition,
Wiesbaden, 2007.
4. George, J.M. & Jones, G.R., Organizational Behaviour. Upper Saddle River, 2000.
5. Rudolph, U., Motivationspsychologie. Berlin, 2003.
6. Reiss, S., Who am I? The 16 basic desires that motivate our behaviour and define our personality.
New York, 2000.
7. Nerdinger, F., Motivation und Handeln in Organisationen. Eine Einführung. Stuttgart, 1995.
8. Weber, M., Wirtschaft und Gesellschaft. 5th edition, Tübingen, 1972.
9. Parsons, T. & Shils, E.A. (edts.), Toward a General Theory of Action. 2nd edition, Cambridge, 1967.
10. Frese, M. et.al., Goal orientation and Planfulness, Action Styles as Personality Concepts. In, Journal
of Personality and Social Psychology, Vol. 52, 1987, pp. 1182-1194.
11. Heckhausen, H., Motivation and action. 2nd
edition; Berlin, 1991.
12. Bruch, H., Leaders, Action. Model Development and Testing; Mering, 2003.
13. Hacker. W., Arbeitspsychologie. Bern, 1986.
14. Bibeault, D.B., Corporate Turnaround, How managers turn losers into winners. New York, 1992.
15. Seligman, M., Learned Helplessness. San Francisco, 1975.
16. Dörner, D. et.al, Ein System zur Handlungsregulation oder, Die Interaktion von Emotion, Kognition
und Motivation. In, Roth, E. (ed.), Denken und Fühlen. Aspekte kognitiv-emotionaler
Wechselwirkung. Berlin, 1989.
17. Kuhl, J., Handlungs- und Lageorientierung. In, Sarges, W. (ed.), Management-Diagnostik, 2nd ed.,
Göttingen, 1995.
18. Skinner, B.F., Recent Issues in the Analysis of Behaviour. New York, 1989.
19. Jung, H., Allgemeine Betriebswirtschaftslehere. 9th edition, München, 2004.
20. Lepper, M.R. & Hodell, M., Intrinsic Motivation in the classroom. In, Ames, C. & Ames, R. (eds),
Research on motivation in education, Vol. 3, San Diego, 1989.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
670 Jens Wingenfeld
THEORETICAL ARGUMENTS FOR A PASSIVE INVESTMENT STRATEGY
Jens Wingenfeld, University of Latvia, Latvia /
Fachhochschule Kufstein, Germany1
Abstract. One main classification of portfolio management strategies is the
differentiation between active and passive approaches. Proponents of an active
investment management strategy believe that capital markets are inefficient, and
therefore it should be possible to achieve above-average risk-adjusted returns via stock
selection and/or timing. On the other hand, passive investment managers do not believe
in such opportunities. Next to diverse empirical quantitative studies, there are developed
some theories that can support a passive investment strategy by a distinct sequence of
logical arguments. Aim of the depiction is to elaborate these existing theories and create
a better understanding of employing passive investment management strategies. The
paper presents these theories and evaluates their utility for an application of a passive
investment approach. Altogether, five specific qualitative arguments could be found
which are eligible to be a theoretical proponent for passive portfolio management. The
validity to the active versus passive debate is critical interpreted. The novelty is that the
detected research models are able to find an adequate answer to the question which
investment style is preferable under diverse presumptions by the methodology of a
qualitative approach. Other studies often employ tests with success-measurement
figures. The weakness of these single quantitative scientific models is their reference
only to the past. With the help of an entire qualitative theory, the commitment to one of
the above mentioned basic investment strategies can receive a more profound
appreciation. The research is embedded in view of the fact that public pension schemes
will not be able to guarantee an adequate living standard for the coming pensioners in
Europe. The result is that some of the presented theories are indeed very suitable to gain
a sophisticated decision for a special investment approach, although some assumptions
are not fully congruent with the reality on worldwide financial markets.
Key words: passive investment approach, indexing
JEL code: G11
1. Introduction
By the end of October 2012, fund management companies of German provenience governed assets
under management (AuM) with a volume of more than 715 billion Euros in mutual funds open to the
general public and more than 952 billion Euros in specialised funds (open to institutional investors only)
1 Corresponding author – e-mail address: [email protected], telephone: ++49/177/2962958
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Jens Wingenfeld 671
(BVI, 2012). In the United States of America, the most important capital market in the world up until
now, the combined assets of the nation’s mutual funds were US-$ 12.71 trillion in October 2012,
according to the Investment Company Institute’s official survey of the mutual fund industry (ICI, 2012).
Considering these huge amounts of money alone, both the importance of the portfolio management
process and its responsibility in terms of the global economy become obvious. It has to be stated that
public pension scheme is not, nor will it ever be able to guarantee an adequate standard of living for its
citizens in our society. In this regard, it is essential for nearly any citizen to provide for their retirement on
their own. Hence, the question should pertain to specific methods that are intelligent and rational.
Therefore, mutual funds are a popular investment vehicle. A mutual fund can be described as a
financial intermediary that pools the savings of various investors who share a common financial goal
(Achleitner A., 2002, p. 657). Because an investor has a huge choice of mutual funds, the question is
which of these investment vehicles are preferable or – concerning the view of a fund company – what is
the best way to manage a fund or portfolio in general. This problem is also one of the dominant themes in
modern finance, both for institutional investors and also for private investors.
One fundamental approach to categorize portfolio management is on the one hand an active approach
and on the other hand a passive one:
Portfoliomanagement
Active
Portfoliomanagement
Passive
Portfoliomanagement
Source: Own.
Fig. 1. Basic categorization of the Portfolio Management Process
Few topics have generated more engaging discussions between academics and investment
professionals than the debate over active versus passive portfolio management (Harlow W.V., 2005, p. 1).
A lot of definitions exist for both kinds of investment styles. Basically, an active portfolio manager
tries to outperform a given benchmark; whereas within a passive management strategy, the objective is to
track a given benchmark as accurately as possible.
Active and passive portfolio management approaches are often seen as the two main and opposing
investment styles (Malkiel B. G., 2003, p. 2). The following remarks should provide an answer to the
question if the employment of passive investment management tools, like Exchange Traded Funds (ETFs),
is to justify by diverse theoretical and universal appropriable chain of thoughts.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
672 Jens Wingenfeld
2. The Single Specific Qualitative Arguments for a Passive Investment Strategy
2.1. Sharpe’s Arithmetic of Active Management
Sharpe (1991, pp. 7-9) published a short but remarkable article about his point of view of a basic
axiom of investment management. His theory does not invoke and is independent from efficient markets
or any other financial theory, but relies only upon the laws of addition, subtraction, multiplication and
division. Sharpe was prompted to implement his theory by often used statements of investment
professionals like the following ones (Sharpe W. F., 1991, p. 7):
“The case for passive management rests only on complex and unrealistic theories of equilibrium in
capital markets.”
“Any graduate of the Business School should be able to beat an index fund over the course of a
market cycle.”
Sharpe countered these statements by introducing his laws of arithmetic which are based on the all
over accepted assumption that the entire capital market is composed of active investors and passive
investors; or put another way, the average performance of all investors (either active investors and
passive investors) will be the same as the market performance, because from a superior point of view,
at any one time, the holdings of all investors in a particular market make up that market. For his model,
Sharpe postulates that a certain market like the S&P 500 or anyone else has to be selected. Furthermore,
a clear distinction between an active and a passive investor has to be carried out. The latter one holds
every security from the market (as defined above), with each represented in the same manner as in the
market. By implication, an active investor is simply one who is not passive. Market return is defined as
a weighted average of the returns of all securities within the market, using beginning market values as
weights (Sharpe W. F., 1991, p. 8). Sharpe’s laws of arithmetic are the following ones (Sharpe W. F.,
1991, p. 7):
“If “active” and “passive” management styles are defined in sensible ways, it must be the case that:
(1) Before costs, the return on the average actively managed dollar will equal the return on the average
passively managed dollar, and;
(2) After costs, the return on the average actively managed dollar will be less than the return on the
average passively managed dollar.”
Sharpe enunciates that these assertions will hold for any time period. Moreover, no exception is
possible to this mathematical necessity which is casually named as the “Zero -Sum Game of
Dispersion of Return” or also “Equilibrium Accounting”. Ferri (2011, p. 28) describes this issue in
the context of explaining Sharpe’s introduction of the Greek letter beta (β) for representing market
risk: “In summary, there’s only one market risk and one market return. No excess return or excess
risk exists in this market. This makes all non-market risk a zero-sum game: For every non-market
risk winner (i.e., for any active investor) there must be a non-market risk looser at the same time in
the market. Another way of stating this is that the asset weighted performance of all investors, both
positive and negative, will equal the overall performance of the market. However, no one invests for
free. After fees and expenses, most non-market risk takers must underperform the market by the
costs they incur. It’s simple arithmetic.”
It is, of course, possible that individual active investors add value. But if they do, it is at the expense
of other active investors. Because of the fact that some existing studies are convinced that active
strategies gain advantage over passive strategies in their context, Sharpe (1991, p. 7) presents three
practical occasions why these false observations can occur:
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Jens Wingenfeld 673
1) Not all passive managers are passive in a true sense. Hence, not all index managers hold all
securities in market proportions, rather they often sample the market of their choice; often to
charge high enough fees to bring their total costs to an equal level or exceed those of active
managers.
2) This group of investors who is labled in some studies as “active investors”, do not fully represent
all “non-passive” investors in the market. Often, the active part is applied to institutional investors
only; thus, the retail investor who pays the added costs for the active managers via inferior
performance, is not counted within this context. Another example that will tend to produce results
that are better than those obtained by the average passively managed dollar, is connected with
survivorship bias. The latter is the tendency for failed funds to be excluded from performance
studies due to the fact that they do not longer exist.
3) As possibly most important reason, Sharpe claims that there are often wrongly applied statistics,
because it is necessary to compute the performance of an average actively managed dollar versus a
passive one. Some comparisons use a simple average of all large and small managers or e.g. the
median active manager. A consequence of such an approach is that certain empirical regularities of
a superior active investment strategy persist.
Sharpe (1991, p. 9) accentuates that by a proper measurement, the average actively managed dollar
must underperform the average passively managed dollar, net costs. If empirical analysis arises which
refutes this principle, these studies will be guilty of improper measurement. In Sharpe’s opinion, the
return advantage gained by one active fund can only be at the expense of another active fund that
underperforms the market, hence we can describe it as an entire zero-sum game.
2.2. Thorley’s Drop-Out Argument
In contrast to the Efficient Market Theory and its implications for a passive investment strategy,
Thorley (1999, p. 11) argues in his article “The Inefficient Market Argument for Passive Investing” in
favor of a passive investment strategy even under the assumption that the stock market is not efficient.
The author does not explicitly postulate an informational efficient capital market for a functioning passive
investment strategy, in fact he states quite the opposite; he presents a logical line of arguments which
leads to the following conclusion (Thorley S., 1999, pp. 6 et seq.):
1. In a perfectly efficient stock market, advantages of skill don’t matter, rather it is all luck, and less
skilled players have the same one in three chance of beating the market like anyone else. Thus,
market efficiency is a protection for less-skilled participants taking wrong decisions.
2. If the market is not informational efficient, successive thoughts are valid:
In a competitive market, all participants with superior knowledge and abilities will reach
superior investment results. Vice versa, such traders with low skills will reach below-average
results.
Traders with below-average results will realize their failure, because it is easy for them to
compare their trading results with public index returns (roughly, this is the average result,
before expenses).
As Sharpe points out, an alternative to reach better returns for all below-average traders is to
use a passive strategy, e. g. investing in an Index Fund or ETF instead of “financing” the
above-average returns of the superior traders (Sharpe W. F., 1991, p. 9).
The market becomes more competitive the more inferior participants leave and switch to the
fraction of passive investors. This way, the number of inferior participants who stay in the
market becomes smaller. Hence, fewer financiers remain manifesting superior returns for the
high-skilled traders.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
674 Jens Wingenfeld
Due to the number of inferior participants quitting the market, the level of competence in the
remaining market increases. It becomes harder for all skilled traders to reach superior
investment results compared to the former situation with more low-skilled traders present. The
longer this process persists, the greater the hurdle for the remaining participants to achieve
adequately superior returns.
As a result of the above given argumentation line by Thorley, only such rational investors who deny
an informational efficient capital market and concurrently claim an above-average level of trading-skills
for themselves, will remain in the market.
2.3. The Influence of Asset Allocation on the Portfolio Management Performance
Rather than focusing on risk-adjusted returns, practitioners often simply want to ascertain which
decisions results in superior or inferior performance (Bodie Z. et al., 2011, p. 874). Active investment
strategies can be categorized in many respects. Referring to Statmann (2000, p. 17), any active investment
strategy consists at least of market timing or stock-picking or a mixture between these approaches,
whereas a passive investment strategy only consists of asset allocation.
Table 1
The Three Items of the Investment Management Process
Asset Allocation Alternative Expression:
Strategic Asset Allocation, Static
Asset Allocation, Fixed Weight
Asset Allocation, Investment
Policy, Portfolio Policy
Market Timing Alternative Expression:
Tactical Asset Allocation,
Dynamic Asset Allocation
Stock Picking Alternative Expression:
Security Selection
Purpose: Universal sharing of the Portfolio
to the diverse asset classes, in
which exposure is required. There
is no possibility to realize an
outperformance with this kind of
choice. Asset Allocation does not
cause avoidable costs.
Purpose: Exploiting deviations of the
valuation of single assets-classes
(markets) to achieve outperform-
mance. Success of Market Timing
implies prediction skills. A
Market Timer accepts additional
but avoidable costs.
Purpose: Exploiting deviations of the
valuation of single securities to
achieve outperformance.
Success of Stock Picking
implies prediction skills. A
Stock Picker accepts additional
but avoidable costs. Note: A passive investor only works
with this kind of investment deci-
sion and does not care about the
other two elements. He adapts his
asset allocation only for the case
if his risk exposure or his liquidity
requirements change, but not for
the purpose to achieve an
outperformance.
Note: Market Timing means active
investing, but a Market Timer
can also take an asset allocation
decision, if it constitutes a
minimum range of assets. If this
is not the case, Asset Allocation
is only a negligible side effect
of Market Timing.
Note: Stock Picking means active
investing, but a Stock Picker
can also take an asset allocation
decision, if it constitutes a
minimum range of assets. If this
is not the case, Asset Allocation
is only a negligible side effect
of Stock Picking.
Source: Statmann M., 2000, p. 16.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Jens Wingenfeld 675
Brinson et al. (1986, p. 133) define asset allocation within a portfolio management process as
investment policy which identifies the long-term asset allocation plan (including asset classes and normal
weights) selected to control the overall risk and meet fund objectives. For a practical implementation of a
portfolio of assets, the first two of a total of four steps are:
1. Deciding which asset classes to include and which to exclude from the portfolio.
2. Deciding upon the normal, or long-term, weights for each of the asset classes allowed in the
portfolio.
For Brinson et al., market timing means the strategic under- or overweighting of an asset class relative
to its normal weight, for purposes of return enhancement and/or risk reduction, while security selection is
the active selection of investments within an asset class. As a consequent resumption of the two steps
above, this means for the portfolio management process:
3. Strategically altering the investment mix weights away from normal in an attempt to capture
excess returns from short-term fluctuations in asset class prices (market timing).
4. Selecting individual securities within an asset class to achieve superior returns relative that asset
class (security selection).
Brinson et al. developed an arithmetic framework which can be used to decompose total portfolio
returns in the sense of a performance attribution. They used data from 91 pension plans for a complete 10-
year (40-quarter) period beginning in 1974. They computed that the mean average annualized total return
was 9.01 per cent. The contribution of market timing accounted for a loss of 66 basis points per year,
while security selection caused a loss of 36 basis points per year. Thus, they found out that within their
sample the two main active portfolio management approaches even contributed to a negative performance
over time. Furthermore, with the help of the time-series R-squared they found out that on average 93.6
per cent of the total variation in actual plan return was explained by policy, vice versa, less than 10
percent of variation of returns could be ascribed to active portfolio management. In a further study,
Brinson and Gilbert (1991, pp. 40 et seq.) regenerated together with Singer their first study from 1985.
They examined data from 82 large pension plans over the 10-year period December 1977 to December
1987 and found out that 91.5 per cent of the variation in quarterly total plan returns could be explained by
investment policy.
Ibbotson and Kaplan (2000, pp. 26-33) expanded the Brinson et al. study, because the applied
performance attribution of funds was only measured over time; which means that they examined how
much of the variability in the monthly returns of each fund can be explained in a fund’s policy benchmark.
Thus, the authors wanted to answer the following questions:
a. How much of the variation in return among funds is explained by policy differences? The question
is whether there is a tendency for policy to differentiate performance across funds.
b. What is the ratio of the policy benchmark return compared to the fund’s actual return (explaining
the level of returns)?
For answering question a), the authors compared funds with each other through the use of cross
sectional regression analysis R-squared. If all funds were invested passively under the same asset
allocation policy, there would be no variation among funds. If all funds were invested passively but had a
wide range of asset allocation policies; however, all of the variation of returns would be attributable to
policy. Ibbotson and Kaplan (2000, p. 32) demonstrated that asset allocation explained about 40 per cent
of the variation of returns among funds. On average, across funds, asset allocation policy explains a little
more than 100 per cent of the level of returns.
Drobetz and Köhler (2002) conducted a study on simple monthly returns of 51 Swiss and German
balanced mutual funds. They followed the research approach of Ibbotson and Kaplan (2000), which
means that they also distinguished exactly the same three research questions like them. Drobetz and
Köhler found out that more than 80 per cent of the variability of returns in a typical fund over time is
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
676 Jens Wingenfeld
explained by asset allocation policy, roughly 60 percent of the variation among funds is explained by
policy, and more than 130 per cent on the return level, on average, is explained by the policy return level.
The latest study in this field comes from Kinniry et al. (2006). They tested a sample of 214 US domestic
equity funds over a very long time period from 1966 to 2003. Table 2 gives a synopsis of the above
presented research results to the question what impact asset allocation has for portfolio performance:
Table 2
The Impact of Asset Allocation for the Portfolio Performance
Brinson et al.
(1986)
Brinson et al.
(1991)
Ibbotson/Kaplan
(2000)
Drobetz/Köhler
(2002) Kinniry et al.
(2006)
Number of
Analyzed
Funds
91 US-Pension
Funds
82 US-Pension
Funds
94 US-Equity
Funds
51 German and
Swiss Equity
Funds
214 US Equity
Funds
Time Period 1974 – 1983 1977 – 1987 1988 – 1998 Up to 12/2001* 1966 – 2003
Share of Return and Risk Parameter Determined by Asset Allocation
Return
Variation of a
given Fund
over Time
93.6% (Avg.)
Med. n. a.
91.5% (Avg.)
Med. n. a.
81.4% (Avg.)
87.6 % Med
82.9% (Avg).
85.7% (Med.)
18.9% (Avg.)
15.0% (Med.)
Return
Variation
across Funds
Time
n. a. n. a. 40.0% (Avg.)
Med. n. a.
65.0% (Avg.)
Med. n. a.
81.6% (Avg.)
85.5% (Med.)
Return level 112% (Avg.)
Med. n. a.
101% (Avg.)
Med. n. a.
104% (Avg.)
100% (Med.)
134% (Avg).
131% (Med.)
122% (Avg.)
106% (Med.)
Return compared to Benchmark p. a.
-1.1% (Avg.)
Med. n. a.
-0.1% (Avg.)
Med. n. a.
-0.3% (Avg.)
0.0% (Med)
-2.4% (Avg).
-2.0% (Med.)
-0.5% (Avg.)
Med. n. a.
* no exact time period given Source: Author’s Composition of Cited Studies.
2.4. The Mean-Reverting Effect
Berk and Green (2004) derived a theory of portfolio management which focusses on the relationship
between fund flows and performance. Their model suggests that fund flows are one key mechanism that
prevents a persistent outperformance, but also removes a persistent underperformance. An economy is
assumed in which investors and managers are fully rational. It follows a brief description of the model:
There exist skilled active investment managers with differential ability to generate positive risk-
adjusted excess returns. A further assumption is that managers and investors alike know who these
managers are. Thus, in the market exists at least one active managed fund which achieves a performance
above-average. Investors recognize this as an evidence for replicable skill rather than luck. They expect
also an above-average performance in the future with a probability of more than 50%. As a result, the
amount of assets under management of the superior fund grows very strong. It is a generally accepted fact
that the greater the funds’ size, the expected return of the portfolio as a whole becomes lower (negative
fund size effect), see e. g. the elaborations of Zheng (1999), Finn and Sawacki (2001), Chen et al. (2004),
Pollet and Wilson (2008) or Bessler et al. (2010). Referring to Bogle (1999, pp. 265 et seq.), basically
there are three reasons why an increasing cash-inflow results in a negative fund performance:
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Jens Wingenfeld 677
A decreasing investment universe
In many jurisdictions there are limitations concerning the maximum share of a single asset a fund is
allowed to invest, see e.g. section 52 German Investment Act (InvG). Despite this, a fund with big cash
reserves relative to its investment target is only able to purchase small tranches of light capitalized
securities. Even if such a tranche will produce a good performance, it will not affect the funds’
performance very well because of it small weighting within the fund. Costs of analysis for the single asset
are independent from this matter of fact. Hence, investments in light capitalized stocks will not pay for
the big fund, although ceteris paribus these stocks can be a worthwhile investment for a small fund.
Because of this phenomenon it can be observed that funds with high cash-inflows have a tendency to
focus their policies to high capitalized securities and therefore mimic more and more a benchmark index,
because high capitalized stocks in most indexes have a higher weight than lower ones. As described in
number 2, investment universe also constrains to higher capitalized assets the more a fund attracts money
from investors. This means the respectively investment universe diminishes. In correspondence with Peter
Bernstein, Warren Buffet explains: “We have always known that huge increases in managed funds would
dramatically diminish our universe of investment choices. (…) Obviously performance would be much
diminished if we had only 100 securities available for possible purchase compared to, say, 10,000
available when our capital was microscopic (Bogle J., 1999, p. 270).
Indirect Transaction costs
Another important, but not always very obvious reason for a shrinking investment entirety arises due
to the market impact of purchase and sale. These implied costs emerge from the deviation of the realized
transaction price and the price which would develop if no transaction would occur (Keim and Madhavan,
1997, p. 272). However, these kinds of costs are not easy to measure. The higher the single transaction
volume, or the more urgent it is, the higher the costs. This relation becomes stronger if the certain stock is
less liquid. On the other hand, if the fund manager divides his order into smaller shares to minimize
implied transaction costs, it will emerge higher direct transaction costs. A manager of a small fund who
has to execute relative small-size trades is not concerned by indirect transaction costs.
Organizations’ Costs of Hierarchy
Bogle (1999, p. 270) contends that with the growing of an investment company the influence of the
single manager recedes. He claims that a fund manager cannot work best in an environment with high
hierarchical and bureaucratic structures. In his view, the superior skills of an excellent manager are
repressed.
“Picking stocks, like writing stories, is a one-at-a-time endeavor. It is done best by individuals or
small groups of people sharing their ideas and buying only the very best. A small fund family managing
selective portfolios (…) can succeed as a group, but no large institution (…) can order dozens of
managers to outperform. The image can be branded, but not the talent. The people matters more than the
name.”(Bogle J., 1999, p. 270).
Chen et al. (2004, pp. 1278 et seq.) bring forward the argument that hierarchy costs may be especially
relevant for mutual funds. The basic premise is that in large organizations with hierarchies, the process of
agents fighting for (and potentially not having) their ideas implemented will affect agents’ ex ante
decisions of what ideas they want to work on. Thus, small organizations ought to outperform large ones
on tasks that involve the processing of soft information (i.e., information that cannot be directly verified
by anyone other than the agent who produces it). If the information is soft, then agents have a harder time
convincing others of their ideas and it becomes more difficult to pass this information up the organization.
If we confess that funds’ performance decreases the more resources the fund has, investors will
allocate their money into this fund until it has reached the performance of the second best fund. At that
point, investors will be indifferent between investing with either manager, so money will flow to both
managers until they have reached the performance of the third best fund. This cascade effect persists until
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
678 Jens Wingenfeld
the performance of all former outperformer funds declines to the performance of a passive benchmark
fund.
In the contrary, all funds with an inferior performance successively have cash-outflows until they
reach the performance of a passive benchmark fund.
The result is that in equilibrium all funds have the same expected return than the passive benchmark.
In this equilibrium all managers, regardless of their skill level, have the same expected return.
3. Research results and discussion
3.1. Evaluation of the discussed qualitative theories to the research question
Beside quantitative arguments that sometime support and also sometime do not recommend the
application of passive investment strategies, the above presented arguments are a strong argument to
implement a passive strategy in general, which means unconnected and independent of special market
movements. The author agrees with the argumentation line of Sharpe (1991) in a strictly theoretical
perspective. But it has to be stated that even today it is not possible to buy “the market” in a convenient
and cost efficient way, especially for retail investors. Sharpe claims the market has to be selected. With
this approach, it is necessary to make an active decision which defines his model down. Referring to the
World Federation of Exchanges, a total number of 46,514 stock exchange listed companies are available
to an investor (WFE Monthly Report, 2012). This number is only the amount of listed companies of such
states that are a member of the World Federation of Exchanges. This given figure consists of very
heterogeneous companies which are not all covered by index funds, exchange traded funds, or other
passive investment tools. Thus “to buy the market” is a very theoretical approach, especially for a private
investor. For the latter, it is simply impossible to invest into the entire market by buying all assets in the
same weight as the market prescribes due to occurring fees relative to the investment amount.
However, if we apply Sharpe’s Arithmetic of Active Management ceteris paribus to an established
investment universe like German DAX or US S&P 500, all assumptions of Sharpe’s model can be
transferred into reality of investment and it can be considered as “fundamental law”. In such a case, it is
very easy for a passive investor to transfer his strategy and to buy “the market” by only purchasing a few
standard products. Thorley’s thoughts seem to be coherent and also a strong proponent of applying a
passive investment strategy. But one should notice that this theory – like the Efficient Market Hypothesis
– requires a strictly rational investor which is a paradigm in traditional finance. In this context of
neoclassical finance science, the theoretical model of the “homo economicus” is a key assumption in
terms of positive economic theory. Homo economicus refers to a greatly simplified model of human
behavior where an individual is characterized by perfect self-interest, perfect rationality, and free access
to perfect information regarding a specific condition. But a growing number of economists have come to
interpret diverse anomalies described in literature as consistent with several irrationalities that seem to
characterize individuals making complicated decisions. These irrationalities fall into two broad categories:
first, investors do not always process information correctly and therefore infer incorrect probability
distributions about future rates of return; and second, even when given a probability distribution of
returns, investors often make inconsistent or systematically suboptimal decisions (Bodi et al., 2011, p.
210). Insofar, Thorley’s arguments are a self-contained theoretical assumption which should be accepted
as a piece of advice for any market participant who does not have an overwhelming conviction about his
own research and trading abilities. In this context Barber and Odean (2001) provided an interesting
example of overconfidence in financial markets. They compared trading activity and average returns in
brokerage accounts of men and women and found out a general greater overconfidence of men versus
women which is also well documented in the psychological literature.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Jens Wingenfeld 679
Overall, it is obvious that asset allocation has an overwhelming influence on the risk/return tradeoff
within the portfolio management process. All studies arrive at the conclusion that active investment
decisions in terms of selecting and timing did little to improve performance. “Extra returns seemed to be
unrelated to the level of active management.”(Brinson, G. P. et al., 1991, p. 48): Nearly all surveys show
that active management has not even been neutral to fund performance, but “rather destroyed a significant
portion of investors’ value.”(Drobetz and Köhler, 2002 p. 233) respectively “reduces return and increases
volatility.”(Kinniry et al., 2006, p. 53) Kinniry et al. underline that dynamic asset allocation (i. e. all non-
passive portfolio management methods) can enhance portfolio performance only if investors have the
ability to consistently predict expected returns in financial markets. But it is a well-known fact that it is
nearly impossible to forecast expected returns in a persisting manner in a sustainable above-average
quality. Bernstein (2001, p. 80) summarizes this with the following sentence: “For a retail investor the
likely conclusion do draw from this research is restricting investment process to asset allocation and to
abstain from active fiddling with the portfolio, that could reduce long term return and does not have a
clearly positive effect on portfolio risk.”
Hence, if asset allocation has such an important impact on the outcome of an investment strategy and
other methods do only contribute little or even a negative share to investment success, this finding is
possibly the strongest theoretical proponent of a preference of a passive portfolio management strategy. If
passive management is implemented by investing in one or a few broad market indexes via Index Funds,
Exchange Traded Funds, or Investment Certificates, asset allocation is automatically realized with nearly
no additional expenses.
For Berk and Green (2004), the fact that investments with active managers do not outperform passive
benchmarks is a consequence of the competiveness in the market for capital investment. For them
successful funds capture excess returns. Therefore, all the economic rents generated using managers’
ability by raising fees, thus investors do not participate on superior managerial skill. The managers
themselves benefit from their skills. The arguments of Berk and Green are very coherent, the effect
described by the authors can regularly be observed in the field. In conclusion, the authors give a further
strong qualitative support for an application of a passive investment strategy.
3.2. Proposal for further research activities
Altogether, it has to be stated that there exist some interesting, but not very well known theories which
do recommend passive investment portfolio management eminently. Although they are a strictly
theoretical approach and base on diverse assumptions which cannot be observed in reality all the time, the
theories contribute to a better understanding of a rational and prescient portfolio management style. They
conduce to justify a special portfolio management approach by scientific arguments which are applicable
in any market environment and therefore can be seen as statements with a universal validity, detached
from a certain market movement and situation. Further research activities should be done in this field of
international finance, because it is crucial for any citizen to provide for their retirement in a self-reliant
way.
Bibliography
Achleitner, A. K., 2002. Handbuch Investment-Banking. Wiesbaden: Gabler.
Barber, B. & Odean T., 2001. Boys Will Be Boys: Gender, Overconfidence, and Common Stock
Investment, The Quarterly Journal of Economics, 116(1), pp. 261-292.
Berk, J. & Green, R., 2004, Mutual Fund Flows and Performance in Rational Markets. Journal of
Political Economy, 112, (4), pp. 1269-1295.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
680 Jens Wingenfeld
Bernstein, W. J., 2001. The Intelligent Asset Allocator. How to Build your Portfolio to Maximize Returns
and Minimize Risk. New York: McGraw Hill.
Bessler, W.; Blake, D. P.; Lueckoff, P.; Tonks, I., 2010. Why Does Mutual Fund Performance Not
Persist? The Impact and Interaction of Fund Flows and Manager Changes. Finance Meeting
EUROFIDAI AFFI. Paris.
Bodie, Z.; Kane, A.; Marcus, A. J., 2011. Investments. New York: McGraw-Hill/Irwin.
Bogle, J. C., 1999: John Bogle on Investing. The first 50 years. New York: McGraw Hill.
Brinson, G.; Beebower, G.; Hood, R., 1986. Determinants of Portfolio Performance. Financial Analysts
Journal, 42(4), pp. 39-48.
Brinson, G.; Beebower, G.; Hood, R., 1991. Determinants of Portfolio Performance II: An Update.
Financial Analysts Journal, 47(3), pp. 40-48.
Bundesverband Investment und Asset Management e.V. (BVI), 2012. Investmentstatistik. [Online]
Available at http://www.bvi.de/de/statistikwelt/Investmentstatistik/index.html [accessed 08 January
2013].
Chen, J.; Hong, H.; Huang, M.; Kubik, J., 2004. Does Fund Size Erode Mutual Fund Performance? The
Role of Liquidity and Organization. American Economic Review, 94(5), pp. 1276-1307.
Drobetz, W. & Köhler, F., 2002. The Contribution of Asset Allocation Policy to Portfolio Performance.
Financial Markets and Portfolio Management, 16(2), pp. 219-233.
Ferri, R A., 2011. The ETF Book. All you need to know about exchange-traded funds. Hoboken, N.J: John
Wiley & Sons.
Finn, F. & Sawicki, J., 2001. Smart Money and Small Funds. Journal of Business Finance and
Accounting, 29(5, 6), pp. 825-846.
Harlow, W. V. & Brown, K. C., 2005. The Right Answer to the Wrong Question: Identifying Superior
Active Portfolio Management. Journal of Investment Management, 3(3), pp. 1-21.
Ibbotson, R. & Kapplan, P. D., 2000. Does Asset Allocation Policy Explain 40, 90, or 100 Percent of
Performance? Financial Analysts Journal, 56(1), pp. 26-33.
Investment Company Institute (ICI), 2012. Investment Company Fact Book. [Online] Available at
http://www.ici.org/research/stats/trends/trends_11_11 [accessed 08 January 2013].
Kinniry F.; Tokat, Y.; Wicas, N., 2006. The Asset Allocation Debate: A Review and Reconciliation.
Journal of Financial Planning, 19(10), pp. 53-63.
Malkiel, B. G., 2003. Passive Investment Strategies and Efficient Markets. European Financial
Management (9), pp. 1-10.
Pollet, J. & Wilson, M., 2008. How Does Size Effect Mutual Fund Behavior? Journal of Finance, 62,
pp. 2941-2969.
Sharpe, W. F., 1991. The Arithmetic of Active Management. Financial Analysts Journal 47(1), pp. 7-9.
Statman, M., 2000. The 93.6% Question of Financial Advisors. Journal of Investing, 9(1), pp. 16-20.
Thorley, S., 1999. The Inefficient Markets Argument for Passive Investing. Brigham Young University.
[Online] Available at: http://marriott-school.net/emp/SRT/passive.html. [Accessed 10 January 2013].
World Federation of Exchanges, 2012. WFE Monthly Report. [Online] Available at: http://www.world-
exchanges.org/statistics/monthly-reports [Accessed 6 January 2013]
Zheng, L., 1999. Is Money Smart? A Study of Mutual Fund Investors' Selection Ability. Journal of
Finance, 54(3), pp. 901-904.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Nicola Zech 681
STAKEHOLDER RELATIONSHIP MANAGEMENT
IN THE CONTEXT OF CRISIS MANAGEMENT
Nicola Zech, University of Latvia, Latvia1
Abstract. In an organizational crisis, typically multiple stakeholder groups are
affected and involved – to a varying extent. Stakeholders’ needs and demands have to
be balanced and prioritized wherever applicable. Professional crisis management and
crisis communication may help creating support for and trust in companies by the
complete range of its stakeholders.
This research paper works out key success factors for stakeholder relationship
management in the context of crisis management. Thereby it considers how professional
stakeholder relationship management before, during, and after a crisis helps overcoming
the crisis and reducing its impact. The results base on in-depth literature review. An
introduction of the fundamental concepts of stakeholder management and crisis
management serves as a basis for their consolidation. Practical implication of the paper
is to introduce the stakeholder and stakeholder relationship specifications towards crisis
management in general and crisis communication in specific. The findings will be
converted into instructions for setting up a crisis management plan and corresponding
training plan.
Key words: crisis management, crisis communication, stakeholder management, stakeholder relationship
management
JEL code: M100
Introduction
The modern, more powerful technology has the capacity to transmit crises and disasters increasingly
faster and to a broader audience, especially to the organization’s Stakeholders. As a consequence to the
speed of news spreading, maximum justifiable time of reaction and communication of affected companies
and industries is constantly decreasing. In order to meet the requirements of professional and almost
instant reaction at the same time, applying the most appropriate and effective leadership concept is a
fundamental aspect. However, in acute crisis situations there may be no opportunity to verify the
information available or to seek for further details. Therefore, without professional crisis preparation and
training, decisions may be taken on information without having full confidence in its source or content.
(Cosgrave J., 1996)
1 Corresponding author – e-mail address: [email protected], telephone: 0049 89 37066487
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
682 Nicola Zech
1. Stakeholder Management
Robert Philips claims that “organisations are dependent on their Stakeholders for their success and
their failures” (Phillips R. 2003, p. v). Further notable remarks considering the same subject are: “The
social structure of the modern society can no longer be described accurately as consisting only of
relations among natural persons; our understanding must be stretched to include as well those relations
between natural and collective actors, and between two or more collective actors.” (Scott W. R. & Davis
G. F., 2007, p. 7) or “No organisation is self-sufficient; all depend for survival on the types of relations
they establish with the larger systems of which they are a part.” (Scott W. R. & Davis G. F., 2007, p. 11)
A modern Stakeholder Management approach can be interpreted as obtaining “optimal benefits for all
identified Stakeholder groups, without giving priority to one Stakeholder’s interests over another. Under
this philosophy, the entire purpose of the firm becomes the co-ordination of Stakeholder interests.”
(Sautter E. T., 1999, p. 314) Kotler claims that companies can no longer operate as self-contained, fully
capable units without dedicated partners, but they are increasingly dependent on their employees, their
suppliers, their distributers and dealers, and their advertising company. (Freeman R. E., Harrison J. S.,
Wicks A. C., Parmar B. L., & De Colle S., 2010)
Whereas in the traditional perspective a company is seen as an economic entity, the Stakeholder view
sees it as a network of relationships among the firm and its Stakeholders. In consequence, the Stakeholder
view does not attribute competitive advantage solely to best adapting to the company’s environment by
taking advantage of strengths and opportunities and overcoming weaknesses and threats, but to a high
degree to superior linkages to Stakeholders leading to trust, goodwill, reduced uncertainty, improved
business dealing, and ultimately higher firm performance. (Enz C. A., 2010) Whereas managers still think
first about what the organisation wants and needs to generate profit, true Stakeholder engagement implies
understanding of what Stakeholders value and view as important. (McEuen M. B., 2011)
Stakeholder Groups
Even before questioning if Stakeholders are managed right, it should be questioned if the right
Stakeholders are managed. In 1963, the term “Stakeholder” was introduced in an internal memorandum
of the Stanford Research Institute (now SRI International, Inc.). (Freeman R. E., 1984) In 1984, R.
Edward Freeman published his landmark book “Strategic Management: A Stakeholder Approach” and
defined a Stakeholder as follows:
“A Stakeholder in an organisation is (by definition) any group or individual who can affect or is
affected by the achievement of the organisation’s objectives.” (Freeman R. E., 1984, p. 46) “Stakeholders
include employees, customers, suppliers, stockholders, banks, environmentalist, government and other
groups who can help or hurt the corporation.” (Freeman R. E., 1984, p. vi)
An essential distinction should be drawn between influencers and Stakeholders: “some actors in the
enterprise (e.g. large investors) may be both, but some recognizable Stakeholders (e.g. the job applicants)
have no influence and some influencers (e.g. the media) have no stakes.” (Donaldson T. & Preston L. E.,
1995, p. 86)
Organisations need to understand how far their Stakeholders will go to achieve, promote, or protect
their stake. A stake – by definition – may be:
“An interest
Right (legal or moral)
Ownership
Contribution in the form of knowledge or support” (Bourne L., 2009, p. 30)
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Nicola Zech 683
Can affect or are affected by
Fundamentally in Stakeholder Management, each organisation has to define its respective
Stakeholders and their perceived stakes. (Freeman R. E., 1984) A Stakeholder Map, adapted from the
example of a Traditional Stakeholder Map shown in Fig. 1 has to be drawn.
Source: author’s construction based on Freeman R. E. (1984, p. 25) and Phillips R. (2003, p. 126)
Fig. 1. Traditional Stakeholder Map
Stakeholder influence can be rated by three elements:
Power: the ability to exercise one’s will over others;
Legitimacy: socially accepted and expected structures that help define whose concerns or claims
really count;
Urgency: the dynamics of the time-sensitive nature of Stakeholder interactions (Maignan I., Ferrell
O. C. & Ferrell, L., 2005).
Managers often underestimate the complexity of Stakeholder identification and solely consider the
most obvious ones such as customers, owners/stockholders or government agencies and administration.
(Sautter E. T., 1999) This may possibly result in short-term salient Stakeholder Management. Managing
an organisation based on a short-term salient Stakeholder (who possesses all three attributes: legitimacy,
power, urgency) orientation predominantly does not lead to sustainable corporate success. (Vilanova L.,
2007).
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
684 Nicola Zech
2. Crisis Management
According to Spillan J. & Hough M. (2003, p. 401), Crisis Management is “the function that works to
minimize the impact of a crisis and helps an organisation gain control of the situation. It also operates to
take advantage of any benefits that a crisis may present.” Richardson describes Crisis Management as still
being in its infancy – for not having produced an overarching schema yet. There does not even exist a
common language nor commonly used meanings of “emergency”, “disaster” or “catastrophe”.
(Richardson B., 1994) As there does not exist one universally accepted definition of “crisis” either,
various approaches to the definition of crisis and – consistently – the Crisis Management process will be
reviewed. Third key term is Crisis Communication. In numerous contexts these three terms are
considered in a progressive way. (Coombs W. T., 2010)
Crisis Definition and Typology
Still, no single, universally accepted definition of (organisational) crisis exists. In general, a crisis
represents a “turning point”. (Faulkner B., 2001) In Chinese ideographs „crisis“ (wei-ji) represents danger
as well as opportunity. Although the term crisis therefore implies negative as well as positive outcomes,
most certainly no manager would ever argue for the strategic creation of crises in order to advance
organisational goals as an effective form of management. (Coombs W. T., 2010) Consequently, in
common business, a crisis can be defined as an “undesired, extraordinary, often unexpected and timely
limited process with ambivalent development possibilities”. (Glaesser D., 2006, p. 14) Fink considers a
crisis as not necessarily being bad but as merely being characterized by a certain degree of risk and
uncertainty. (Fink, S., 2002) Commonly, a crisis is characterized by the following conditions:
Time constraint;
Limited information (both in quality and quantity);
Decision load constraint (Cosgrave J., 1996).
According to Elliott D. et al. (2005) organisational crises share a number of features:
Crises involve a wide range of Stakeholders;
Time pressure requires an urgent response;
A crisis usually results from a surprise to the organisation;
High degree of ambiguity in which cause and effects are unclear;
A crisis creates a significant threat to an organisation’s strategic goals.
“Risk” is predominantly used in connection with “crisis”. In this context, “risk” is characterised as
“the product of damage and probability of occurrence” (Glaesser D., 2006, p. 38). Furthermore, risk
factors represent an anticipating step towards a crisis. i.e. if risk factors are dealt with immediately they
might be eliminated and crises prevented or at least its magnitude constrained. The term “disaster” is
generally used to define a major negative event that has the potential to affect a company or industry.
(Hystad P. W. & Keller P. C., 2008) Whereas the root cause of crises might be to some extent self-
inflicted, Faulkner refers to a disaster as situations where an enterprise (or a collection of enterprises) “is
confronted with sudden unpredictable catastrophic changes over which it has little or no control.”
(Faulkner B., 2001, p. 136)
First of all, each organisation should answer the following question for itself: “What would you
consider to be a crisis for your organisation?” (Mitroff I. I., 2000, p. 39) The answer needs to be well-
thought-out, detailed, and honest. All executives might be asked to write down examples of what they
believe would constitute a crisis for their organisation. (Mitroff I. I., Pearson C. M., & Harrington L. K.,
1996) Ideally, as many executives and employees as possible are integrated in the brainstorming, because
the more input is gathered the more realistic the picture drawn. In the early stage of risk identification,
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Nicola Zech 685
potential magnitude, cost and probability are not considered in detail. (Luecke R., 2004) Risk sources are
listed without sorting first and evaluated in a next step. Most importantly, organisations must not rely nor
concentrate solely on crises which have occurred before. However they may analyse patterns and
interconnections in past crises. (Mitroff I. I., 2000)
Based on various authors’ frameworks for Crisis Typologies, hypernyms for a source-based
categorization may be defined as follows (Coombs W. T., 2004; Glaesser D., 2006; Henderson J. C.,
2005; Luecke R., 2004; Mitroff I. I. et al., 1996; Mitroff I. I., 2000; Richardson B., 1994):
Economic crises;
Environmental crises;
Health crises;
Informational/Reputational crises;
Physical crises;
Political crises;
Social cultural crises;
Technological crises.
Only by determining the specific crisis type, causes and impacts may be treated immediately and
effectively. However, a crisis may fall into one or more categories at the same time.
Crisis Management Process
“You and your managers should understand that anytime you’re not in a crisis, you are instead in a
pre-crisis, or prodromal, mode.” (Fink S., 2002, p. 7) This indicates that the Crisis Management process
never stops and is not a once-only procedure but a perpetual one. Professional Crisis Management “must
be integrated into an organisation’s existing systematic programs, such as total quality management,
environmentalism, and health and safety, which cut across functions, departments, and business units.”
(Mitroff I. I. et al., 1996, p. 117) “While not all crises can be foreseen, let alone prevented, all of them can
be managed far more effectively if we understand and practice the best of what is humanly possible.”
(Mitroff, 2000 I. I., p. 5) Ian Mitroff’s statement gives a clear indication on why the implementation of a
systematic management process instead of pure ad-hoc-reaction is essential. Thus a crisis’ duration
respectively damage can be limited. According to him, the first step has to be “overcoming denial – the
worst enemy of Crisis Management” (Mitroff I. I., 2000, p. 9)
In 1986, Steven Fink published the first book on the topic of Crisis Management: Crisis Management:
Planning for the Inevitable. Although in recent years a vast array of Crisis Management books have been
published, this one remains a more than useful classic. Fink S. (2002) compares the Crisis Management
process to a disease by defining consecutive phases:
Prodromal crisis stage;
Acute crisis stage;
Chronic crisis stage;
Crisis resolution stage.
Glaesser describes Crisis Management as “the strategies, processes and measures which are planned
and put into force to prevent and cope with crises.” (Glaesser D., 2006, p. 22) He even defines 7 detailed
phases of Crisis Management. However, one essential aspect which is not displayed in Fig. 2 is the active
feedback after the recovery of a crisis to the early stages of Crisis Management (analysis, evaluation,
protection, training). (Pearson C. M. & Mitroff I. I., 1993) Obviously this would be substantial for
ensuring on-going learning processes and constant improvement.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
686 Nicola Zech
Crisis prevention
Risk management Crisis coping
Crisis precautions
Risk management Crisis avoidance
Limitation of
consequences Recovery
Analysis Evaluation/
Planning Protection/
Implementation Training
Early Warning
Adjustment Employment of instruments
Source: author’s construction based on Glaesser (2006, p. 22)
Fig. 2. Phases of Crisis Management
In addition, a Crisis Management team has to be determined. The Crisis Management team identifies
and develops Crisis Management strategies under the coordination and control of their team leader.
(Ritchie B. W., 2004) They need to work under the condition of time pressure as well as under the
consciousness of the current situation being of high importance to the company. The Crisis Management
team might not always be the same, different types of crises might require different team members. (Fink
S., 2002) Therefore the training must not be too specific or team member oriented. Furthermore, a clear
reporting sequence has to be created so that people know what to do or whom to contact in the event of a
crisis.
Burnett insists that in Crisis Management strategic action has to be taken both to avoid or mitigate
undesirable developments and to bring about a desirable resolution of the problems. Eventually Crisis
Management will only be successful if a continuous effort is notable. (Burnett J. J., 1998) Besides that
Crisis Management needs to consist of strategic planning processes and include the preparation of
detailed contingency plans as well as the definition of decisional roles and responsibilities. But in addition
to that a degree of flexibility must be retained: “Organisations […] have to be mindful of the fact that no
two crisis situations are identical and that therefore, although managerial responses are planned in
advance, such responses need to be flexible to take account of the requirements of the exact
circumstances encountered.” (Evans N. & Elphick S., 2005, p. 147) Fink even adds another perspective:
“The key is to control as much of the crisis as you can. If you can’t control the actual crisis, see if you can
exert some degree of influence over where, how, and when the crisis erupts.” (Fink S., 2002, p. 22-23)
This indicates that not each Crisis Management process has to or can be finished satisfactorily. But,
however, as much input for future Crisis Management processes as possible has to be extracted. The
Crisis Management process determines in the end “whether the media and the public perceive the
organisation favourably as a hero or a victim or unfavourably as a villain. The mismanagement of a crisis
is one of the surest ways in which to earn the label villain.” (Mitroff I. I. et al., 1996, p. 19)
Crisis Communication
A wide range of companies sees the media either as a cause of crises or their principal point of
contact. Whereas some aspects of these statements may be true, Crisis Communication has far more
functions and scope of influence in each Crisis Management stage. Certainly, the management of
Information Technologies (e.g. e-mail, television, news media) is crucial. Mitroff I. I. et al. are equally
right to state: “Realize that there are no secrets in the modern world. Realize that taking the initiative by
telling the truth allows you to control who reveals the truth, in what circumstances, and when it is
revealed.” (Mitroff I. I., 2000, p. 79) Nevertheless, the various perspectives of the recommendable extent
of shared information have to be balanced: Whereas “lawyers typically want to say as little as possible
during a crisis in order to avoid or minimize legal liability[;] marketing, public affairs, and public
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Nicola Zech 687
relations executives, on the other hand, want to share information more broadly as a means of retaining or
recovering consumer confidence and hence safeguarding their business.” (Mitroff I. I. et al., 1996, p. 13)
“Crisis Communication can be defined broadly as the collection, processing, and dissemination of
information required for addressing a crisis situation. In pre-crisis, Crisis Communication revolves around
collecting information about crisis risks, making decisions about how to manage potential crises, and
training people who will be involved in the Crisis Management process. The training includes Crisis
Management Team members, crisis spokespersons, and any individuals who will help with the response.
Crisis Communication includes the collection and processing of information for Crisis Management
Team decision making along with the creation and dissemination of crisis messages to people outside of
the team. Post-crisis involves dissecting the Crisis Management effort, communicating necessary changes
to individuals, and providing follow-up crisis messages as needed.” (Coombs W. T., 2010, p. 20)
Two basic types of Crisis Communication can be identified:
Crisis knowledge management
Stakeholder reaction management
In this context, “crisis knowledge management involves identifying sources, collecting information,
analysing information (knowledge creation), sharing knowledge, and decision making. Crisis knowledge
management is behind the scenes. It involves the work the crisis team does to create public responses to a
crisis. Stakeholder Reaction Management comprises communication efforts (words and actions) to
influence how Stakeholders perceive the crisis, the organisation in crisis, and the organisation’s crisis
response.” (Coombs W. T., 2010, p. 25)
Facing the speed of media coverage these days, it is unlikely that there will be a time delay between a
crisis occurring and the resulting media coverage. This implies the significance of immediate Crisis
Communication. Because if immediate information is not available, this leaves room for speculative
stories. (Ashcroft L. S., 1997) Applying “no comment” in Crisis Communication could imply that the
organisation is guilty or hiding something, therefore spokespersons would be wise avoiding this phrase.
(Coombs W. T., 2010) Furthermore, in most cases it seems advantageous to tell the truth at a time of
crisis. (Ashcroft L. S., 1997) How and what an organisation communicates during a crisis has a
significant effect on the outcomes of the crisis – this includes the number of injuries and the amount of
reputational damage sustained by the organisation. (Coombs W. T., 2010)
Ideally, a company speaks during a crisis with one voice. Nevertheless, this must not be confused with
having just one trained and well-informed spokesperson during a crisis. In fact, different spokespersons
may be needed to cover various areas of expertise, or a crisis may last several days or longer making it
impossible for one person being the sole voice for the organisation. Furthermore, the person may vary
upon the crisis type or media. However, all spokespersons must be kept on the same information level to
help insure consistency. (Coombs W. T., 2010) In the majority of organisations, “Public Relations” is the
department responsible for Crisis Communication. Their main fields of action in this context are training
spokespersons, developing guidelines and policies as well as determining general processes for dealing
with the media. (Burnett J. J., 1998)
Crisis Management Plan
As a rule, the production of a customized anticipating Crisis Management Plan pays off since in
time of crisis “the decision makers are in the most unsuitable position for taking the right decisions:
they are under a pressure of time which prevents the collection of the relevant information and their
analysis in depth. Furthermore, the decision makers are under internal psychological pressure arising
from the feeling of failure and the need to defend themselves, and they have to resist the various
interest groups in the industry. In such situations there is a danger of failing to see the current
development in their correct proportions and of choosing convenient solutions without examination of
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
688 Nicola Zech
possible negative effects and long-range results.” (Arbel A. & Bargur J., 1980, p. 83) Even though a
Crisis Management Plan can most probably never cover all potential types of crises, having prepared a
plan and having thought in advance of the myriad decisions inherent in a crisis helps in finding
efficient and time-saving responses.(Barton L., 1995) However, all Crisis Management Plans are
useless unless the organisation “is ready to acknowledge that all crises create powerful emotions in
those affected by them.”(Mitroff I. I. et al., 1996, p. 189) Therefore, implementing a Crisis
Management Plan depends heavily on the humans performing.
Most companies are not well prepared for crises. Even worse, Mitroff I. I. et al. (1996) consider most
Crisis Manuals being useless. Common reasons are:
1. most manuals lack an overview of Crisis Management’s systematic nature
2. no manual covers all relevant aspects or concerns associated with every crisis
3. Crisis Management manuals and programs contain either too much or too little detail
4. many manuals are crated to satisfy the needs and/or anxieties of corporate headquarters
5. most manuals are primarily reactive
6. very few manuals specify the education, knowledge, and training required to implement an
effective Crisis Management program
Research results and discussion
There is hardly any crisis situation imaginable which would not affect any Stakeholder. On the
contrary, typically multiple Stakeholder groups are affected and involved - to a varying extent. “During a
crisis, another group that may join the functional publics is the victims. Victims may have been customers
prior to the crisis; however, when customers are harmed, they become victims.” (Stephens K. K., Malone
P. C., & Bailey C. M., 2005, p. 395) Two major determinants of Stakeholders’ reactions to company
crises are identified as being the crisis cause and the company’s Crisis Communication. (McDonald L.
M., Sparks B., & Glendon A. I., 2010) In the context of Crisis Communication, “one always needs to bear
in mind that there are multiple courts in which one is being tried. First, there is the court of law. Second,
there is the court of public opinion. Third, there is the stock market and other societal institutions.”
(Mitroff I. I., 2000, p. 90)
In the literature a great number of expressions give implication to an interrelation of Crisis
Management and Stakeholder Relationship Management. Hereinafter a literature review considering this
interrelation is summarized. It does not appear being easy to balance all Stakeholder needs and claims in a
crisis situation. Therefore a strategic approach towards a Stakeholder Relationship Management under
these conditions seems advisable. Alpaslan et al. suggest “that developing trusting and cooperative
relationships with Stakeholders enables the organisation and its Stakeholders to prepare and respond to
crises more efficiently, effectively, and ethically than adhering to contracts or the principle of shareholder
value maximization.”(Alpaslan C. M., Green S. E., & Mitroff I. I., 2009, p. 39) Pearson C. M. and Clair J.
A. define an organisational crisis as a low-probability, high-impact event which could threaten the
viability of an organisation and its organisational Stakeholders. (Pearson & Clair, 1998)
Especially in times of crises it seems not sufficient considering shareholder interests. Depending on
the nature of the crisis type one or more Stakeholders may be especially affected and need specific
attention. The salience (i.e. the degree to which managers give priority to competing Stakeholder claims)
of affected Stakeholders may change dramatically during a crisis. Even if impossible for all imaginable
crisis situations, managers should nevertheless simulate potential alterations of individual Stakeholder
saliences. (Alpaslan C. M. et al., 2009) As Stakeholders have (by definition) a stake in the company, this
company has at least a moral commitment to the inclusion of Stakeholders into the Crisis Management
process.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Nicola Zech 689
From the Stakeholder perspective, a crisis can be defined as an unpredictable event which threatens
their expectancies and can seriously impact an organisation’s performance and generate negative
outcomes. In addition, a crisis can threaten an organisations’ social legitimacy (the consistency
between organisational and Stakeholder values) as it violates Stakeholder expectations of how an
organisation should operate. Whereas an effective Crisis Management might result in a stronger
organisation, “management by crises” would take a heavy toll on Stakeholders. Provoking (physical,
financial or psychological) harm to Stakeholders is considered the most negative outcome in this
context. The Stakeholder reception is essential for defining a crisis situation. In this regard, Crisis
Management aims to prevent or lessen the negative outcomes and thereby protect the Stakeholders. The
effectiveness of Crisis Management is frequently rated by Stakeholders upon highly visible crisis
responses. (Coombs W. T., 2010)
A crucial question in an organisational approach to uncertainty in the environment is asked by
Harrington and Ottenbacher: “What (external) strategic relationships are formed to minimize the effects
of an uncertain world. “Organisations operate in unstable environments where they must constantly
evaluate how they will respond to Stakeholders. They not only have to compete for limited resources with
the outside environment, but they also have limited resources by which to react to external groups. By
examining the attributes of Stakeholder groups, researchers can classify how organisations may formulate
their reactions to pressures and inquiries.” (Stephens K. K. et al., 2005, p. 393) In addition organisations
should use the knowledge not only of its team but of as many Stakeholders as possible - the sum is
usually better than the individual results. Information Stakeholders may have available should be used
and signals sent out by Stakeholders should be made use of. (Alpaslan C. M. et al., 2009; Pearson C. M.
& Clair J. A., 1998) Probably more time and resource investment becomes necessary if Stakeholders
included in Crisis Management process but companies on the other hand are likely to reduce impact of
crises on various levels. (Alpaslan C. M. et al., 2009)
Conclusions, proposals, recommendations
Mitroff I. I. summarized essential recommendations for Stakeholder Relationship Management in the
context of Crisis Management:
1. “Never, never assume that the outside world (persons outside of your immediate work group or
family) will see a situation exactly as you do.
2. List as many assumptions as possible about as many Stakeholders as you can think of. Be aware
that the Stakeholders you overlook, and especially the unwarranted assumptions that you are
making about them, can come back to haunt you later.
3. Never, never solve the wrong problems precisely! In other words, always ask yourself, “Are we
solving the wrong problem?”” (Mitroff I. I., 2000, p. 124)
Displayed in more detailed way, this refers to an ideal Crisis Management manual integrating the
Stakeholder Relationship Management approach (see Figure 3).
In summary, instructions for setting up a professional Crisis Management Plan and corresponding
training plan considering Stakeholder Relationship Management are:
1. A pre-crisis audit including interviews with both internal and external Stakeholders should be
conducted in order to determine the crisis-preparedness of an organisation.
2. The contingency plan should include a detailed communication plan which specifies who inside
and outside the organisation should receive when and which information by which media channel.
3. All means of communication need to be targeted at all Stakeholders and not just the media.
4. Crisis Communication from the perspective of a Stakeholder may start with pre-crisis messages
which give them some information about a potential crisis.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
690 Nicola Zech
5. Performing post-Crisis Communication, Stakeholders must be updated on the business continuity
efforts as the organisation returns to normal operations.
6. For testing the contingency plan, it seems advisable to prepare a detailed crisis portfolio / scenario
for each crisis type defined. Best case, worst case scenarios shall be implemented.
7. Training shall include general training, table-top exercises, workshops and real time and live
simulations including flexible elements with the aim to test the organisation, communications and
the teamwork of those concerned and the ability of individual actions.
8. Crisis management audits and training have to be implemented into business activity plans and
reiterated on a regular basis.
Scenarios Criteria Signals Containment Recovery Post-Crisis Stakeholders For each crisis
family, at least
one type of crisis
that can occur and
its root causes,
i.e. how, when,
and why
Likely versus
worst-case
scenarios, i.e.
worst possible
time,
circumstances,
causes, and most
unfavourable
publicity
Criteria/ hurdles
that must be
surmounted to
trigger a crisis
response, (e.g.
activation of
Crisis
Management
Team)
Early warning
signals that a
crisis is likely to
occur, i.e., events
which are very
near to the criteria
Physically
isolate?
Encase?
Neutralize?
Disperse?
Treat?
Physically
remove?
Transport?
Reduce?
Convert?
Privatization of
key customers
Privatization of
key faculties
manufacturing
sites
Backups for
manufacturing
information
distribution
Triage criteria
No-fault audit
Review critique
of key
assumptions
Causes?
Key lessons
learned vs. not
learned?
Additional CMT
Training?
Privatization of
key stakeholders
and their role in
crisis plans/
capabilities
Contacts?
Available?
Location?
Part of CMT?
Internal vs.
external?
Crisis Types Audits Meetings Training Miscellaneous 1. Economic crises
2. Environmental crises
3. Health crises
4. Information/Reputation crises
5. Physical crises
6. Political crises
7. Social cultural crises
8. Technological crises
Schedule of
precrisis audits
Scope of precrisis
audits
CTM
Designer,
operator,
maintenance,
personnel
Simulations
Conflict Mgnt.
facilitator
CMT
Designer,
operator,
maintenance,
personnel
Simulations
Conflict Mgnt.
facilitator
Source: author’s construction based on Mitroff I. I. et al. (1996, p. 191)
Fig. 3. Ideal Crisis Management manual
For the development of particularized Crisis Management and Training Plans further research is
advisable. Therefore, the author will conduct expert interviews as well as scenario-based interviews in the
progress of the doctoral study.
Bibliography
Alpaslan, C. M., Green, S. E., & Mitroff, I. I., 2009. Corporate Governance in the Context of Crises:
Towards a Stakeholder Theory of Crisis Management. Journal of Contingencies and Crisis
Management, 17(1), pp. 38-49.
Arbel, A., & Bargur, J., 1980. A Planning Model for Crisis Management in the Tourism Sector. European
Journal of Operational Research, 5(2), pp. 77-85.
Ashcroft, L. S., 1997. Crisis Management - Public Relations. Journal of Managerial Psychology, 12(5),
pp. 325-332.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Nicola Zech 691
Barton, L., 1995. Crisis Management: Preparing for and Managing Disasters. Cornell Hotel and
Restaurant Administration Quarterly, 35(1), pp. 59-65.
Bourne, L., 2009. Stakeholder Relationship Management – A Maturity Model for Organisational
Implementation. Farnham: Gower Publishing Limited.
Burnett, J. J., 1998. A Strategic Approach to Managing Crises. Public Relations Review, 24(4), 475–488.
Coombs, W. T. (2004). Impact of Past Crises on current Crisis Communication. Journal of Business
Communication, 41(3), pp. 265-289.
Coombs, W. T., 2010. Parameters for Crisis Communication. In W. T. Coombs & S. J. Holladay (Eds.),
The Handbook of Crisis Communication (pp. 17-53). Blackwell Publishing Limited.
Cosgrave, J., 1996. Decision Making in Emergencies. Disaster Prevention and Management, 5(4), pp. 28-
35.
Donaldson, T., & Preston, L. E., 1995. The Stakeholder Theory of the Corporation: Concepts, Evidence,
and Implications. Academy of Management Review, 20(1), pp. 65-91.
Elliott, D., Harris, K., & Steve, B., 2005. Crisis Management and Services Marketing. Journal of Services
Marketing, 19(5), pp. 336-345.
Enz, C. A., 2010. Hospitality Strategic Management – Concepts and Cases (2nd ed.). Hoboken, New
Jersey: John Wiley & Sons.
Evans, N., & Elphick, S., 2005. Models of Crisis Management: an Evaluation of their Value for Strategic
Planning in the International Travel Industry. International Journal of Tourism Research, 7, pp. 135-150.
Faulkner, B., 2001. Towards a Framework for Tourism Disaster Management. Tourism Management,
22(April 2001), pp. 135-147.
Fink, S., 2002. Crisis Management - Planning for the Inevitable (2nd ed.). Lincoln: backinprint.com.
Freeman, R. E., 1984. Strategic Management – a Stakeholder Approach. Cambridge: Cambridge
University Press.
Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & De Colle, S., 2010. Stakeholder Theory –
the State of the Art. Cambridge: Cambridge University Press.
Glaesser, D., 2006. Crisis Management in the Tourism Industry. Annals of Tourism Research (2nd ed.,
Vol. 37). Oxford: Butterworth-Heinemann.
Henderson, J. C., 2005. Responding to Natural Disasters: Managing a Hotel in the Aftermath of the
Indian Ocean Tsunami. Tourism and Hospitality Research, 6(1), pp. 89-96.
Hystad, P. W., & Keller, P. C., 2008. Towards a Destination Tourism Disaster Management Framework:
Long-term Lessons from a Forest Fire Disaster. Tourism Management, 29, pp. 151, 162.
Luecke, R., 2004. Crisis Management – Master the Skills to Prevent Disasters. Boston, MA: Harvard
Business Press.
Maignan, I., Ferrell, O. C., & Ferrell, L., 2005. A Stakeholder Model for Implementing Social
Responsibility in Marketing. European Journal of Marketing, 39(9/10), pp. 956-977.
McDonald, L. M., Sparks, B., & Glendon, A. I., 2010. Stakeholder Reactions to Company Crisis
Communication and Causes. Public Relations Review, 36, pp. 263-271.
McEuen, M. B., 2011. The Game Has Changed: A New Paradigm for Stakeholder Engagement. Cornell
Hospitality Perspectives, (May).
Mitroff, I. I., 2000. Managing Crises before they happen - What every Executive and Manager needs to
know about Crisis Management. New York: AMACON.
Mitroff, I. I., Pearson, C. M., & Harrington, L. K., 1996. The essential Guide to Managing Corporate
Crises – a Step-by-step Handbook for Surviving major Catastrophes. New York: Oxford University
Press.
Pearson, C. M., & Clair, J. A., 1998. Reframing Crisis Management. Academy of Management Review,
23(1), pp. 59-76.
Pearson, C. M., & Mitroff, I. I., 1993. From Crisis Prone to Crisis Prepared: a Framework for Crisis
Management. Management, 7(1), pp. 48-60.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
692 Nicola Zech
Phillips, R., 2003. Stakeholder Theory and Organizational Ethics. San Francisco: Berrett-Koehler
Publishers.
Richardson, B., 1994. Crisis Management and Management Strategy – Time to “Loop the Loop”?
Disaster Prevention and Management1, 3(3), pp. 59-80.
Ritchie, B. W., 2004. Chaos, Crises and Disasters: a Strategic Approach to Crisis Management in the
Tourism Industry. Tourism Management, 25(6, December 2004), pp. 669-683.
Sautter, E. T., 1999. Managing Stakeholders a Tourism Planning Model. Annals of Tourism Research,
26(2), pp. 312-328.
Scott, W. R., & Davis, G. F., 2007. Organizations and Organizing - Rational, Natural and Open System
Perspectives. Pearson Prentice Hall.
Spillan, J., & Hough, M., 2003. Crisis Planning in Small Businesses: Importance, Impetus and
Indifference. European Management Journal, 21(No. 3), pp. 398-407.
Stephens, K. K., Malone, P. C., & Bailey, C. M., 2005. Communicating with Stakeholders during a
Crisis. Journal of Business Communication, 42(4), pp. 390-419.
Vilanova, L., 2007. Neither Shareholder nor Stakeholder Management: What Happens When Firms are
Run for their Short-term Salient Stakeholder? European Management Journal, 25(2), pp. 146-162.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Zane Zeile 693
POLICY INITIATIVES IN MATERNAL AND CHILDREN’S
HEALTH: A CASE OF LATVIA
Zane Zeile, University of Latvia, Latvia1
Abstract. Health, education and economic development being interrelated, an
improvement in a nation’s overall health will result in increased economic development.
Health is a part of human capital. This paper presents the results of a study aimed at
improving maternal and children’s health by analysing documents that describe public
policy and states the conclusions drawn. Logical constructive, interpretive and
comparative methods were used in the analysis. The research covered the period between
2000 and 2011. The results can organized in three ways depending on the recipient. In the
first group which is directed toward politicians and ministry officers, the focus of the
analysis was to determine the quality of the policy documents. It was found that the
quality of policy documents aimed to improve the maternal and children’s health has
improved over time. In the earlier “Strategy of Maternal and Children’s Health”, the
financial and human resources required to achieve the goals are not indicated; nor is the
time frame. In comparison, the later “Plan for Improving Maternal and Child Health in
Latvia for 2012-2014” specifies the necessary resources and the goals are measurable and
specific. The reporting mechanism is developed, and the responsible and involved
institutions are indicated. In the second group intended for doctors and researchers the
results of investigating the trends in maternal and children’s health in the period between
2000-2011 were reported. Although prenatal and infant mortality is decreasing, it is still
well below the EU average. The causes for the indications of poor health are prospective
parent smoking, unhealthy lifestyles by children and adolescents and insufficient access to
timely and quality care. The third group of research results which can be used by NGO’s
and local governments concentrated on intersectoral collaboration. Inter-sectoral
collaboration and education is emphasized in “Plan for Improvement of Maternal and
Child Health for 2012-2014” and in “Public Health Guidelines”.
Key words: policy initiatives, policy documents, maternal and child health, inter-sectoral collaboration
JEL code: I14
Introduction
The goal of this paper is to identify the trends in maternal and children’s health between 2000 and 2011 and
ascertain the level of improvement of the major policy documents in this field. The tasks undertaken by the
research were to analyze maternal and children’s health data, to determine main causes of poor health and to
1 Corresponding author – e-mail address: [email protected], telephone: +371 22825790
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
694 Zane Zeile
evaluate the following policy documents: “Strategy for Maternal and Children Health Care”, “Plan for
Improving Maternal and Children’s Health for 2012-2014”, “Public Health Strategy for 2004-2010”, the action
plan for the implementation of “Public Health Strategy for 2004-2010”, “Public Health Guidelines for 2011-
2017” and the evaluation of achievement of goals set in “Public Health Strategy for 2004-2010” The evaluation
criteria were the SMART criteria for goals, appropriate time frames, identification of responsible institutions
and resources. The reporting mechanism is also discussed for the “Public Health Guidelines for 2011-2017”. In
the third part of the research results the intersectoral collaboration is discussed.
Theoretical discussion
What influences maternal and children’s health?
The main question is: what influences maternal and children health? Is it the health care administration, the
quality of health care personnel, or the lifestyle factors of prospective parents? The data about pregnant women
who smoke (~10%) and the influence on stillborn babies by parents who smoke indicate that lifestyle factors
are most important. The quality of care is important as well. Improving the performance and quality of health
services has become a prime objective of policy reform worldwide. Reliance on innate professionalism to
deliver high quality, safe and effective services has come to be seen as curiously old fashioned. Ideas coming
from “new public management” (Ferlie et al in Wikstrom and Dellve, 2009) have increased schemes aimed at
measuring and shaping the performance of health care delivery. Pay for performance (P4P) schemes provide
that a portion of payment is based on performance, assesed against one or several measures.(Hahn, Mannion
and Davies in Wikstrom and Dellve, 2009). There is a growing evidence to suggest that public dissemination of
performance data can stimulate provider organisations to improve internal data collective systems and
processes and lever beneficial changes in staff behaviour. (Davies in Wikstrom and Dellve, 2009). However,
there is also a growing evidence to suggest that public disclosure of performance data can induce a range of
unintended and dysfunctional consequences for organisations and patients. (Smith, Mannion et al in Wikstrom
and Dellve, 2009.) In Latvia, this scheme might improve quality and safety of care, where it is especially
needed: maternal and children’s health services and raise the responsibility of doctors. In the situation of low
wages it might be of value. However, it might create stress and peer- pressure in professionals.
Another question: If the same problems exist in two successive documents does it mean that they
haven’t been solved in the period between development of documents? The first document formulating
strategy was developed in 2003 and the plan in 2012. The urgent call for intersectoral collaboration in
promoting adolescent and youth sexual and reproductive health which is a serious issue has not been
heeded.Inter-sectoral collaboration has been introduced as a new approach as compared to earlier
methods. Probably Latvia will need to learn from overseas experience to develop intersectoral
collaboration as a means for improving health. Community participation and intersectoral collabration are
core concepts in the present view of the promotion of healthy living.(WHO, 1986, 2005). (Cramer et al in
Wagemakers, 2010) has stated that community participation is required to design programs that address
the social determinants of health, and intersectoral collaboration has great potential for community action
to improve health. (Wagemakers et al. (2010) think that intersectoral collaboration focuses more on the
organisational level, whereas participation focuses mostly on the community level.
Innovative and current research
The research is based on a multifaceted approach in the analysis of the four policy documents using
the SMART principle and conforming to the reporting mechanism, indicated resources and the required
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Zane Zeile 695
time frame. The most important finding of this research is that there is a correlation between stopping of
twofold child birth benefit for pregnant women who timely register with doctor and decrease in timely
registering with doctor of pregnant women. Several drawbacks and tendencies in policy documents in
maternal and children’s health contain novelty as well.
The index of human development consists of the following three factors: economic development
(GDP per capita), health (life expectancy at birth) and educational level (adult literacy per 10000
inhabitants). The research was based on several assumptions. Health and education determine human
capital which consists of the abilities and skills that increase the potential for economic activity.
(University of Latvia, Institute of Social and Political Research, 2006/2007). Good health begins with
healthy prospective parents, mother and father which in turn result in healthy children. This is a
prerequisite for healthy society. Health is the basis for the ability to achieve a higher level of education
and to work effectively.
Health and economic development – challenges for the government
A challenge for Latvia’s government is to acknowledge the correlation between a healthy society and
workforce and successful economic development. Government must recognize that while GDP and
exports are current economic indicators, young people’s health is an indicator of future economic activity.
Many policy documents have been developed to promote it. “Plan for improvement of maternal and child
health from 2012-2014” and “Public health guidelines for 2011-2017” are based on international
documents, both within the EU and global.
The importance of maternal and child health as a key indicator of nation’s health has been defined in
several international documents. “Global strategy for women’s and children’s health” (UN Secretary
General, 2010) calls for united action by governments, global and regional institutions, health workers
and researchers. It encourages all to strengthen health care systems and join efforts across all sectors of
health, education and nutrition. It expresses the belief that a focus on the most vulnerable is required,
including women and children,the poorest, orphans and those living furthest from health care services.
Innovations in technology, treatment and the delivery of services are making it easier to provide better
and more effective care.(UN Secretary General, 2010.)
Another important document is “European Strategy for children and adolescent health development”
(WHO, 2005). It marks understanding that investment in early stages of life has lifelong impact, affecting
economic development and sustainability and establishment of a healthier society.
Research methods
The following policy analysis methods were used for drawing the main conclusions and tendencies in
the policy documents, logical constructive method (a type of analysis and synthesis), interpretation
method, comparative method, dynamic statistical rows (comparison of data in time).
Research results
The research results can be divided in three parts, defined by user groups:
1. The trends in maternal and children’s health in the period between 2000 and 2012. The users of
these research results might be researchers and doctors.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
696 Zane Zeile
2. The quality of documents, by comparing documents regarding mother and children’s health. The
target group that could use these results are politicians, ministry officers and developers of policy
in the Ministry of Health and Welfare.
3. The new emphasis on intersectoral collaboration and education in “The plan for improvement of
maternal and children’s health for 2012-2014” and “Public health guidelines for 2011-2017”. User
groups here are NGO’s, local self-governments, ministries, health organisations, government.
Maternal and infant health indicators from 2000-2012
Perinatal mortality has been decreasing since 2003. However it increased in 2009. Perinatal mortality
indicators are fluctuating. In rural areas infant mortality is generally lower that in urban areas. Perinatal
mortality has been decreasing in time. By 2007 perinatal mortality had reached the EU average level.
Source: Demography 2011, Central Statistical Bureau of Latvia
Fig. 1. Perinatal mortality per 1000 live births and stillbirths.
Causes of perinatal, neonatal and stillborn infants
(Trapencieris, 2009) has researched that causes of perinatal, neonatal and postneonatal deaths are
influenced by maternal attitudes towards pregnancy, mother’s and father’s lifestyle and status, as well as
health care quality. Significant causes for stillborn babies and perinatal deaths are the mothers’s and
father’s smoking before conception and maternal smoking during pregnancy. Various health problems of
the mother, pregnancy difficulties, as well as tobacco and alcohol use by the mother and father are the
main causes of infants not delivered to term, stillborn babies and infant deaths in 1st week of life.
Approximately 10% of pregnant women have smoked during pregnancy, 0.5% used alcohol, 0.1%
psychoactive substances (Public Health Agency, 2008).
Perinatal mortality per 1000 live births and stillbirths
0
2
4
6
8
10
12
14
16
18
20
1995 2000 2005 2010
Years
Ind
icat
ors
Total perinatal mortalityper 1000 live births andstil lbirthsstil lbirths
death at age 0-6 days
Total perinatal mortality per 1000 live births and stillbirths
Stillbirths
Death at age 0-6 days
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Zane Zeile 697
Figure 3 shows that maternal mortality is very high in Latvia. It is even more significant when
compared to other EU countries, especially Denmark, Finland and Estonia. Maternal mortality is another
indicator of the quality of perinatal health care in the country. It includes women, who have died during
pregnancy, childbirth and post-delivery period.
Source: Maternal and children’s health in Perinatal Period, Public Health Agency, 2009
Fig. 2. Maternal mortality in Latvia from 2001 to 2010.
It is important to begin antenatal care (before the 12th week of pregnancy) to ensure a good health
outcomes for the infant. However between 1.8 and 2.7% of women have not seen a doctor to check their
health or monitor their pregnancy. The rate peaked in 2009. The number of women who received
antenatal care before the 12th week of pregnancy has decreased from 89.6% in 2006 to 88.3 in 2011
(Figure 4). However, this indicator has varied each year. A lack of antenatal care might result in higher
perinatal mortality and infant death.
Diminishing number of pregnant women that register with a doctor in a timely manner might be
explained by the fact that until 2004 timely registration was significantly motivated by the twofold child
birth benefit. After 2004, mothers would receive a maternity benefit of 14 days additional leave from
work if they began antenatal care before the 12th week of pregnancy. This support was available for all
women. In 2008, socially insured individuals could receive a parental benefit of 70% of social payment
wages. This benefit was paid from the social payments that had been made. After the economic crisis
beginning in 2009, the standard rules were changed and the amount of the benefits was reduced. This
shows how health policy influences peoples behaviour. Additionally, according to the view of
gynecologists and birth specialists state paid pregnancy care health services not always are available,
therefore there is risk that antenatal care may not be ensured (Ministry of Health, 2012).
Maternal mortality (absolute numbers)
0
2
4
6
8
10
12
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
Years
Mat
ern
al m
ort
alit
y (a
bso
lute
nu
mb
ers
)
Maternal mortality(absolute numbers)
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
698 Zane Zeile
Source: Demography, 2011, Central Statistical Yearbook of Latvia
Fig. 3. Rate of women, who have started antenatal care before 12 th week
of pregnancy in Latvia from 2001 to 2011.
The number of smoking mothers and fathers is important factor affecting the health of newborns. Ten
percent of pregnant women smoked during pregnancy. In 2011 a significantly higher number of stillborn
babies were born to mothers, who smoked during pregnancy.
Smoking mothers accounted for:
9.5% of live born babies;
19.6% of stillborn babies.
For smoking fathers:
32.8% of live born babies;
34.8% of stillborn babies.
Children’s (1-14) and adolescent’s (15-17) health
One of the most important means to monitor children’s and adolescent’s health are regular preventive
check-ups.
General children’s health status is characterized by 3 health groups:
1st health group: children wihout chronic pathologies, organ and system functions without
pathologies, physical development according to age;
2nd health group – children with threats of development of chronic illnesses, acute illneses
develop with complications;
3rd health group- children with chronic illneses, genetic organ and system pathologies.
Antenatal care started from 12th week of pregnancy , rate
84
85
86
87
88
89
90
91
92
93
94
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Years
An
ten
atal
car
e s
tart
ed
fro
m 1
2 t
h
we
ek
of
pre
gnan
cy Antenatal care startedfrom 12th week ofpregnancy , rate
Antenatal care started bofore 12th week of pregnancy
94
93
92
91
90
89
88
87
86
85
84
An
ten
ata
l care
sta
rted
bo
fore
12th
week o
f p
reg
na
nc
y
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Zane Zeile 699
Source: Disease Prevention and Control Centre, Statistical Data about year 2011
Fig. 4. Children’s (3-14 years) division in health groups in Latvia from 1995-2011
Figures 4 and 5 show that the percentage of children in the 1st health group has not increased
significantly in the last 16 years. For adolescents it has decreased by two percentage points. Figure 5
presents the results of of calculations made by the author regarding health problems.
Source: calculations made by the author, based on data of Disease Prevention and Control Centre, Statistical Data Collection
about year 2011
Fig. 5. Rates of diseases for children and adolescents in Latvia, in 2011
Division of adolescents in health groups
0%
20%
40%
60%
80%
100%
1995 2000 2005 2010 2011
Years
Ind
icat
ors 3rd health group
2nd health group
1st health group
0
5
10
15
20
25
30
35
40
45
Val
ue
s
Impaired hearing Speech illnesses Other illnesses of posture
Types of illnesses
Types of illnesses for children and adolescents in
Latvia in 2011
children
adolescents
45
40
35
30
25
20
15
10
5
0
Valu
es
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
700 Zane Zeile
As shown in the Figure 5 the greatest rate of is other disorders of posture and impaired vision.
Impaired vision and scoliosis increase with age. Speech disorders decrease rapildly with age.
Health problems have been detected in 30% of children and in 35.5% of adolescents. Data shows that
health problems increase with age. From 1st grade pupils, already 32.3% have health problems and these
indicators have a tendency to increase.
Other factors which describe schoolchildren’s health are nutrition habits, prevalence of smoking and
alcohol use, as well as physical activity.
Lifestyle habits of school children – nutrition, alcohol use and smoking prevalence
According to Survey of Health Habits of Schoolchildren in Latvia, 14.6% of schoolchildren in school
year of 2005./2006 never eat breakfast on working days. Only 18.2% boys and 21.1% girls eat vegetables
daily, indicating a decrease when compared to school year 2002./2003. 39.8% of schoolchildren eat
sweets at least once a day. Amongs 11-year old girls the rate rapidly increased from 31% in 2001./2002
school year to 41% in the 2005./2006 school year.
The positive trend has been observed as well: a number of schoolchildren who drink cola once a day,
has decreased significantly.
TV viewing and computer use affect children’s vision and posture,as well as contributing to an
increase in obesity. Computer and TV viewing data for schoolchildren in 2006 show that 32.5% of boys,
and 30.2% girls watch TV at least 4 hours on work days. In 2001 among 15 year olds, 24% of the boys
and 8.9% of the girls have spent at least 3 hours a day at the computer.The number of girls in the 15 year
old girls group who who spend at least 3 hours a day increased significantly from 8.9 in 2001 to 29% in
15 year. This number has increased in all girls age groups.
Trends in alcohol use and smoking prevalence are very alarming. The number of 15 year old
schoolchildren, who have used alcohol at least once a week for boys varies. It was the lowest in 1994 at
17.5%. It appears to have peaked in 2008. at 27.8%. In 1994, 6.8% girls used alcohol at least once a week
and in 2006 it increased to 12.7% (Health Economics Centre, 2009).
The rate of smoking of both boys and girls who smoke regularly increased with age. Observing the
rate of smoking schoolchildren, it can be concluded that prevalence of smoking is not decreasing. The
rate of smoking boys in the last 3 years has stabilized, but among girls it continues to increase (Health
Economics Centre, 2009).
2. Comparative analysis of policy initiatives regarding maternal and children’s
health in Latvia
2.1. Comparative analysis of “Strategy of maternal and children’s health care in Latvia” with
“Plan for improvement of maternal and children’s health for 2012-2014”
The first document, devoted to improvement of maternal and children health was “The strategy of
maternal and children health care in Latvia” (2003). This document had many drawbacks when compared
with “Plan for improvement of maternal and child health for 2012-2014”. The main goals of the strategy
are a healthy next generation, reduced genetic pathologies and child morbidity, increase in birth rate by
5%, reduction in child mortality to average EU average. These goals are too vague, universal and not
specific. On the whole, they do not meet the SMART criteria for goals, which specifies that goals should
be specific, measurable, attainable, realistic and timely. In the document indicators were defined, but only
for some goals and they are vague, not being specific and measurable. The neccessary financial resources
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Zane Zeile 701
and responsible institutions are not identified. This is a serious drawback as it inhibits implementation and
control of policy stated in the policy documents.
However the positive side of this document is the development of possible course of action and states
the consequences of no action.
Caldwell and Mays (2012) describe the CLAHRCS programme in three levels.The macro-level
requires governmental action. At this level programme exists conceptually. In the meso-level, the
CLAHRC programme started to shape from policy to programme with specific scope of defined
deliverables. Micro-level frame is understanding of CLAHRCS as an organisation in its local contexts,
including its ability to fulfil the proposed model as policy and programme. The analysed policy
documents described in this article also have these three levels. The first is a policy initiative, a proposal
for Cabinet of Ministers. At the meso level, it is planned in greater detail with necessary resources,
actions and indicators. At micro-level, it is the implementation of the policy document in a health
organisation, for example Perinatal Health Care Centre.
2.2. Analysis of the “Public Health strategy for 2004-2010”
The goals for maternal and children health for the period 2007-2010 were included in “Public health
strategy for 2004-2010”. It was decided further not to develop a seperate document. “Strategy” and it’s
action program for 2004-2010. was accepted by the Cabinet of Ministers on the March 6, 2001. In this
document the goals formulated are mostly expressed as qualitative indicators but quantitative indicators
are used as well. This strategy and action program has been regularly monitored and reports on results
were prepared by Public Health Agency for the Ministry of Health. Each report covered completion of a
specific goal.
The strategy is well structured and clear. The implementation process, monitoring and evaluation has
been defined. The action program for implementation of “Public health strategy for 2004-2010” has
shown the neccesary financial resources required each year for state institutions, local-self governments
and NGO’s. Financing mechanism is based in budget reality and the implementation of activities is
planned to comply with the available budget. If the financial resources are only partially available then it
is indicated that the goals would be achieved only partially.
In the action program of “Public Health Strategy for 2004-2010” activities, required to reach each
goal, responsible institutions, the expected results and their indicators and schedule has been stated.
Monitoring progress and timely reporting of results are important requirements in implementation of this
document. It characterizes health policy planning process as a goal oriented process. Each second year
Ministry of Health handed in a report in the Cabinet of Ministers.
Evaluation of “Public Health guidelines for 2011-2017”
In “Public Health guidelines for 2011-2017” a new concept “health of mother, father and a children”
has been introduced. It is noteworthy because health habits of fathers and their attitude towards partners
pregnancy influence health of the children.
The aim of public health policy is to increase healthily lived life years and prevent early death, to
improve and restore good health.
The main directions for achieving these goals have been developed:
1) ensure partnerships and promoting equal opportunities for all inhabitants;
2) improve the health of pregnant women and children;
3) reduce non- communicable diseases.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
702 Zane Zeile
Health Economics Centre (2010) has developed policy results, action results and resultative indicators
to precisely show the goals and indicators of the guidelines. Indicator is a measure which shows when a
goal has been achieved.
There are several policy results, action results and resultative indicators that relate to maternal and
children’s health.
Policy result (A1): average newborn life expectancy has increased. Resultative indicators: average
newborn life expectancy for men (in years) has increased from 69.1 years of life in 2014 to 71.1 years of
life in 2017.
Action result (C1): informing of parents about effects of substance abuse on pregnant women’s and
fetal health. Resultative indicator: rate of smoking pregnant women has decreased from 9% in 2014 to 8%
in 2017 (Health Economics Centre, 2010).
From the results it is estimated that only very small improvements in health indicators have ocurred. It is
especially alarming regarding infant mortality and pregnant women, who have smoked during pregnancy.
Instead of setting the target low not to compromise the policy developers in case the target is not reached,
effective strategies should set high target goals to improve maternal and children’s health. Two important
indicators have not been shown regarding maternal health – maternal mortality and antenatally uncared for
women. These indicators are rising, therefore should have been included. Lack of those indicators might
result in lack of monitoring and diminished improvement in care as well and acess to care.
Evaluation of “Report on achieving goals set in public health strategy for 2004-2011”
“Report on achieving goals set in public health strategy for 2004-2011” is a document showing the
progress in achieving the set goals. Many goals relating to the health of mother, infant and children’s
health have either not been reached or only partially reached. The causes preventing the achievement of
goals were not analysed in this document. If they had been analysed, the goals might have been reached
more timely or completely. The third goal stated in the document is that by 2010. the health of newborns,
infants and pre-school children has to be improved significantly. The first subgoal required that Latvia be
in the top third European Region states in terms of the quality of work in reproductive health, antenatal,
perinatal and children’s health services. Unfortunately this subgoal has not been reached. The following
indicators of first subgoal of the third goal have not been reached: the number of antenatally uncared
women until 12th week of pregnancy is increasing, the number of Caesarean sections is increasing,
mother mortality is very high. Three more subgoals relating to children’s health, as well as life
expectancy have not been reached.
3. Intersectoral collaboration
Intersectora collaboration is an important trend in both public health administration and in improving
maternal and children’s health. Many institutions, ministries and local-self governments are included in
“Maternal and children’s health improvement plan for 2012-2014” and “Public Health guidelines for
2011-2017”. Nutbeam (1998 a, in Wagemakers et al (2010) has defined intersectoral collaboration as “a
recognized relationship between part or parts of different sectors of society which has been formed to take
action on an issue to achieve health outcomes or intermediate health outcomes in away which is more
effective, efficient and sustainable than might be achieved by the health sector acting alone.”
Intersectoral collaboration in “The plan for improvement of maternal and children health for 2012-2014”
main calls for intersectoral collaboration in mainly involving NGO’s in informal education in sexual and
reproductive health for adolescents and youth because they have longer experience in this area. It also calls
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Zane Zeile 703
for education in family planning and education in schools regarding these issues Here the Ministry of
Education and schoolteachers work as a team. Nutbeam (1998a in Wagemakers et al (2010) thinks that
health education, e.g., communication of information, skills and confidence necessary to take action to
improve health in itself is not enough to bring about behavioural effects. Therefore reorientation towards
health promotion, in particular community action in health, is needed and is now noticable.
The plan encourages cooperarating among state institutions, local self- governments and NGOs in
adolescent and youth sexual and reproductive health education. In 2011. the guidelines for local self-
governments in health education were confirmed. This will support local self-governments in sexual and
reproductive health education and support activities. To implement these guidelines beginning from 2012, it is
planned to introduce local self-governments coordinator net that will be responsible for public health issues.
Several local self-governments (Riga, Rēzekne, Talsi) have already been active in organising specialist work
groups in information exchange about violence against children. Primary health specialists and media should
play role in educating young parents about violence against children and children safety. (Ministry of Health,
2012). WHO and EU institutions also should be team players along with government, local self-governments
and NGO’s. The key players, who ensure intersectoral collaboration in implementation the “The plan for
improvement of maternal and children health for 2012-2014” are the following: The Ministry of Health,
Ministry of Welfare, World Health Organisation, National Health Agency, Association of Latvian
Gynecologists and Birth specialists, Health Inspection, Disease Prevention and Control Centre, Riga Stradiņš
University.
Conclusions
1. Analysis of data and time-series show that the indicators of maternal and infant health during period
2000-2012. have not improved much. Infant, perinatal and neonatal mortality have decreased during the
period 2000-2012, but these indicators fluctuate from year to year, and do not indicate an overall
downward trend. Maternal mortality remains high. Antenatal care started from 12 th week of pregnancy
has desreased from 92.9 in 2003 to 88.3 in 2011. Most of the indicators are below EU average.
2. The policy document analysis shows that diminished number of women who have started timely
pregnancy care might be explained by changes in social benefit system, because these indictors
correspond to the cessation of twoforld child birth benefit.
3. There are serious drawbacks in “The strategy of maternal and children health care” (2003), when
compared with “The plan for improvement of maternal and children health for 2012-2014” and
“Guidelines for public health for 2011-2017”. In the first document there is a lack of SMART criteria
for goals, fiancial resources, responsible insitutions and time frame are not indicated. The latter two
documents are well prepared, with the SMART criteria present. In time, the policy documents have
improved in many aspects.
4. Intersectoral collaboration mentioned in “The plan for improvement of maternal and children health
for 2012-2014” focuses sexual and reproductive health education for adolescents and youth. The team
players here are schools, NGO’s and local self-governments. Violence against children has been
recognized as a problem, which has not yet fully been researched. Local self-governments, which
have started work groups in information exchange in violence against children are indicated.
Proposals
1. Trends in perinatal mortality and maternal motality asks for more detailed research on causes of poor
maternal and infant health.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
704 Zane Zeile
2. Well-functioning perinatal care-system should be created and a perinatal and maternal mortality audit
be implemented. (Wolfe, 2012) states that prental care can help to undo past harms, alter risky
behaviours, build capacity for health. Because the pregnant woman is the intended recipent of
services, her compliance and satisfaction tends to be primary. Goals that focus on the mother’s health
include decreasing maternal mortality, decreasing short-term maternal diseases and generally
improved maternal health and well-being.
3. Policy document development might be improved by creating policy briefs before developing
strategies, guidelines or plans. (Lavis et al, 2009) describes that policy briefs allow to mobilise a full
range of research evidence for a high priority issue. It can be of help to peolpe who are responsible for
making desicions about health policies and programmes and those who support policy makers.Policy
briefs take much shorter time to develop and allow to consider whether it is a high priority issue which
is being addressed. The policy brief should describe the problem, costs and consequences of options to
adress the problem, and the key implementation considerations.
4. Intersectoral collaboration should be strengthened and developed between ministries, local self-
governments, NGO’s and foreign organisations (EU, WHO, UNICEF). Policy developers and local self-
governments as well as other partners might use the model developed by Wagemakers et al. (2010). The
models or framework has structured key variables. Variables that local collaboration partners might use
are regard for participant’s expectations, competences, experience, expertise. Variables pertinent to
parnerships are: the role, task and responsibility and structure, leadership management. The evaluation of
outcomes should be based on percieved effectiveness, benefits and costs.
5. Programs for improving adolescent’s health should be developed to reduce the impact of films, media,
advertisments and marketing that create unhealthy habits such as smoking and excessive alcohol use,
obesity and sedentary lifestyle.
Bibliography
Bronnum-Hansen Henrik, 2000. Socioeconomic differences in health expectancy in Denmark,
Scandinavian Journal of Public Health, 28, 194 p. [Online] Available at: http://sjp.sagepub.
com/content/28/3/194.
Caldwell and Mays, 2012. Stydying policy implementations using a macro, meso and micro frame
analysis: the case of Collaboration for Leadership in Applied Health Research (CLAHRC)
programme, Research Policy and Systems, 10, 32 p. 10/1/32.
Central Statistical Bureau of Latvia, 2011. Demography 2011, Riga: Central Statistical Bureau of Latvia,
pp. 86-87.
Hogan C. Margaret et al., 2010. Maternal mortality for 181 countries, 1980-2008: a systematic analysis of
progress towards Millenium Development Goal 5, Lancet, 375: pp. 1609-1623. [Online] Available at:
http://www. thelancet.com.
Lavis et al, 2009. SUPPORT Tools for evidence – informed policymaking 13: preparing and using policy
briefs to support evidence-informed policymaking, Health Research Policy and Systems, Suppl 10:
13 p. [Online] Available at: http://www.health-policy-systems.com/content/7/S1/s13.
Mackenbach et al, 2008. Socioeconomic inequalities in health in 22 European Countries, The New
England Journal of Medicine, 358, pp. 2466-2481.
Mackenzie Mhairi, 2008. “Doing” public health and “making” public health practitioners: Putting policy
into practice in “Starting Well”, Social Science and Medicine, 67, pp. 1028-1037. [Online] Available
at: http://www.elsevier.com/locate/socsciemed [Accessed 14 February 2013].
Ministry of Health, 2012. Plan for improvement of maternal and children health for 2012-2014, Riga:
Ministry of Health, pp. 10, 14-15, 26-28, 38-57.
Ministry of Health, 2011. Public Health Guidelines for 2011-2017, Riga: Ministry of Health, pp. 9-10.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Zane Zeile 705
Ministry of Health, 2004. “Public Health Strategy” implementation action program for 2004-2010, Riga:
Ministry of Health.
Ministry of Health, 2003. Strategy of maternal and children health care, Riga: Ministry of Health.
The Order of Ensuring Help for Deliveries, 2006. The rules of Cabinet of Ministers, No. 611, 25 July
2006, Riga.
Partnership for Maternal, Newborn and children’s Health, 2010. Global strategy for woman’s and
children’s health, UN Secretary General.
Public Health Agency, 2009. Maternal and children health during perinatal period, Riga: Public Health
Agency, pp. 9, 19-23.
Public Health Agency, 2009. Newborn register in Maternal and children health during perinatal period,
Riga: Public Health Agency.
Richter et al, 2009. Socio-economic differences and adolescent health, Social Science and Medicine, 69,
pp. 396-403.
Tabuns et al, 2006/2007. Latvia. Human Development Report. Human Capital, Riga: University of
Latvia, Institute of Social ad Political Research.
Trapencieris, Māris. Women, who have used dependency creating substances and their newborns. Riga.
Wagemakers et al, 2010. Community Health Promotion: a framework to facilitate and evaluate supportive
environments for health”, Evaluation and Program Planning, 33, pp. 430.
Wikstrom E. and Dellve L., 2009. Contemporary leadership in health care organisations: fragmented or
concurrent leadership, Journal of Health Organisation and Management, Vol. 23, Iss 4., 411 p.
Wolfe W. Matthew, 2012. Mother and child: a multi- determinant model for maternal and infant health
outcomes in urban, low-income communities and the effectiveness of prenatal care and other
interventions. [Online] Available at: http://ssrn.com/abstract=979683 [Accessed 20 June 2013].
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
706 Anna Zhigalova
CONSUMER ATTITUDES AND BEHAVIOUR
Anna Zhigalova, University of Latvia, Latvia1
Abstract. Ability of attitudes to predict behavioural intentions continues to be a
major focus of theory and research. This article reviews theoretical framework on
attitude and behaviour correlation that experiences significant progress along with the
changing environment and covers research that is investigating behavioural differences
through various lifestyle segments. Sparkling wine category research investigates
consumer attitude to the category and particular brands from a lifestyle segmentation
perspective. Through understanding of brands’ positions in mind of consumers (brand
continuum, brand attraction, image, levers) according behavioural reactions are
estimated, evaluating how rational and emotional brand attractiveness influence the
intention to act (willingness to buy the brand, to recommend or to pay premium price).
The study confirmed that there was a significant association between the lifestyle of the
consumers and the brands used. It was concluded that consumers often choose products,
services and activities over others because they are associated with a certain lifestyle.
Key words: attitude-behaviour relation, intention, lifestyle
JEL codes: D03, M31
Introduction
Ability of attitudes to predict behavioural intentions continues to be a major focus of theory and
research. Significant amount of consumer literature is devoted to the attitude-behaviour relationship
where attitude is treated as a function of beliefs and associated values (Bass and Talarzyk, 1972; Kraft,
Granbois and Summers, 1975). The attitude concept played a central role in scientific attempts to
understand human thoughts and behaviour. Throughout the 20th
century, the concept has had a
tremendous impact on the social sciences. Perhaps the most fundamental assumptions underlying the
attitude concept are the notion that attitudes, in some way, guide, influence, direct shape or predict actual
behaviour.
Lifestyle is the most holistic segmentation approach that takes into account everything that might help
marketers identify and reach desirable target markets (Gonzalez and Bello, 2002). Typically, a traditional
lifestyle analysis segments markets using variables from the social sciences (e.g., psychology, social
psychology) in combination with the commonly used demographic descriptors (e.g., age, race, sex). The
underlying premise is that people who are similar in terms of such things as attitudes, opinions,
motivation, orientation, access to resources, values, and interests are also similar as consumers. Segments
are defined in terms of how consumers choose to spend their time and money. They deal with everyday
behaviourally oriented facets of people as well as their feelings, attitudes, interests and opinion. A
lifestyle marketing perspective recognizes that people sort themselves into groups on the basis of the
things they like to do, how they like to spend their time and how they choose to spend their disposable
1 Corresponding author – e-mail address: [email protected], telephone: +371 29548343
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Anna Zhigalova 707
income. Lifestyle is an important concept used in segmenting markets and understanding target
customers, which is not provided by the study of demographics alone. Many researchers have focused on
identifying the lifestyle of the consumers’ to have better information about them.
Demographics do not give a complete picture of the consumer, thus hampering the marketer in
segmenting the market to its full potential (Cooper, 1984). Bone (1997) indicates that the use of
demographic characteristics such as age, income and employment status can be misleading factors while
segmenting markets. The use of chronological age as a tool for segmentation is not as closely related to
purchase behaviour as the psychological age (Barak & Rahtz, 1999; Barots, 1990). Though income is
highly related to buying behaviour, it is generally used in segmenting the market; but it does not take into
consideration factors such as activities, interest, health (Bone, 1995; Burnett & Wilkes, 1989; Moehrle,
1993). Social class adds a greater depth to demographics but it has to be supplemented by other
information to give a meaningful insight of the individual characteristics. Lifestyle segmentation has been
a very useful concept for marketing and advertisement planners. (Wells and Tigert, 1971)
By incorporating psychographics information with demographics, the marketer will better understand
the wants and needs of the consumers. Psychographics was a term first introduced by Demby (1974) putting
together psychology and demographics. Psychographic or Lifestyle refers to consumers’ activities Interests
and Opinion. More specifically it focuses on what people like to do, what are their areas of interests, and
what are the opinion people hold on various matters (Lazer, 1963, Plumer 1974). Hence lifestyle patterns
provide broader views about the consumers. The basic premise of lifestyle research is that the more the
marketers know and understand their customers, the more effectively they can communicate to them and
serve them. (Kaynak and Kara, 1996). This study used the lifestyle analysis to identify market segments.
The main purpose of this study is to empirically examine the association between the consumers’ general
life styles and their consumption patterns within the sparkling wine category.
Theoretical Background
Earlier researches on attitude correlation with consumer behaviour was concerned primarily with
demonstrating the predictive validity of the attitude construct (Wilkie and Pessemier, 1973) and has been
demonstrated that changes in beliefs lead to changes in attitude (Lutz, 1975), that people combine belief
and evaluation in the formation of an attitude (Bettman, Capon and Lutz, 1975). Attempts to predict
behaviour from attitudes are largely based on a general notion of consistency. It is usually considered to
be logical for a person who holds a favourable attitude toward some object to perform favourable
behaviours, and vice versa.
According to Ajzen et al (1977), attitudinal and behavioural entities may be viewed as consisting of
four different elements: the action, the target at which the action is directed, the context in which the
action is performed, and the time, at which it is performed. The generality or specificity of each element
depends on the measurement procedure employed. Given action is always performed with respect to a
given target, in a given context, and at a given point in time. Criteria based on multiple observations of
behaviour generalize across one or more of the four elements. For example, when the behavioural
observations constituting the criterion measure involve a very heterogeneous sample of targets, the target
element is essentially left unspecified. However, when the different targets constitute a more
homogeneous set, their common attributes determine the target element. Similar considerations apply to
the definition of the action, context, and time elements.
The central thesis of Ajzens’ ‘Attitude-Behavior Relations: A Theoretical Analysis and Review of
Empirical Research’ is that the strength of an attitude-behaviour relationship depends on the degree of
correspondence between attitudinal and behavioural entities. Considering target and action elements alone, two
attitudinal predictors can be identified that deserve special attention. The most common measure specifies a
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
708 Anna Zhigalova
given target without reference to a particular action. This predictor may be termed attitude toward a target. Of
less frequent use is attitude toward an action, a predictor that specifies both action and target elements. A
similar distinction can be made with reference to behavioural criteria. When the criterion is an index based on
observations of heterogeneous behaviours with respect to a given target, only the target element is specified
and the resulting measure may be called a multiple-act criterion. When only one behaviour toward a given
target is observed, both target and action elements are specified and we obtain a single-act criterion.
Two major distinguishable conceptualizations of attitude could be defined in the literature. Multi-
dimensional that consider attitude to be a complex construct comprised of two or more components. In
accordance with this view, Krech, Crutchfield and Ballachey (1962) define attitude as an enduring system
of cognitions, feelings and response dispositions centered about a single object.’ Also, Rosenberg and
Hovland (1960) describes attitude as a ‘predisposition to some class of stimuli with cognitive, affective
and behavioural responses.’ Attitude-behaviour relationship are considered to be stronger when the
components are consistent (Rosenberg and Hovland, 1960; Rosenberg, 1968 and is suggested that
cognitive, affective and conative evaluations of objects are distinguishable aspects of attitude and that
simultaneous consideration of all three components should be most predictive of overt behaviour
(Greenwald, 1968). Failure to find a consistent direct relationship between attitude and behaviour may be
due to a failure to measure people’s standing on all three components of attitude and to employ these as
simultaneous and/or independent predictors of behaviour.
The major alternative considers attitude as a single affective construct. For example, Thurstone
defines attitude as “the affect for or against a psychological object” (1931). Fishbein (1967) argues that
scaling techniques have in common the characteristic that they place individuals on a dimension of affect.
This affect for or against an object is typically inferred from an assessment of people’s beliefs about the
object and the evaluative aspect of those beliefs. Therefore, alternative approaches to the measurement of
attitude provide alternative measures of the same thing and should yield the same results. Obtained
differences among alternative instruments in measurement of an attitude, according to this approach,
would be due to measurement error and not the assessment of alternative components.
A third and intermediate position is maintained in the paper “Attitude Measurement and Behaviour
Change: A Reconsideration of Attitude Organization and Its Relationship to Behaviour” by Richard P.
Bagozzi and R. Burnkran (1979). According to their view, attitude is a complex construct comprised of
cognitive and affective components. These components simultaneously account for behavioural
intentions. These intentions, in turn, lead to overt behaviours.
Katz and Stotland (1959) and Rosenberg (1968) point out that all true attitudes must have both
cognitive and affective content, although they need not include a conative component. Similarly,
Rosenberg (1968) stresses that, with the exception of cognitive dissonance, most of the consistency
theories give only token recognition to the definition of attitude as an internally consistent structure of
affective, cognitive and behavioural components; but, in practice, the behavioural component is usually
treated as a dependent variable. The two component attitude position is consistent with the fact that self-
reported behaviours and stated intentions to respond have frequently been treated as dependent effects of
affective and/or cognitive variables (e.g., Tittle and Hill, 1967; Warner et al, 1969, Rogers and
Thistlethwaite, 1970). Intentions appear to be at a lower level of abstraction than the cognitions and
affective feelings on which they are based.
Ajzen summarized theories of predicted behaviour in his study ‘Nature and operations of attitudes’
(Annu. Rev. Psychol. 2001): most studies concerned with the prediction of behaviour from attitudinal
variables were conducted in the framework of the theory of planned behaviour (Ajzen 1991) and, to a
lesser extent, its predecessor, the theory of reasoned action (Ajzen & Fishbein 1980). According to the
theory of planned behaviour, people act in accordance with their intentions and perceptions of control
over the behaviour, while intentions in turn are influenced by attitudes toward the behaviour, subjective
norms, and perceptions of behavioral control. The cognitive foundations of these factors are consistent
with an expectancy-value formulation. Support for the theory in general is summarized in a meta-analysis
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Anna Zhigalova 709
(Armitage & Conner 2000a) and a review of the literature (Sutton 1998), and another review summarizes
its applications to health-related behaviour (Conner & Sparks 1996).
The lifestyle concept was introduced by Bell (1958), Rainwater, Coleman and Handel (1959), and
Havinhurst and Feigenbaum (1959), pointing to its potential significance in understanding, explaining
and predicting consumer behaviour. William Lazer introduced the concept of lifestyle patterns and its
relationship to marketing in 1963. He defined lifestyle pattern as a systems concept. It refers to a
distinctive or characteristic mode of living, in its aggregate and broadest sense, of a whole society or
segment. The aggregate of consumer purchases, and the manner in which they are consumed, reflect a
society’s [or] consumer’s lifestyle. Moore (1963) suggested still another definition of lifestyle to bridge
conceptual and operational interpretations of the term. The term “life style” suggests a patterned way of
life into which people fit various products, events or resources. It suggests that consumer purchasing is an
interrelated, patterned phenomenon, products are bought as part of a “lifestyle package”.
Weber (1922) already used the term “Way of life” and the term “lifestyle” for persons in a certain status-
group, based on as well social economic as on cultural resources. Lifestyle is described as ‘the behaviour
and rules used within a certain status group in those social interactions that are outside the economic sphere,
which one regards in order to belong to a social group and by which one can distinguish oneself from
others’ (Ouwehand et al). This behaviour is led by the individual’s choices but these choices take place
within a limited number of opportunities, depending on one’s structural position in society. Economic
classes and status groups are in this way connected but do not completely coincide. Decades later Herbert
Gans (1991) distinguished five ‘ways of life’ for urban residents. From the end of the seventies, the work of
Bourdieu has been very influential (Parker, 2004; Devine & Savage, 2005). Bourdieu builds on the work of
Weber and distinguishes economic, cultural and social capital. Lifestyles are seen as a product of the volume
and the interaction between economic and cultural capital (Bourdieu 2001). Ganzeboom (1998) states that
the important difference in stated preferences and revealed preferences of different generations have not
received much attention. Bourdieu assumes an obvious path of someone’s life, but people make also
rationale choices (Anderiesen and Reijndorp 1999). Gerhard Schulze states in his book
‘Erlebnisgesellschaft’ that the cultural hierarchy has lost ground to a much more horizontal experience
society like a market model, due to growing wealth and opportunities (in Germany). “Where the cultural
capital of Bourdieu will be built up through the years according to the lines of the philosophy of life, the
choice on the experience market is a question of the moment. Why shouldn’t these choices differ from
moment to moment and from domain to domain?” (Van der Wouden and Kullberg, 2002). Jansen states
after describing the way lifestyle has been conceptualized in different disciplines: “The approaches show
important differences in their definition of lifestyle and in the factors through which it is expressed and
through which it can be measured. The concept of lifestyle may vary from a limited characteristic to a broad
spectrum of behaviour and various psychological and social variables.
Research on the sparkling wine category
The research investigates consumer attitude to the category of sparkling wines in general and concrete
brands in particular and through understanding of brands’ positions in mind of consumers (brand
continuum, brand attraction, image, levers) estimates according behavioural reactions, evaluating how
rational and emotional brand attractiveness influence the intention to act (willingness to buy the brand, to
recommend or to pay premium price).
Research methodology: quantitative survey, face-to-face interviews. Target group: Inhabitants of
Latvia, aged 18-74, drink champagne/sparkling wine at least once per three months. Sample size: 511
target group representatives.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
710 Anna Zhigalova
The research designed to identify how consumer’s attitude towards brands influence behaviour
through Brand Potential Index executed by GfK Latvia.
Acceptance of Premium
PricingQuality
Brand Awareness
Uniqueness
Identification with Brand
Empathy with the
Brand
Confidence in the Brand
Willingness to recommend
Brand
BuyingInterest
Brand Bonding
actio
n-orie
nted facets rational facets
facetsemotional
BrandPotential
Index
Source: GFK Research
Fig. 1. Brand Potential Index
The Brand Potential Index is operationalized through 10 different facets. It measures intersectorally
the attractiveness of a brand according to the perception of customers. The Brand Potential Index (BPI)
reflects their emotional and rational valuation as well as the behavioural willingness vis-à-vis the brand
and therefore comprises all relevant aspects of the attitudinal brand strength.
Source: GFK Research
Fig. 2. Brand Potential Dimensions
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Anna Zhigalova 711
This measure allows for a valid picture of the relative attractiveness of the brand within its
competitive environment and makes a future-oriented evaluation of the brand success possible.
In BPI dimensions consumer’s attitudes towards brands are measured – how emotional and rational
attitude leads to the behaviour – willingness to buy the brand, pay premium price and willingness to
recommend.
Among this competitive set, Rīgas Šampanietis has the highest scores, winning in terms of rational
and emotional attitude from consumers and, accordingly, willingness to act.
The weakest sides of Rīgas Šampanietis are price premium (the target group is not willing to pay
more for this brand) as well as Attachment.
Source: GFK Research
Fig. 3. Brand Potential Dimensions
If comparing to Martini Asti, Rīgas Šampanietis is weaker in most of the facets, except awareness,
scoring the worst particularly in rational attachment. Based on these diagrams could be concluded that
attitude has strong relation to the behaviour of consumer’s brand choice and loyalty.
The most attractive for the target group and thus the strongest brand from all the brands observed is
Martini Asti. Rīgas Šampanietis is quite close and can be marked as one of the strongest brands in the
market. To maintain or improve it’s positions marketing strategy of acquiring stronger emotional link
with the consumers required.
If looking at the existing and potential target group of Rīgas Šampanietis, we can see that it is quite
similar to the Champagne/ sparkling wine consumer on average – the largest segment is Open-minded
(more young people, with higher education, searching for self-realization and enjoyment of life). At the
same time, there are more than on average segment Settled (which is older target group, traditional-
oriented people, desiring peace and harmony) representatives among the Rīgas Šampanietis regular
consumers.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
712 Anna Zhigalova
Source: GFK Research
Fig. 4. Brand Potential Score
To sum up, – Dreamers, Adventurers and Open-minded covers the 45% of the Rīgas Šampanietis
customers and is recommended direction for the further communication. Still, it has to be taken into account
that these target groups are highly occupied by the main competitor of Rīgas Šampanietis Martini Asti.
Source: GFK Research
Fig. 5. Consumer Segments vs. Brand Preference
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Anna Zhigalova 713
The largest segment in the Champagne market is Open-minded, it covers almost the third part of the
market. There are more settled segment representatives among Rīgas Šampanietis regular consumers than
on average in the market and also comparing to the other brand consumers. There are smaller number of
adventurers among Rīgas Šampanitetis consumers, comparing to other brand consumers, as well as
average in the market.
Source: GFK Research
Fig. 6. Structure of Value Orientation and Drivers of the Consumption
As a research results showed, sparkling and Champagne category is preferred by open-minded
segment, which is in the sector ‘to live a passionate life’, interested in adventures, fun, freedom and
innovations. Rīgas Šampanietis is also strong in settled segment that is characterized by being devoted to
traditions, modesty and precaution.
Conclusions
Through evolution of studies, attitude-behaviour relationship remains a central element in theoretical
as well as applied work, based mainly on the assumption that attitudes can explain and predict social
behaviour. When empirical evidence concerning the attitude-behaviour relationship appeared to
challenge, some investigators came to the defence of the attitude construct by questioning the validity of
the instruments used to assess attitudes. Other investigators either resigned themselves to the conclusion
that attitudes are poor predictors of behaviour or suggested that their impact on behaviour is moderated by
situational factors, by personality traits, or by characteristics of the attitude itself. Attitude-behavioural
path depend on a complex of various determinants, as latest researches report, it may vary if considering
cross-national differences, or different product groups, or different consumer age groups or different
lifestyles.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
714 Anna Zhigalova
Concepts of life, values and intentions of the consumers are so multifaceted that demographic target
group analysis and one-dimensional target group models often are too limited to understand consumer
behaviour and to create marketing activities oriented to their needs. Lifestyle approach is an instrument to
investigate values, behaviour and interests of the consumers, to allow marketing activities to be focused
to the target group specific needs and use in the complete marketing process.
In the 21st century, “Lifestyle Marketing” has become the magic buzzword to enthral customers after
the 80s “Niche Marketing” and the 90s “Branding” craze. Which allows to center promotional approach
on the interests, values, attitudes and way of life of consumer target group. In lifestyle marketing one
categorizes customers based on their interests, activities and opinions. Lifestyle marketing attempts to
group customers according to some amalgamation of three categories of variables: activities, Interests,
and Opinions and identifies the potency of a customer’s chosen lifestyle for determining the sort of
products to be purchased and the specific brands that are further likely to appeal to the chosen lifestyle
segment. Lifestyle marketing has assumed a new paradigm in today’s competitive business world.
Lifestyle Marketing necessitates and works best when companies are able to connect with the lifestyle of
their existing and potential customers by developing effective marketing strategies that seamlessly fit
their way of living. It provides tremendous opportunities to the companies to directly target a specific
type of consumer who will most likely be an enthusiast of the company’s specific products and thus,
provide a competitive business advantage to the company and generate more business.
The paper gives an overview of the theories according to the model of the consumer behaviour
process. The aim of the article was to give a view on consumer attitude – behaviour relationship, showing
how attitudes differ between lifestyle segments, particularly illustrated by a sparkling wine research and
to support the assumption that consumers often choose products, services and activities over others
because they are associated with a certain lifestyle.
Bibliography
Abrams D., Ando K., Hinkle S., 1998. Psychological attachment to the group: cross-cultural differences
in organizational identification and subjective norms as predictors of workers’ turnover intentions.
Pers. Soc. Psychol. Bull, pp. 1027-39.
Ajzen I., Fishbein M., 1977. Attitude-Behaviour Relations: A Theoretical Analysis and Review of
Empirical Research, Psychological Bulletin, 84 (1977), pp. 888-918.
Ajzen I., 1991. The theory of planned behaviour. Org. Behav. Hum. Decis. Process, pp. 179-211.
Bagozzi P., Burnkrant Robert E., Attitude Measurement and Behaviour Change: A Reconsideration of
Attitude Organization and Its Relationship to Behaviour. [Online] Available at: http://www.
acrwebsite.org/ search/view-conference-proceedings.aspx?Id=9573 [Accessed 24 January 2013].
Bardis P. D., 1961. A Religion Scale, Social Science, 36, pp. 120-123.
Bass F. M., Talarzyk W. W., 1972. An Attitude Model for the Study of Brand Preference, Journal of
Marketing Research, 9, pp. 93-96.
Bettman J. R., Capon N., and Lutz R. J., 1975. Multiattribute Measurement Models and Mul-
tiattribute Attitude Theory: A Test of Construct Validity, Journal of Consumer Research, 1,
pp. 11-15.
Conner M., Sparks P., 1996. The Theory of Planned Behaviour and Health Behaviours. In Predicting
Health Behaviour: Research and Practice with Social Cognition Models, Bucking- ham, England:
Open Univ. Press, ed. M Conner, P Norman, pp. 121-62.
Conner M., Heywood-Everett S., 1998. Addressing mental health problems with the Theory of Planned
Behaviour. Psychol. Health Med., pp. 87-95.
Crano W.D., 1997. Vested interest and symbolic politics – observations and recommendations: reply to
Sears (1997). J. Pers. Soc. Psychol., pp. 497-500.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
Anna Zhigalova 715
Faulkner J. E. and De Jong G. F., 1969. Religiosity in 5-D: An Empirical Analysis. In J. P. Robinson and
P. R. Shaver (eds.), Measures of Social Psychological Attitudes. Ann Arbor: University of Michigan,
Institute of Social Research.
Fishbein M., 1967. A Consideration of Beliefs and Their Role in Attitude Measurement. In M. Fishbein
(ed.), Readings in Attitude Theory and Measurement. New York: Wiley.
Forsythe S., 2012. Purchase intention for luxury brands: a cross cultural comparison. J Bus Res 2012,
65(10), pp. 1443-51, Journal of Business Research 65 (2012), pp. 1395-1398.
Gil L., Kwon K., Good L., Johnso W., 2012. Impact of self on attitudes toward luxury brands among
teens. J Bus Res 2012, 65(10), pp. 1425-33, Journal of Business Research 65 (2012), pp. 1395-1398.
Greenwald A., 1968. On Defining Attitude and Attitude Theory. In Greenwald A. G., Brock T. C. and
Ostrom T. M. (eds.), Psychological Foundations of Attitudes. New York: Academic Press.
Kastanakis M.N., Balabanis G., 2012. Between the mass and the class: antecedents of the “band-wagon”
luxury consumption behavior. Journal of Business Research, 65, 2012, pp. 1395-1398. J Bus Res.
2012, 65(10), pp. 1399-407.
Katz D. and Stotland E., 1959. A Preliminary Statement to a Theory of Attitude Structure and
Change. In Koch S. (ed.), Psychology: A Study of a Science, Vol. 3, New York: McGraw-Hill,
pp. 423-475.
Kokkinaki F., Lunt P., 1999. The effect of advertising message involvement on brand attitude
accessibility. J. Econ. Psychol., 20, pp. 41-51.
Kothandapani V., 1971. Validation of Feeling, Belief, and Intention to Act as Three Components of
Attitude and Their Contribution to Prediction of Contraceptive Behaviour, Journal of Personality and
Social Psychology, 19, pp. 321-333.
Kraft F. B., Granbois D. H. and Summers J. O., 1973. Brand Evaluation and Brand Choice: A
Longitudinal Study, Journal of Marketing Research, 10, pp. 235-241.
Krech D., Crutchfield R. S. and Ballachey E. L., 1962. Individuals in Society. New York: McGraw-Hill.
Lertwannawit A., Mandhachitara R., 2012. Interpersonal effects on fashion consciousness and status
consumption moderated by materialism in metropolitan men. J Bus Res. 2012, 65(10), pp. 1408-16.
Journal of Business Research, 65, 2012, pp. 1395-1398.
Lutz R. J., 1975. Changing Brand Attitudes Through Modification of Cognitive Structure, Journal of
Consumer Research, 1, pp. 49-59.
Lutz R. J., 1977. An Experimental Investigation of Causal Relations Among Cognitions, Affect, and
Behavioral Intention, Journal of Consumer Research, 3, pp. 197-208.
McGuire W. J., 1960. Cognitive Consistency and Attitude Change, Journal of Abnormal and Social
Psychology, 60, pp. 345-353.
Millar M., Millar K., 1998. The effects of prior experience and thought on the attitude-behaviour relation.
Soc. Behav. Pers., 26, pp. 105-114.
Ostrom T. M., 1969. The Relationship Between the Affective, Behavioural, and Cognitive Components
of Attitude, Journal of Experimental Social Psychology, 5, pp. 12-30.
Poppleton P. K. and Pilkington G. W., 1963. The Measurement of Religious Attitudes in a University
Population, British Journal of Social and Clinical Psychology, 2, pp. 20-36.
Posavac S., Sanbonmatsu D., Fazio R., 1997. Considering the best choice: effects of the salience and
accessibility of alternatives on attitude-decision consistency. J. Pers. Soc. Psychol., 72, pp. 253-261.
Prislin R., Ouellette J., 1996. When it is embedded, it is potent: effects of general attitude embeddedness on
formation of specific attitudes and behavioral intentions. Pers. Soc. Psychol. Bull., 22, pp. 845-861.
Rogers R. W., Thistlethwaite D. L., 1970. Effects of Fear Arousal and Reassurance on Attitude Change,
Journal of Personality and Social Psychology, 15, pp. 227-233.
Rosenberg M. J. and Hovland C. I., 1960. Cognitive, Affective and Behavioural Components of
Attitudes." In Rosenberg M. J., Hovland C. I. (eds.), Attitude Organization and Change: An Analysis
of Consistency Among Attitude Components. New Haven: Yale University Press.
New Challenges of Economic and Business Development – 2013
May 9 - 11, 2013, Riga, University of Latvia
716 Anna Zhigalova
Rosenberg M. J., 1968. Hedonism, Inauthenticity, and Other Goads Toward Expansion of a Consistency
Theory. In Abelson R. P., et al. (eds.), Theories of Cognitive Consistency: A Source-Book. Chicago:
Rand McNally.
Schultz P., Oskamp S., 1996. Effort as a moderator of the attitude-behaviour relation- ship: general
environmental concern and re- cycling. Soc. Psychol. Q., 59, pp. 375-383.
Sears D., 1997. The impact of self-interest on attitudes – a symbolic politics perspective on differences between
survey and experimental findings: comment on Crano (1997). J. Pers. Soc. Psychol.,72, pp. 492-496.
Shukla P., Purani K., 2012. Comparing the importance of luxury value perceptions in cross- national contexts.
J Bus Res., 65(10), 2012, pp. 1417-1424. Journal of Business Research, 65, 2012, pp. 1395-1398.
Sutton S., 1998. Predicting and explaining intentions and behaviour: How well are we doing? J. Appl.
Soc. Psychol. 28, pp. 1317-1338.
Terry D., Hogg M., 1996. Group norms and the attitude-behaviour relationship: a role for group
identification. Pers. Soc. Psychol. Bull., 22, pp. 776-793.
Thurstone L., Chave E., 1929. The Measurement of Attitude. Chicago, Ill. University of Chicago Press.
Tittle C. R., Hill R. J., 1967. Attitude Measurement and Prediction of Behaviour: An Evaluation of
Conditions and Measurement Techniques, Sociometry, 30, pp. 199-213.
Trafimow D., Finlay K., 1996. The importance of subjective norms for a minority of people: between-
subjects and within-subjects analyses. Pers. Soc. Psychol. Bull. 22, pp. 820-828.
Warner L. G. and DeFleur M. L., 1969. Attitude as an Interactional Concept: Social Constraint and Social
Distance as Intervening Variables Between Attitudes and Action, American Psychological Review, 34,
pp. 153-169.
Wilkie W. L. and Pessemier E. A., 1973. Issues in Marketing’s Use of Multiattribute Attitude Models,
Journal of Marketing Research, 10, pp. 428-441.
Woodmansee J. J. and Cook S. W., 1967. Dimensions of Verbal Racial Attitudes: Their Identification and
Measurement. Journal of Personality and Social Psychology, 7, pp. 240-250.
Ybarra O., Trafimow D., 1998. How priming the private self or collective self affects the relative weights
of attitudes and subjective norms. Pers. Soc. Psychol. Bull., 24, pp. 362-370.